Bad Faith and Long-Term Disability Claims

You may have heard of the term bad faith as it relates to insurance claims and wonder what it means.

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This blog post will take a look at what bad faith means when it comes to long-term disability (LTD) claims.

What are Bad Faith Claims?

Bad faith claims are claims that arise when an insurance company has grossly mishandled the claim of its insured (the policy member; whether under a group or private policy).

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Examples of bad faith are:

• Not rendering a decision about benefits in a timely fashion, even though medical information shows that the insured is totally disabled.
• Denial of benefits without medical certification indicating the insured is able to resume regular occupation.
• Unreasonable interpretation of policy.

What is the Duty of Good Faith?

In Canada, the courts tell us that the duty of good faith requires that an insurer act both promptly and fairly when assessing claims.

Breaching the duty of good faith in an insurance claim can lead to what is known as punitive damages.

In order for the court to find that unfair conduct has taken place, and to award punitive damages, the court must find that the insurer acted unfairly and ‘delinquently’.

The idea is to reveal how the claim was handled from the outset and by what means the insurer actually arrived at the decision to stop payment or deny the claim.

Bad faith claims are meant to act as a deterrent so that insurers will not exploit the vulnerability of the insured.

Morrison J., in Asseltine v. Manufacturers Life Insurance Company (Plaintiff sues disability insurer) said:

“A duty of good faith and fair dealing requires an even-handed evaluation of all evidence before the insurer by the insurer. 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.”

How Does It Work?

​In addition to the duty of acting in good faith, the insurer has other duties to consider. The following list is not an exhaustive list.

Duty to Assess the Evidence in a Balanced and Reasonable Manner

The insurer should assess the merits of the claim in a balanced and reasonable manner. The insurer cannot dismiss credible, alternative evidence that does not support its pre-conceived ideas.

Duty to Reasonably Interpret the Policy

The policy language must be reviewed and checked; the policy should actually be read.

Duty to Adequately Investigate

A timely and thorough investigation of the claim should be made before a claim is denied, this is essential where a claim for disability is being made under a long-term disability policy. Medical investigations are to be made and all reports are to be considered, from the insured person’s doctors as well.

Duty to Inform

The insurer has to inform the insured person of the nature and extent of the benefits that are payable to him/her, and assist the insured in the completion of the necessary documentation (provide instructions).

When an insurer decides to deny a claim, there is a duty to properly inform that the denial has been made, the insured person should not be told or misled by stating “the matter is under investigation”.

In a lot of cases, we do see that insurance companies write to our clients and postpone the actual denial of benefits by saying that a final decision has not been made, the matter is under investigation pending further documentation etc. This is incredibly frustrating to our clients!

Duty not to misinform

For example, not providing a copy of the actual policy.

Duty not to Take Advantage of an Insured’s Economic Vulnerability

For example, by trying to get the insured person to settle at an early stage in the claim, for a lesser amount than the claim is worth due to their financial situation.

What are the Duties of the Insured?

The insured person, as this is a contractual relationship has duties as well, to act in “good faith”.

Duty to be Honest

For example, in any type of disability policy, to disclose all relevant health information, all employment details, all previous claims, details of any WSIB claims or other sources of income, anything that may be relevant. You do not want the insurance company to find out information about you in any way except from you yourself.

Duty to Rehabilitate and Mitigate

You have the duty to attend rehabilitation (physiotherapy, massage, psychotherapy, etc.), whatever type of therapy that helps you try to feel better and has been medically recommended. You must actively be under the care of a physician and actively be trying to get better.

Mitigation refers to the attempt to return to work. If you do try to return to work or to volunteer you must advise the insurance company of your attempts, even if unsuccessful.

Duty to Give Notice of a Claim in a Timely Manner

If you are seriously injured or suffering from an illness that takes you off work and believe you qualify for long-term disability benefits, you should apply as soon as possible. Your policy will tell you how long you have to apply for LTD benefits after you first became disabled.

You should consider submitting your application within this timeframe as one reason insurers do tend to deny claims is for late applications.

You should also consider that in order to qualify for long-term disability benefits, you have to be continuously disabled throughout the qualifying period, which can be anywhere from 15 to 52 weeks. You should apply for benefits before the end of the qualifying period as it will take time for your claim to be processed, especially if further information is needed.

How does Your Lawyer Help?

Starting the Lawsuit

When your benefits are denied or terminated, you have the right to hire a lawyer to fight the denial of your claim. Once we have been retained and have the appropriate details (policy number, claim number, date of disability, date of denial), we commence a court action against the disability insurer. The action is commenced by issuing a documented called a Statement of Claim. This is the document that officially starts the legal process.

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In the Statement of Claim, your lawyer outlines what it is you are suing for. When suing an LTD insurer, we include a section where we plead that the insurer has adjudicated the claim in bad faith. In order to make a claim for bad faith, we must explicitly include it in this document so that the insurance company knows this type of claim is being brought.

Exchanging Documents

During the course of your lawsuit, documents will be exchanged with the other party, so that the lawyer for the insurer can have a chance to review new medical information and other important information relating to your disability and inability to work.

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The insurance company will provide your lawyer with a copy of their policy and claims file and your lawyer has a chance to review these documents and see what went on during the course of your claim and how the insurer came to the decision to deny your claim.

Negotiating a Fair Settlement

After lawyers have been appointment and documents have been exchanged, lawyers will discuss next steps and how to best proceed to resolve the case.

Whether through settlement talks at a settlement conference or exchanging offers by way of a written settlement proposal or at a private mediation, your lawyer represents your interests and will negotiate a fair and just settlement for you.

Your lawyer considers the amount of benefits owed to you since your claim has been denied (past) and how many years left in your policy when negotiating a settlement (future benefits). Your lawyer will not present any offer to the insurance company without your knowledge and approval.

Your lawyer also has to make sure you are aware of any offers or counter-offers made on behalf of the insurance company.

Your lawyer is there to advise you on the fairness of any offers made to you.

You should be aware that the final decision to accept or reject an offer to settle is yours to make.

We hope that this overview of bad faith claims and insurers duties to you has been helpful.