The Latest on Disability Insurance Claims

The recent case of Fernandes v. Penncorp Life Insurance Company provides useful and interesting insights into the obligations of insurers to pay up under disability insurance policies, and the consequences of any failure to act reasonably in dealing with disability insurance claims.

The Plaintiff was an immigrant to Canada with limited education and limited intellectual capability.  He obtained employment as a bricklayer, ten to twelve hours per day for six or seven days per week for many years.  The work was very demanding physically, requiring strength and endurance.  In December, 2004, he fell from a scaffold from a height of about eight feet.  He was badly injured to the extent that he could not return to work.

If common care and prudence would require an insured from working at his business or occupation in order to recuperate or prolong his life, he will be considered to be totally disabled within the meaning of an insurance policy.

He made a claim under his disability insurance policy.  The insurer, Penncorp, refused to pay and the Plaintiff sued.

The Plaintiff’s policy entitled him to benefits for two years if he was unable to work at his own occupation and further benefits thereafter if he was disabled from working at any occupation for which he was reasonably suited by education, training or experience.  In this case, Penncorp agreed that for the first two years following the Plaintiff’s injury he was unable to work as a bricklayer and paid him for the two years.  It refused to pay any further.

Penncorp made its decision to stop paying on the basis that after two years, the Plaintiff was now capable of doing other work.  It appears from the case that Penncorp relied primarily on surveillance video tape obtained by its investigators.  Between August, 2005 and February, 2010, the investigators conducted surveillance on nineteen different days showing the Plaintiff performing such activities as lifting a wheelbarrow in and out of a truck, shovelling earth in and out of a wheelbarrow, and carrying boxes out of a house.  As far as Penncorp was concerned, this was an indication that the Plaintiff was not totally disabled within the meaning of the policy. 

As the Judge pointed out, there is authority from the Supreme Court of Canada defining total disability in the context of an insurance policy.  It is not necessary for an insured to prove that he or she cannot do anything whatsoever that the job might require.  The test is satisfied when the circumstances are such that a reasonable man would recognize that he should not engage in certain activity even though he literally is not physically unable to do so.  In other words, it does not mean absolute physical inability to do the job.  If common care and prudence would require an insured to refrain from working at his business or occupation in order to recuperate or prolong his life, he will be considered to be totally disabled within the meaning of an insurance policy.

The Judge had some interesting observations with respect to the surveillance evidence.  In this case, surveillance evidence was presented covering several days within a period of many years.  The video surveillance did not record the periods of time when the Plaintiff was out of sight recuperating or unable to leave his home.  The Plaintiff in this case testified that he had both good days and bad days.  He also stated that after he engaged in some level of physical work, he “paid the price” and suffered thereafter.

In the result, the Judge found that the Plaintiff met the test of total disability and ordered Penncorp to pay him the benefits out to him.

In addition, the Judge carefully considered the Plaintiff’s claim against Penncorp for punitive damages.  As the Judge pointed out, punitive damages are very much the exception rather than the rule and will only be considered where the Defendant’s conduct departs from “ordinary standards of decency”.  In the context of an insurance claim, this means that an insurer must act in good faith in dealing with an insured’s claim.  Bad faith will give rise to the distinct possibility that punitive damages will be awarded.

The duty of good faith also requires an insurer to deal with a claim fairly, both in terms of the way in which the insurer investigates and assesses the claim and also with respect to the decision as to whether or not to pay it.  An insurer has to assess the merits of the claim in a balanced and reasonable manner and is prohibited from denying coverage or delaying payment to take advantage of an insured’s economic vulnerability or to gain bargaining leverage in negotiating a settlement.

In this case, the Judge found that Penncorp acted in bad faith.  While Penncorp relied on the surveillance video, the video did not remotely establish that the Plaintiff was able to do heavy continuous labour for long hours.  As a result, the Judge added in an award of $200,000 for punitive damages.

Claims on insurance policies can be tricky.  Unlike in the case of business disputes, plaintiffs suing on disability insurance contracts can be unsophisticated people, often from blue collar working backgrounds, sometimes unfamiliar with the language, and frequently intimidated by the process.  If an insurer digs in its heels, the legal proceeding can be difficult and time consuming.  If the plaintiff is unable to work, he or she may be facing severe economic distress throughout the time period taken up by the litigation.  This case provides a useful reminder that success may be possible for those who have meritorious cases and are willing and able to make the effort.

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