A lesson for insurers, administrators

B.C. Supreme Court punishes University of British Columbia with $150,000 in punitive damages for the way a long-term disability claim was handled for a worker with MS

Punitive damages in the employment law realm are relatively rare. When they’re awarded, it’s usually worth taking notice.

The British Columbia Supreme Court, in a decision upheld by the B.C. Court of Appeal, awarded a worker whose claim for long-term disability was rejected $35,000 in aggravated damages and $150,000 in punitive damages.

In doing so, the Supreme Court attempted to send a strong message to insurers: bad-faith administration of their policies will simply not be tolerated.

The case

British Columbia’s top court has upheld punitive damages of $150,000 against the University of British Columbia (UBC) for the way a third-party administrator handled the long-term disability claim of a worker diagnosed with multiple sclerosis (MS).

Penny Asselstine was a registered nurse who was employed by UBC in a research facility. In March 1997 she was diagnosed with MS. At the time she was experiencing chronic fatigue and a loss of balance that affected her ability to walk.

She took six weeks’ sick leave and returned to work, though only to do sedentary tasks. At the beginning of May, due to a lack of funding, Asselstine was given notice her position would be terminated at the end of July. She negotiated a paid leave in lieu of working notice and later found a position as a doctor’s receptionist where she worked from mid-August until the end of the year. By that time her health had reached a point where she could no longer do any work.

UBC has a disability insurance plan that provides long-term disability benefits to employees who qualify. Manulife administers the plan, but UBC is the insurer. To qualify for LTD benefits, an employee must establish she became totally disabled while employed by the university. “Total disability” is defined in the policy as the inability to perform the duties of any occupation for which an employee is fitted by education, training or experience.

The employee also has to establish she was totally disabled for a continuous period of six months.

Manulife rejects claim

In January and February 1998 UBC’s human resources department wrote to Manulife to help Asselstine initiate a claim for LTD benefits. Though UBC would pay the benefits, the decision as to whether the claim would be accepted or rejected rested with Manulife.

Manulife rejected her claim at the end of July 1998 on the basis she was not totally disabled prior to the end of her employment with UBC. The adjudicator of the claim was faced with conflicting medical opinions on Asselstine’s condition at the time she left UBC.

The doctor who treated her until July 1997 said she was able to work and urged her to continue to do so, albeit at a reduced level of activity. But another neurologist who started treating her in the fall of 1997 said Asselstine did not have the ability to do any work from the time she was diagnosed in March 1997.

The adjudicator relied on the first doctor’s opinion in ruling Asselstine was not totally disabled when her employment at UBC came to an end.

Asselstine appealed the rejection of her claim twice. She provided another medical opinion from a neurologist specializing in MS. He agreed with the second doctor’s assessment that she did not have the ability to work after she was diagnosed with MS in March 1997. But the adjudicator still denied the claim.

Punitive damages

Asselstine started an action against UBC and Manulife alleging bad faith. The British Columbia Supreme Court said UBC and Manulife had acted in bad faith, and awarded $35,000 in aggravated damages and $150,000 in punitive damages against UBC and Manulife. That decision was appealed by UBC and Manulife to the British Columbia Court of Appeal.

Court of Appeal upholds damages

The Court of Appeal refused to overturn the Supreme Court’s decision on damages. But it did make some changes.

The policy under which Asselstine filed her lawsuit specifically provided that “no legal action for the recovery of any claim may be brought against (Manulife.)”

The Court of Appeal set the damage award against Manulife aside, but said UBC was still liable. It said because of the way UBC and Manulife pleaded and conducted their defence, there was no meaningful separation between the conduct of the principal and the agent.

“Manulife adjudicated the claim for the university and they treated the actions of one as that of the other,” the Court of Appeal said. “It is as though an in-house administrator managed the claim. In that case, it would make no sense for the university to say it is immune from punitive damages for the conduct of an employee acting in the course and scope of her employment.”

The court said UBC accepted that Manulife’s actions were the university’s actions, and therefore it had to live with that position.

An ‘exceptional case’

The Court of Appeal said there was no doubt UBC’s actions rose to the point where punitive damages were appropriate. The lower court judge followed the reasoning in Whiten v. Pilot Insurance that states punitive damages should only be resorted to in exceptional cases.

“She found this to be an exceptional case,” the Court of Appeal said. “We think the judge was moved by the indifference of the defendants to the predicament of the plaintiff. (Asselstine) was struggling with a terrible disease not knowing whether she would have enough to live on.”

Though the lower court judge did not use highly charged language to describe the breach of good faith, the Court of Appeal said it was satisfied she thought the adjudication of Asselstine’s claim was “sufficiently reprehensible” to warrant punitive damages.

“How does one measure the gravity of misconduct? It is surely a matter of judgment best left to the judge of the facts,” the Court of Appeal said.

But was $150,000 an appropriate amount? The Court of Appeal said the award was high, but not excessively. It said punitive damages, unlike compensatory damages, have no limit. Therefore, there’s always an element of informed judgment on the part of the judge in coming up with a figure.

“The award is substantial, on the high side of what seems proportionate to the blameworthiness of the defendants’ conduct viewed without regard to its effect on (Asselstine), particularly where there is no evidence of any gain to either defendant,” the Court of Appeal said. “But when consideration is given to the vulnerability of (Asselstine) and the harm she would have suffered if she had not had recourse to the court for redress of what the trial judge found and we agree is a serious lack of good faith in the assessment of her application, we cannot say it crosses the line.”

For more information see:

Asselstine v. Manufacturers Life Insurance Co., 2005 CarswellBC 1226, 41 C.C.E.L. (3d) 209 (B.C. C.A.)

Don’t shirk responsibilities, insurers told

In the original 2003 ruling, the lower court judge was very critical of how the University of British Columbia and Manulife handled this case.

By awarding punitive damages of $150,000 and aggravated damages of $35,000, Justice Nancy Morrison of the B.C. Supreme Court wanted to send a clear message to employers and insurers that they can’t shirk their responsibilities when it comes to legitimate claims for disability.

“The defendants, and insurance companies generally, cannot expect to be able to disregard compelling medical and other information while placing undue emphasis on evidence aligned only with their interests,” said Justice Morrison. “I award punitive damages here as a reminder that it is not in the economic interest of the insurer to engage in similar conduct in future similar situations.”

She was critical of how Manulife assessed the claim, because it ignored credible evidence that Penny Asselstine was “totally disabled” and favoured conflicting evidence that was in the interest of the defendants.

“A duty of good faith and fair dealing requires an even-handed evaluation of all evidence before the insurer by the insurer,” she said. “Just as one cannot cherry-pick the information to send to an assessor for a rehabilitation opinion, one cannot choose only to accept certain medical evidence in the face of compelling, conflicting evidence.”

She painted a bleak picture of Asselstine’s condition after being diagnosed with MS while she struggled to continue working.

“At home, she had to grope her way across a small studio apartment from her bed to the bathroom by grabbing on to chairs placed between bed and bathroom. She could not function at all beyond her desk duties at work. The defendants cannot dismiss the whole picture of the plaintiff’s daily life from April, May 1997 on. She could not function.”

Justice Morrison said insurance contracts are supposed to offer security and protection in times of crisis and disaster. Courts have specifically found that a contract of disability insurance designed to replace all or a portion of an insured’s income is a class of contract that is intended to provide peace of mind to the insured. Consequently, an insurance contract is unlike other commercial relationships and it requires “utmost good faith,” she said. The defendants did not act in good faith in denying her claim, the court said.

“The defendants clearly failed to assess (Asselstine’s) claim in a balanced and reasonable manner and failed to act fairly in dealing with it,” she said.

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