Insurance companies slapped with millions in punitive damages for withholding benefits

November 11th, 2014 by

Luciano Branco, a Canadian citizen, immigrated to Canada from Portugal at age 24. He became a highly qualified welder working throughout Canada, before taking a job at a gold mine in Kyrgyzstan with Cameco Corporation, a Saskatchewan based mining company. He relocated his family to Portugal and was later transferred from Cameco to its subsidiary Kumtor Operating Company. For this job, he had to work rotations that involved 28 days in and 28 days out. The mine was approximately an eight hour bus ride from the company’s head office.

Branco was an excellent employee with perfect attendance, and no previous workers’ compensation board claims. On Christmas 1999, he dropped a steel plate on his foot while working at the mine. On his next rotation, he re-injured his foot and did not return as he was ill. He reported his injury for the first time to his company, and they continued to pay his base annual salary to the end of his contract on March 31, 2001.

American Home Assurance Company (AIG) provided benefits for work-related injuries to Kumtor’s workers and was advised of Branco’s injury. AIG’s doctor concluded that Branco was disabled. On July 30, 2001, Branco’s personal physician provided a report to AIG stating that Branco was permanently disabled and could not perform his occupation. The same day, AIG offered Branco a settlement of $22,500. Branco rejected this offer as he believed it was inadequate. Branco was later sent to additional specialists who confirmed he suffered from Reflex Sympathetic Dystrophy, chronic adjustment disorder, anxiety and depression as a result of his inability to work and provide for his family. Finally, after being cut off twice from benefits (both times without explanation), in April 2003, AIG began to pay Branco monthly payments and paid back some of the benefits he should have received.

AIG insisted Branco be retrained as a gardener, even though it was inappropriate, since he could not work on uneven ground. They advised him they would terminate his workers’ compensation benefits if he did not co-operate or find other vocational training. The benefits were terminated on December 1, 2004, and no further payments were made until August 2012, just days before the start of Branco’s trial for his action on damages.

Zurich Life Insurance Company Ltd provided long-term disability benefits for Kumtor employees. However, Kumtor did not understand its obligation to submit claims and medical reports to Zurich. Zurich refused to pay benefits, and later made an offer to settle, which Branco rejected. Branco’s first cheque from Zurich was nine years after the first payment was due. As a result of Branco and his family being without funds for many years, he relied on his family extensively for loans, and his marriage broke down.

Branco’s action against AIG, Zurich, Cameco and Kumtor was finally decided in March 2013, where the Court found that the insurance companies’ actions were cruel, malicious and reprehensible. Branco was awarded aggravated damages of $150,000 and $300,000 against AIG and Zurich and the highest awarded to date in punitive damages of $1.5 million and $3 million.

In assessing aggravated damages, the judge relied on Fidler in which the Supreme Court upheld damages for mental distress caused by an insurance company’s unjustified denial of benefits. The reasoning is that parties enter into insurance related contracts to secure a psychological benefit and both the workers’ compensation coverage by AIG and Zurich were both peace-of-mind contracts. Therefore, the mental distress caused by their breach was “within the reasonable expectation of the parties.” Furthermore, the judge held that AIG was also in breach of its duty of good faith and fair dealing. They discontinued payment of Branco’s benefits in order to intimidate, create undue hardship and force him into accepting an extremely low settlement.

As for punitive damages, the court relied on the Supreme Court’s leading decision in Whiten, where the court identified “retribution, denunciation and deterrence” as the justifications for a punitive award and that “a disproportionate award overshoots its purpose and becomes irrational,” but too small of an award fails to achieve its purpose. The judge also noted the major power imbalance between AIG and Branco.

From this case, the court is sending a message to insurance companies that they will no longer tolerate intimidation in attempts to financially starve legitimate claimants’ into low settlements.

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