Damages — Exemplary or punitive damages — When available — Appeal by the insurer from a decision upholding the insured's award of damages for mental distress, and awarding an additional $100,000 in punitive damages, allowed in part — Punitive damages award was set aside — Termination of benefits relating to an unobservable disability, in the absence of any medical evidence indicating an ability to return to work, represented conduct that was troubling, but was not sufficiently troublesome so as to justify interfering with the trial judge's conclusion that there was no bad faith.

Damages — Aggravated damages — When available — Appeal by the insurer from a decision upholding the insured's award of damages for mental distress, and awarding an additional $100,000 in punitive damages, allowed in part — Aggravated damages award was upheld — Breach of contract in this case gave rise to mental distress of sufficient degree to warrant compensation.

Insurance law — Actions — By insured against insurer — Appeal by the insurer from a decision upholding the insured's award of damages for mental distress, and awarding an additional $100,000 in punitive damages, allowed in part — Punitive damages award for breach of contract was set aside — Aggravated damages award for mental distress was upheld — Insurer's denial of disability benefits in the absence of any medical evidence indicating an ability to return to work gave rise to mental distress of sufficient degree to warrant compensation.

Insurance law — The insurance contract — Termination or breach — By insurer — Appeal by the insurer from a decision upholding the insured's award of damages for mental distress, and awarding an additional $100,000 in punitive damages, allowed in part — Punitive damages award for breach of contract was set aside — Aggravated damages award was upheld — Breach of contract in this case gave rise to mental distress of sufficient degree to warrant compensation.

Appeal by Sun Life Assurance Company of Canada from a Court of Appeal decision upholding the respondent's award of damages for mental distress, and awarding an additional $100,000 in punitive damages. The respondent, Fidler, worked as a bank receptionist and was covered by a group policy that included long-term disability benefits. She became ill and was eventually diagnosed with chronic fatigue syndrome and fibromyalgia. The respondent began receiving long-term disability benefits in January 1991. The policy provided that the respondent would only receive benefits after a period of two years if she was unable to perform any job. In May 1997, the appellant informed the respondent that her benefit payments would be terminated. According to the appellant, its video surveillance revealed activities inconsistent with the respondent's claim that she was unable to perform light work or sedentary work. In December 1998, despite medical evidence to the effect that the respondent was not capable of doing any work, the appellant, relying on its own experts and consultants, confirmed it decision to terminate benefits. The respondent commenced an action and, before the trial was scheduled to start, the appellant offered to reinstate her benefits and to pay all arrears with interest. The only issue at trial was the respondent's entitlement to damages. The trial judge awarded the respondent $20,000 in aggravated damages for mental distress, but dismissed her claim for punitive damages. On appeal, the aggravated damages award was upheld and the court awarded an additional $100,000 in punitive damages.  

     Held: Appeal allowed in part. The aggravated damages award was upheld. The award of punitive damages was set aside. Damages for mental distress for breach of contract could be recovered where it was established on the evidence and shown to have been within the reasonable contemplation of the parties at the time the contract was made. In this case, given the nature of the disability insurance contract, it would have been within the reasonable contemplation of the parties at the time the contract was made that mental distress would likely flow from a failure to pay the required benefits. The mental distress occasioned was of a degree sufficient to warrant compensation. Respecting the award of punitive damages, the termination of benefits relating to an unobservable disability, in the absence of any medical evidence indicating an ability to return to work, represented conduct that was troubling. However, that conduct was not sufficiently troublesome so as to justify interfering with the trial judge's conclusion that there was no bad faith.