Indemnification for legal costs awarded when disability coverage denied

In the recent case of Tanious v. The Empire Life Insurance Company, 2017 BCSC 85, the British Columbia Supreme Court awarded special costs equivalent to full indemnification of the plaintiff’s litigation costs in a disability insurance action. The plaintiff was initially diagnosed with multiple sclerosis (“MS”) in 2002 at the age of 25. Her condition progressed to the point that in 2011, her family physician provided a report stating her medical condition would prevent her from working. The plaintiff was subsequently terminated from her employment. In 2012, the defendant advised her that it had rejected her disability claim and later refused to pay long-term disability benefits.

In the underlying action, the Court concluded that the plaintiff was totally disabled by MS under the terms of her disability insurance policy issued by the defendant and would continue to be disabled in the future. The Court allowed her action for long-term disability benefits and also awarded $15,000 in aggravated damages for mental distress caused by the defendant insurer’s refusal to pay benefits. Of note, the action did not involve a “bad faith” claim against the insurer.

The plaintiff sought special costs in the nature of full indemnification of her costs of litigation. She did not claim reprehensible conduct on the part of the insurer, but instead argued that such costs were merited on the basis that disability insurance claims involve unique considerations. The defendant in turn argued that there was no legal authority for the court to award full indemnification in these circumstances and submitted that the plaintiff was seeking a novel costs order.

The Court reviewed case law where plaintiffs have been awarded full indemnification for costs in an action against their insurer. The Court divided these cases into four basic classes of claims by an insured against his or her insurer:

  • cases in which the insured incurred legal costs to determine coverage under the contract;
  • cases in which courts found full indemnity of legal costs was necessary to give effect to the fundamental purpose of the contract and to secure justice;
  • cases in which full indemnity costs were awarded in addition to punitive damages; and
  • cases in which legal costs were treated as damages which were foreseeably incurred in mitigation of the insured’s losses.

The court recognized that disability insurance claims have unique characteristics that distinguish them from other personal harm cases. For example, plaintiffs in disability insurance cases must pay for their future care needs out of future benefits, while personal injury plaintiffs may recover their cost of future care in a lump sum. In addition, plaintiffs in disability insurance cases may in the future have their benefits terminated even after the court has reinstated them, resulting in the need to potentially commence further legal action for reinstatement.

The court found that the extension of a special costs award in the amount of full indemnity in the disability insurance context was not a revolutionary proposal, as there had been numerous cases in other contexts where the courts ordered full indemnity in insurance contract claims.

The Court concluded that the particular circumstances of the case merited an award for full indemnification for costs. The Court explained the considerations involved in this determination:

(a)          The plaintiff had a disability insurance contract with the defendant, the purpose of which was to provide her, in the event of a disability that rendered her unable to work, with a subsistence level amount of income with which to feed, clothe, and house herself while unable to work, and to provide her with the peace of mind that flows from the coverage.

(b)          The plaintiff did in fact suffer a disability which rendered her unable to work and triggered the defendant’s obligation to pay those subsistence level benefits, which it did not do.

(c)          The plaintiff was required to commence litigation against the defendant or else forfeit the benefits to which she was entitled under the contract. The significant challenges caused by the plaintiff’s disability also necessitated (and complicated) the assistance of counsel for virtually every aspect of that litigation.

(d)          The legal costs the plaintiff reasonably incurred in obtaining her contractual benefits in this case substantially deprived her of the full benefit of the contract, leaving her with less than the necessary amount of income on which to obtain the basic necessities of food, clothing, and shelter.

(e)          The coverage issue in the case at bar is not fundamentally different in principle than the coverage issues in cases where courts have awarded special or solicitor and client costs in addition to the insurance benefits payable under the terms of the policy. In both situations, fulfilment of the intention of the insurance coverage is the driving consideration. There is also case law to support the proposition that full indemnification is appropriate where a plaintiff has been forced to enforce a disability or other type of insurance contract through litigation, and ought to be put in the position they otherwise would have been in had the litigation not been required.

The Court showed its willingness to make an award of special costs in the amount of full indemnification in a novel insurance context where no “bad faith” claim was raised. This case demonstrates a court taking into account some of the unique characteristics of disability insurance and using its discretion to award special costs absent the requirement of reprehensible conduct. Insurers should be wary that even actions involving disability coverage claims without the threat of possible punitive damages, can still result in significant cost consequences.