Industrial Alliance Insurance and Financial Services Inc. v. Brine, 2015 NSCA 104

Nova Scotia Court of Appeal Citation: Industrial Alliance Insurance and Financial Services Inc. v. Brine , 2015 NSCA 104 Date: 20151117 Docket: CA 431538 Registry: Halifax Between: Industrial Alliance Insurance and Financial Services Inc. Appellant Respondent by Cross-Appeal v. Bruce Brine Respondent Appellant by Cross-Appeal Judges: Fichaud, Oland and Scanlan, JJ.A. Appeal Heard: April 16, 2015, in Halifax, Nova Scotia Held: Appeal allowed in part and cross-appeal dismissed with costs, per reasons for judgment of the Court Counsel: Michelle C.

Awad, Q.C., and Danielle Kershaw for the appellant Barry Mason, Q.C., and Glenn Jones for the respondent Reasons for judgment of the Court: [ 1 ] Disability insurance is a peace of mind contract. It shields from stress at a time of vulnerability. Mr. Brine’s total disability left him vulnerable, psychologically and financially. His insurer paid the disability benefits to which he was entitled. In fact, Mr. Brine’s recoveries from other sources meant the insurer overpaid him. Yet Mr. Brine and his insurer were at odds constantly over sixteen years.

Their differences stemmed partly from the insurer’s attempts to recoup the overpayments and partly from what Mr. Brine considered as the insurer’s inveterate obstinacy. Hence this litigation. [ 2 ] Justice Cindy A. Bourgeois, then of the Supreme Court of Nova Scotia, found that the insurer had breached its contractual obligations and duty of good faith ( 2014 NSSC 219 ). She awarded Mr. Brine substantial contractual damages, $150,000 aggravated damages and $500,000 punitive damages. She held that the insurer was subrogated to a settlement Mr. Brine had received. [ 3 ] The insurer appeals and Mr.

Brine cross-appeals, each on many grounds. We would allow the appeal in part, and dismiss the cross-appeal. Background [ 4 ] Mr. Bruce Brine was born March 17, 1949. He is married with three children. His career in police work led to his appointment in 1993 as Director of Ports Canada Police in Halifax, at the rank of Superintendent. He achieved favourable performance reviews throughout his career and, in 1994, received the Governor General’s award for exemplary service in policing. [ 5 ] Mr.

Brine was covered for long-term disability (“LTD”) under Policy G68-1400 (“Policy”) between the National Life Assurance Company of Canada, now Industrial Alliance Insurance and Financial Services Inc. (“National Life”), and the Board of Trustees of the Public Service Management Insurance Plan.

[ 6 ] In March 1995, Ports Canada Police terminated Mr. Brine’s employment. Shortly after, Mr. Brine was diagnosed with depression. He applied for LTD benefits under the Policy. On August 1, 1995, National Life approved his application. [ 7 ] The disagreements between Mr. Brine and National Life over the following years concerned rehabilitation services, the tax treatment of the benefits paid to him, and National Life’s reduction of benefits for third party payments to Mr. Brine. National Life started the litigation in 2001. But, at trial in 2013, what remained was Mr.

Brine’s amended Counterclaim alleging that National Life had breached specific terms of the Policy and its duty of good faith. National Life argued that it had handled the claim appropriately, and it was entitled to a settlement that Mr. Brine had received. [ 8 ] Mr. Brine testified. Dr. Edwin Rosenberg, who diagnosed Mr. Brine’s depression and was his treating psychiatrist, testified on his behalf. National Life’s witnesses were: Alan Stern, Q.C., who had represented Mr. Brine’s employer respecting Mr. Brine, particularly the settlement of Mr.

Brine’s complaint to the Canadian Human Rights Commission against Ports Canada Police; Anna Antonini, Supervisor of National Life’s LTD department from 1997 to 2005; and Julie Jako, Director of the LTD department in the 1990s. [ 9 ] The judge accepted Dr. Rosenberg’s diagnosis of Mr. Brine’s depressive illness, his symptoms, mental state and abilities at various times. National Life acknowledged that, at all material times, Mr. Brine was totally disabled as defined in the Policy. Except when it withheld benefits due to an overpayment, it paid him disability benefits under the terms of the Policy.

The judge agreed that Mr. Brine was totally disabled and entitled to benefits. She found that, other than some modest and temporary improvement in 1990 and 2004, Mr. Brine’s mental health functioned at a significantly impaired level. She also determined that National Life knew of his condition and limitations. [ 10 ] The judge held that National Life was entitled to claim reimbursement for overpayments of $99,506.64 from Mr. Brine’s receipt of retroactive lump sums under the Canada Pension Plan (“CPP”) and Public Service Superannuation Act (“PSSA”).

However, in her view, the Policy’s provision regarding the timing of reimbursement for lump sum payments did not entitle National Life to completely stop his monthly disability payments until the overpayment was repaid, as National Life had done. Rather, the reimbursement should have been pro-rated monthly. She held that the $62,036.81 balance of Mr. Brine’s claim for the overpayment was extinguished by Mr. Brine’s discharge from bankruptcy, and Mr. Brine should recover $62,036.81 as damages for National Life’s breach of contract. [ 11 ] The judge next considered Mr.

Brine’s claim that National Life had breached its duty of good faith. She found that National Life had breached that duty on the bases that: (

i) it discontinued rehabilitation counselling services; (ii) it did not provide him with a report dated April 15, 2003 by Dr. Mark Rubens (“Rubens Report”) until the week before trial, some ten years later; and, (iii) it continued to issue T4 slips that classified his disability benefits as taxable after National Life had received a Tax Court ruling that they were not taxable. [ 12 ] The judge awarded Mr.

Brine $150,000 aggravated damages and $30,000 for mental distress. [ 13 ] The judge concluded that punitive damages were justified on four bases – the three elements of National Life’s breach of its duty of good faith, and the evidence of National Life’s Ms. Antonini whom the judge described as having a “wanton disregard for the accuracy of her testimony”. She awarded Mr. Brine $500,000 in punitive damages. [ 14 ] The judge turned to National Life’s claim of subrogation. In 2004, Mr. Brine settled his human rights complaint against Ports Canada Police and the Halifax Port Authority for $300,000.

The judge held that the subrogation provision in the Policy obliged Mr. Brine to advise the insurer of the settlement, which he had not done. She determined that the larger component of his claim was for his loss of past and future income. The judge deducted certain amounts from the settlement and ruled that Mr. Brine owed National Life the balance of $210,000. [ 15 ] The foregoing briefly summarizes the decision that contained 333 paragraphs. We will set out the evidence and Justice Bourgeois’ analysis more fully as we consider the issues raised on appeal.

Issues [ 16 ] The Notices of Appeal and Cross-Appeal set out various grounds. We reframe the grounds that are not withdrawn, and indicate their source, as follows: 1. On reimbursement for the overpayments: (

a) The trial judge erred in her

interpretation of the Policy’s provisions, namely the Pro Rata and Temporary Reductions clauses, that govern the insurer’s reduction of benefits to recover an overpayment. (National Life’s appeal). (

b) She erred in the application of the Policy’s provisions to the circumstances of Mr. Brine’s bankruptcy, and by awarding $62,036.81 damages to Mr. Brine (National Life’s appeal) . (

c) If the Pro Rata clause does apply, the judge erred in calculating the amount of any set off that National Life could apply against ongoing benefits, and erred in quantifying the loss (National Life’s appeal). 2. On the insurer’s duty of good faith: (

a) The judge erred in her formulation of the test that governs breach of an insurer’s duty of good faith. (National Life’s appeal) . (

b) She erred by ruling that National Life’s allegations of Mr. Brine’s fraud and misrepresentation did not breach its duty of good faith. (Mr. Brine’s cross-appeal) .

(

c) She erred by ruling that National Life’s misinterpretation of the Pro Rata clause did not breach its duty of good faith (Mr.Brine’s cross-appeal). (

d) The judge erred in finding that any of the following breached National Life’s duty of good faith owed to Mr. Brine: (

i) the discontinuance of rehabilitation services in July 1998; (ii) the failure to produce the Rubens Report earlier, given that Mr. Brine did not plead the late production as a particularof bad faith; (iii) the issuance of T4 slips treating Mr. Brine’s benefits as taxable after receipt of a 2006 Tax Court of Canada decisionthat they were not taxable. (National Life’s appeal). 3. On damages for lost opportunity - the judge erred in determining that Mr. Brine was not entitled to damages for lost opportunityto return to the workforce resulting from National Life’s discontinuation of rehabilitation services (Mr.

Brine’s cross-appeal). 4. We will concurrently discuss contractual damages for mental distress and aggravated damages: (

a) National Life says there are no contractual damages because there is no breach of contract, as discussed under issues # 1 and 2. (

b) On aggravated damages: (

i) The judge erred by awarding duplicative damages (National Life’s appeal). (ii) The appeal and cross-appeal each raise the question - Should damages for mental distress be assessed as “aggravated”damages or under Hadley v. Baxendale? (iii) The judge erred by awarding amounts that were too high (National Life’s appeal) or too low (Mr. Brine’s cross-appeal). 5. On punitive damages: (

a) The judge erred in finding that any of the following should attract a punitive award: (

i) National Life’s discontinuance of rehabilitation services; (ii) National Life’s failure to make timely production of the Rubens Report; (iii) National Life’s issuance of T4 slips classifying the disability payments as taxable after its receipt of a 2006 Tax Courtof Canada decision that they were not taxable; and (iv) the judge’s finding that the testimony of one of National Life’s witnesses was misleading. (National Life’s appeal); (

b) The judge erred by quantifying an amount that was too high (National Life’s appeal) or too low (Mr. Brine’s cross-appeal). 6. On subrogation, the judge erred in her

interpretation of the Policy. (Mr. Brine’s cross-appeal). [17] We will consider these six issues in the order set out above. Under each we will discuss concurrently the points raised by theappeal and cross-appeal. Standard of Review [18] Except where these reasons indicate otherwise, the normal appellate standard of review to a trial judge’s decision will apply: correctness as to issues of law, and palpable and overriding error to issues of both fact and mixed fact and law with no extricable legalissue: Housen v. Nikolaisen, 2002 SCC 33 , [2002] 2 S.C.R. 235, at ¶ 25-26, and ¶ 36. 1.

Reimbursement for Overpayment [19] This issue deals with Mr. Brine’s receipt of CPP and PSSA benefits. [20] First, the background. [21] The Policy provided that, during the beneficiary’s total disability to age 65, the LTD gross benefit would be 70% of thebeneficiary’s salary, plus cost of living increases. Mr. Brine’s annual salary had been $73,000. Accordingly, in 1995 his gross monthlydisability benefit from National Life started at $4,258.33. His net benefit would be the gross benefit less reductions for Mr. Brine’s otherincome according to the protocol in the Policy.

The Policy and its explanatory material said that these reductions would include CPP andPSSA benefits and income replacement from third party damages. From August 1995 through September 1998, Mr. Brine’s grossdisability benefits from National Life totalled $166,270.13.

[ 22 ] This was a last payor policy. National Life’s letter of August 14, 1995, approving disability benefits, pointed out that CPP and PSSA benefits were deductible from its disability payments under the Policy. [ 23 ] Mr. Brine received $12,341.76 (retroactive CPP benefits) and $87,164.88 (retroactive PSSA medical retirement benefits), totalling $99,506.64. By July 1998, National Life knew that Mr. Brine had received these amounts. To recover the overpayments by set- off, beginning October 1, 1998 National Life stopped paying Mr. Brine any disability benefits. Mr.

Brine said the termination of benefits took him by surprise, and he reacted with despair, confusion and panic. He said the news was “totally crippling”. [ 24 ] On July 30, 1999, Mr. Brine made an assignment in bankruptcy. He had cashed in his RRSP savings, sold his home and incurred significant legal fees in his efforts to establish that he had been wrongfully dismissed and to clear his name. The two debts Mr.

Brine identified as prompting his bankruptcy were a liability of about $67,000 owing to National Life, being the balance of the CPP and PSSA overpayment, and $30,000 owing to the Canada Revenue Agency for income tax arrears from a reassessment. The tax reassessment followed National Life’s refusal to accept that the disability benefits were not taxable income. He also owed $120,000 to CIBC. [ 25 ] In its Proof of Claim to the trustee, National Life said that the outstanding debt for the overpayments was $62,036.81. During the bankruptcy, National Life continued to fully set off Mr.

Brine’s debt for the overpayments against his ongoing disability benefits. [ 26 ] On May 1, 2000, Mr. Brine was discharged from bankruptcy. [ 27 ] After Mr. Brine’s discharge, National Life continued to fully reduce his monthly disability benefits by the balance of the overpayments. National Life took the view that Mr. Brine’s debt survived his bankruptcy discharge because the debt had been incurred by fraud. [ 28 ] On June 8, 2000, the Nova Scotia Supreme Court in Bankruptcy issued an Order, to which Mr.

Brine’s counsel consented, that said “National Life may commence an action against Brine to claim repayment of benefits it alleges are due from Brine”. On September 20, 2001, National Life filed an Originating Notice and Statement of Claim. This is the Originating Notice that led ultimately to the trial before Justice Bourgeois. The Statement of Claim alleged that Mr. Brine had received overpayments of $99,506.64 of CPP and Public Service Superannuation, and his failure to notify National Life was “a fraudulent misrepresentation and a misappropriation of funds.” National Life’s claim was based on s. 178(1) (

d) of the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3: 178(1) An order of discharge does not release the bankrupt from … (

d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others. National Life’s Statement of Claim, dated September 20, 2001, calculated the quantum of National Life’s net claim: 12. Since October 1, 1998, National Life ceased paying to Brine any benefits under the Policy so as to set off against the overpayment referred to herein.

In total, National Life has set off the sum of $58,541.05 leaving the amount owing to it of $40,965.59. [ 29 ] By August 2003, National Life’s set-offs had recovered the full amount of the overpayments. Then National Life resumed payment of disability benefits until Mr. Brine reached age 65 in March 2014. [ 30 ] On November 13, 2013, in closing argument to Justice Bourgeois, counsel for National Life withdrew its allegations under s. 178(1) (d). Counsel cited an Alberta case, then said: One final comment My Lady on that front.

And that is on the question of the fraud allegation in our initial Statement of Claim in this matter. … And on page 3 they [the Alberta Court] set out the law as it was at that time, fraud must be proven on a civil standard of probabilities. … We’re not seeking such a determination in this case against Mr. Brine. My point simply is when the action started in 2001 based on the information that was available at that time it was not unreasonable to make such an allegation when National Life knew clearly that Mr.

Brine received those funds. [ 31 ] We turn to the grounds of appeal respecting National Life’s reimbursement for the overpayments. (

a) Interpretation of Policy [ 32 ] National Life submits that the judge misinterpreted the Policy’s provisions that govern the timing for reimbursement of overpayments. [ 33 ] The judge ruled that National Life should have pro-rated the deductions from Mr. Brine’s disability benefits to recover the overpayment over time. She relied on the Pro Rata clause in the Policy.

That clause reads: If an employee should receive a lump sum settlement in lieu of, or as an accumulation of periodic benefits from any of the sources described above, other than as described under clauses (4) and (5), the amount of the lump sum received shall be apportioned equally over the period from the date of payment of such lump sum to the date of the employee's 65th birthday, and the amount apportioned to each month or partial month in the period shall be deemed a benefit payable for such month or partial month. [ 34 ] The judge set out National Life’s argument on the Pro Rata clause:

[256] National Life submits, supported by the evidence of its witnesses, that retroactive lump sum payments had never been pro-ratedover the remaining balance of a policy in any situation that they could recall. They explained the provision permitting a pro-rating issolely intended to apply to those circumstances where a lump sum settlement constitutes a payment of future income losses. Mr.Saunders argued, quite capably, that such an approach makes complete financial sense. In fact, to pro-rate retro-active payments wouldbe contrary to any reasonable

interpretation of the policy, as an insured would have recovered their past losses, plus disability benefits forthe same period, resulting in double recovery. Mr. Saunders further directed the Court's attention to the fact that the policy provision inquestion was subsequently amended, and is now entirely reflective of the

interpretation advanced by National Life. He suggests theamendment served to "clarify" the intent of the original provision. [35] The judge rejected that submission. She wrote: [258] In my view, the provision in question is not as "clear cut" as National Life asks the Court to accept. Further, although I agree thatthere are good financial reasons why National Life would want the provision interpreted to exclude lump sum payments of retroactiveawards, there are also financial reasons why a claimant may say such should be included.

A claimant may fully anticipate National Lifebeing willing to structure a pro-rated repayment given that in many instances of a retroactive payment, a claimant has not regularlyreceived that particular source of income, and the disability benefits themselves do not constitute a full indemnity of their pre-disabilityincome. A claimant having been placed in financial circumstances more challenging than normal, may very well anticipate such aprovision being negotiated by the policyholder as a means of alleviating financial hardship which may have arisen due to the disabilityand resulting drop in income.

I cannot reject the

interpretation advanced by Mr. Brine as not being within the reasonable contemplationof the parties to the policy. [259] The provision is open to alternate

interpretation. I base that conclusion on several observations. The clause does not clearlydifferentiate between lump sum payments covering retroactive versus future income payments. Further the use of the phrase "or as anaccumulation of periodic benefits from any of the sources described above" gives rise to a question as to its meaning and purpose ofinclusion. Mr. Saunders submits this references a situation where a party received a final lump sum settlement which encompasses anaccumulation of future benefits and should be read in conjunction with the phrase that immediately precedes it.

Typically, or at leastsometimes however, "accumulation" is used to describe some event which has already occurred. The "or" is significant and in my viewits use creates two alternative scenarios in which a pro-rated payment will arise. Mr. Brine's situation would fall within the secondcategory - he received an accumulation of periodic benefits. In light of the above, Mr. Brine's

interpretation should prevail. NationalLife was not entitled to undertake a complete claw back of his monthly disability payments. The overpayment should have been pro-rated on a monthly basis until Mr. Brine's 65th birthday. [36] National Life acknowledges that the judge (¶ 186) correctly set out the principles for

interpretation of an insurance contract,from Ruffolo v. Sun Life Assurance Co. of Canada, [2007] O.J. No. 4541 at ¶ 82 and ¶ 83, aff’d 2009 ONCA 274, leave to appeal denied[2009] S.C.C.A.no. 222: 82 It is accepted that some special rules apply to the

interpretation of insurance contracts. However, it is also accepted that thenormal rules of contract

interpretation apply to insurance contracts and that the normal rules are the starting place for interpretinginsurance contracts… 83 The normal rules for the

interpretation of contracts direct a court to search for an

interpretation from the whole of the contract thatadvances the intent of the parties at the time they signed the agreement…In searching for the intent of the parties, the court should giveparticular consideration to the terms used by the parties, the context in which they are used and the purpose sought by the parties inusing those terms… [37] On the appeal, National Life makes two arguments: (1) the judge did not consider the “factual matrix” as directed by SattvaCapital Corp. v.

Creston Moly Corp., 2014 SCC 53 , [2014] 2 S.C.R 633, released by the Supreme Court after JusticeBourgeois’ decision; and (2) she should have focused on the Policy’s Temporary Reductions provision instead of the Pro Rata clause. [38] The Sattva Argument: In Sattva, two corporations had agreed to arbitration of matters pertaining to a finder’s fee. The appealswere from the commercial arbitration decision. Justice Rothstein, for the Court, observed that historically, the determination of the rightsand obligations from a written contract was considered a question of law.

He continued: [50] With respect for the contrary view, I am of the opinion that the historical approach should be abandoned. Contractualinterpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual

interpretation are applied tothe words of the written contract, considered in light of the factual matrix. ... [57] While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed tooverwhelm the words of that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30). The goal of examining such evidence isto deepen a decision-maker’s understanding of the mutual and objective intentions of the parties as expressed in the words of thecontract. The

interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract(Hall, at pp. 15 and 30-32). While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them todeviate from the text such that the court effectively creates a new agreement (Glaswegian Enterprises Inc. v. B.C. Tel Mobility CellularInc. (1997), (BC CA), 101 B.C.A.C. 62). [58] The nature of the evidence that can be relied upon under the rubric of “surrounding circumstances” will necessarily vary fromcase to case. It does, however, have its limits.

It should consist only of objective evidence of the background facts at the time of theexecution of the contract (King, at paras. 66 and 70), that is, knowledge that was or reasonably ought to have been within the knowledgeof both parties at or before the date of contracting. ...

[ 39 ] From these passages, National Life’s factum submits: 48. What is the factual matrix in this case? Quite simply: The Policy provided indemnity for disability-related income loss. The Reductions and Temporary Reductions provisions ... clearly show that the Appellant (as administrator of the benefit ultimately paid by the Policyholder) was the ‘last payor’ when there was income loss and therefore income or replacement income from other sources were direct deductions from the Monthly Income Benefit provided under the Policy. [ 40 ] Sattva is the leading authority on the standard of review for the

interpretation of a contract. Nonetheless, some authorities indicate the standard of review for the

interpretation of a discrete provision in a standard form insurance contract remains correctness: Fontaine v. Canada (Attorney General) , 2015 ABCA 132 (Q.L.) at ¶ 17 and ¶ 18, Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. , 2015 ABCA 121 (Q.L.) at ¶ 14 , ¶ 17 to ¶ 18, and Precision Plating Ltd. v. Axa Pacific Insurance Co ., 2015 BCCA 277 at ¶ 28 . On the other hand, in Thorburn Wharf Fisheries Ltd. v.

ING Insurance Company , 2010 NSCA 96 , Justice Saunders expressed a view that presaged Justice Rothstein’s later comments in Sattva : [10] As to the appropriate standard of review on appeal, we agree with the respondent. While it is true that the judge was discerning the meaning of certain words within an insurance contract and in that sense was required to employ correct legal principles of

interpretation, in doing so he was applying those principles to a particular set of facts. The exercise was really a question of mixed fact and law to which deference is owed. Absent palpable and overriding error, this court will not intervene. … [ 41 ] We will apply Sattva . But the use of Sattva ’s standard of review does not overturn the judge’s conclusion. [ 42 ] In Sattva , Justice Rothstein (¶ 50) characterized the

interpretation of a contract as an issue of mixed fact and law “in which the principles of contractual

interpretation are applied to the words of the written contract, considered in light of the factual matrix”. He continued (¶ 51) – “one central purpose of drawing a distinction between questions of law and those of mixed fact and law is to limit the intervention of appellate courts to cases where the results can be expected to have an impact beyond the parties to the particular dispute”. [ 43 ] In Mr. Brine’s case, Justice Bourgeois considered the factual matrix. She (¶ 256) noted National Life’s perspective of the circumstantial background. But (¶ 258) she found that the insured’s perspective better assisted her

interpretation. [ 44 ] In our view, the Pro Rata clause’s wording reasonably may be understood as encompassing retroactive lump sum payments. Further, the judge’s appreciation of the insured’s perspective was well supported by Mr. Brine’s evidence. Sattva directs appellate deference, i.e ., a standard of palpable and overriding error, to the judge’s assessment of the factual matrix.

The judge’s ruling involved neither an error of law nor a palpable and overriding error on a factual or mixed issue. [ 45 ] Temporary Reductions clause: National Life’s second argument is that the judge erred by focusing on the Pro Rata clause.

National Life says that the relevant provision of the Policy was the Temporary Reductions clause, which says: Temporary Reductions The Insurer reserves the right to reduce immediately the amount of an employee’s Monthly Income Benefit according to the Insurer’s estimate of the amount of periodic disability benefits to which the employee would be entitled, if approved, under the Canada Pension Plan, Quebec Pension Plan or any workers’ compensation law, where such benefits (

a) have not yet been approved or disallowed, or (

b) have been disallowed and such disallowance is being appealed. However, the Insurer will not make an immediate reduction of the estimated amount of disability benefits provided the employee (

a) with respect to the Canada Pension Plan: (

i) applies for a disability benefit under the Canada Pension Plan, and completes and signs the Consent To Deduction From Canada Pension Plan In Payment To The Administrator (Insurer) Of The Disability Income Program form, or (ii) signs an undertaking stating that he or she will pursue a claim for disability benefits under the Canada Pension Plan, and agrees that he or she will repay the Insurer any overpayment of Monthly Income Benefit by the Insurer as a result of the disability benefit received under such Plan.

If the employee should receive a disability benefit under the Canada Pension Plan and he or she should fail to make repayment of any overpayment to the Insurer in a timely manner, the Insurer may charge interest, at a rate set by the Insurer, on the amount of the overpayment. (

b) with respect to the Quebec Pension Plan or any workers’ compensation law: (

i) signs an undertaking stating that he or she will pursue a claim for disability benefit under such Plan or law, and agrees that he or she will repay the Insurer any overpayment of Monthly Income Benefit by the Insurer as a result of the disability benefit received under such Plan or law.

If the employee should receive a disability benefit under the Quebec Pension Plan or any workers’ compensation law and he or she should fail to make repayment of any overpayment to the Insurer in a timely manner, the Insurer may charge interest, at a rate set by the Insurer, on the amount of the overpayment. [ 46 ] National Life notes the Temporary Reductions clause contemplates anticipatory deductions for the types of outside payments that Mr. Brine received.

National Life says the Temporary Reductions clause sensibly must be read as requiring immediate repayment of the CPP and PSSA overpayments. [ 47 ] We do not accept National Life’s submission. The Temporary Reductions clause allows reduction of benefits in anticipation of

a future overpayment. But, unlike the Pro Rata clause, it does not cite a protocol for recovery of a lump sum retroactive overpayment, if anticipatory reductions have not been made. Here there were no anticipatory reductions. The Temporary Reductions provision does not undermine the judge’s view that literally, and purposefully from the insured’s perspective of the factual matrix, the Pro Rata clause governed National Life’s recovery of the retroactive lump sums paid to Mr. Brine. (

b) Effect of the Bankruptcy [ 48 ] National Life submits that, even if the judge correctly interpreted the Pro Rata clause, she erred in its application given Mr. Brine’s bankruptcy. [ 49 ] As described earlier, to recover the overpayment, National Life refused to pay Mr. Brine any disability benefits from October 1998 onward, during his bankruptcy and after his discharge from bankruptcy.

In the bankruptcy proceedings, National Life filed a Proof of Claim for the outstanding amount of $62,036.81. [ 50 ] After the judge determined that National Life had contravened the Pro Rata clause, the judge addressed the effects of the bankruptcy and discharge. She found that Mr. Brine was neither fraudulent nor acting in a fiduciary capacity towards National Life, within s. 178(1) (d), nor did he possess the discretionary power to alter the insurer’s legal or practical interests in the overpayment. The judge’s findings included: [228] …I find that Mr.

Brine’s misinterpretation was just that, a misinterpretation, as opposed to a deliberate attempt to circumvent National Life from receiving funds it claims it is owed. … [263] …He had no intent to give the type of undertaking required to give rise to an ad hoc fiduciary duty. … … [265] Based on the foregoing, the balance of the overpayment claimed by National Life, being the sum of $62,036.81 was extinguished by the bankruptcy. [ 51 ] The judge turned to quantification of Mr. Brine’s damages for breach of contract, i.e. , breach of the Pro Rata clause.

She said (¶ 300) that National Life’s claw backs “undoubtedly created a considerable financial strain” which “in turn, increased his mental distress”. She continued: [301] …To award Mr. Brine the total of the sums inappropriately withheld would not be proper in my view, as it would not reflect the reality that had the policy provision been properly implemented, Mr. Brine would have continued to have a deduction of $342.00 applied every month, until the policy terminated on his 65th birthday.

In effect, if not for its own policy breach, National Life would have recouped the entire $99,506.64 over the life of the policy. Such a pro-rated deduction would not have been impacted by Mr. Brine's bankruptcy. [302] It is not reasonable however, that National Life should benefit from its own breach of the policy, while Mr. Brine clearly suffered an unwarranted financial detriment for nearly 5 years. National Life chose to seek an upfront claw back of the overpayment, a significant balance being outstanding at the time of Mr. Brine's bankruptcy.

National Life chose to file a Notice of Claim characterizing the balance of the overpayment as an outstanding debt and it an unsecured creditor. It subsequently withdrew from the bankruptcy proceeding and claimed the protection afforded by s. 178(1) (

d) of the Bankruptcy and Insolvency Act . The Court has previously found that National Life was not entitled to that protection. As such, and in the normal course, the unsecured debt would be extinguished by the bankruptcy. [303] In my view, given National Life's breach, and given the path it forced upon Mr. Brine, namely a unilateral upfront claw back of his benefits, an appropriate measure of damages is $62,036.81, being the balance of the overpayment purported to be outstanding at the date of the bankruptcy. This debt, as characterized by National Life, was not extinguished by the bankruptcy.

As National Life continued to inappropriately withhold benefits from Mr. Brine until that sum was paid down, that amount is properly returnable to him. [ 52 ] Mr. Brine’s obligation to reimburse National Life for the overpayment was a pre-bankruptcy debt provable in bankruptcy. Unless that debt survived according to a provision of the Bankruptcy and Insolvency Act , National Life’s claim for the balance of that debt ended with his discharge on May 1, 2000. Sections 178(1) (

d) and 97(3) pertain to whether the debt might have survived. [ 53 ] In September 2001, National Life pleaded that Mr. Brine incurred the debt by fraud or misappropriation while he was a fiduciary for Industrial Alliance, so the debt would have survived the discharge by s. 178(1) (d). As noted earlier, in closing argument to Justice Bourgeois, National Life abandoned its claim under s. 178(1) (d). The judge found that Mr. Brine had not acted fraudulently and held that he was not a fiduciary. National Life’s Notice of Appeal does not include a ground that the Court of Appeal should overturn these findings.

Given National Life’s abandonment of the issue in the trial court, no such ground could be tenable. [ 54 ] Section 178(1)(

d) is a dead issue.

The Supreme Court’s Order of June 8, 2000, that permitted National Life to commence its action under s. 178(1) (d), is spent. [ 55 ] Section 97(3) of the Bankruptcy and Insolvency Act governs set-offs: 97(3) The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff or defendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provisions of this Act respecting fraud or fraudulent preferences.

Section 97(3) relates to debts and receivables during a bankruptcy. Mr. Brine’s entitlement to post-bankruptcy benefits was contingent on his continuing disability after the bankruptcy. His post-discharge disability benefits were not ascertained or unconditional at the time of his bankruptcy. So his entitlement to post-discharge disability benefits was not a receivable of his trustee. Section 97(3) does not

entitle National Life to reduce disability benefits that are payable after Mr. Brine’s discharge from bankruptcy. [56] Simply put, National Life’s claim for Mr. Brine’s pre-bankruptcy debt for the overpayments was extinguished by Mr. Brine’sdischarge from bankruptcy. After his discharge, National Life could no longer reduce Mr. Brine’s ongoing post-bankruptcy disabilitybenefits with what remained of that pre-bankruptcy debt. By improperly reducing Mr.

Brine’s post-bankruptcy benefits, National Lifebreached the contract by underpaying the benefits due under the Policy. [57] The judge (¶ 301-3) quantified contractual damages at $62,036.81. Our comments on quantum are these. [58] The $62,036.81 came from National Life’s proof of claim to the trustee in bankruptcy. The proof of claim said that Mr. Brineowed $62,036.81 as of July 30, 1999. National Life’s Ms. Jako attached to the Proof of Claim an affidavit dated August 19, 1999, stating: 9.

Based on the information contained in Brine’s Income and Expense Statement, National Life calculates the amount of theoverpayment is $88,274.00, based on payments received over 38 months at $2,323.00 per month. 10. Since October 1, 1998, National Life has not paid benefits in the amount of $26,237.19, resulting in a net overpayment as oftoday’s date in the amount of $62,036.81. [59] National Life’s factum to this Court points out an arithmetic error by the judge: 61. In this case, the breach by the Appellant was the discontinuance of all benefit payments on October 1, 1998. Application of HerLadyship’s

interpretation would have resulted in a reduction of the Monthly Income Benefit paid from October 1, 1998 until theRespondent reached age 65, (which is 186 months and not 292 months as Justice Bourgeois calculated at para. 297 of the Decision: ABvol. 1, p. 157). The amount of the reduction would have been $534.98 per month (and not $342.00 per month as Her Ladyship suggestedat para. 297 of the Decision, supra). National Life submits that, as the full $62,036.81 would have been set off eventually, at $534.98 monthly, Mr. Brine has suffered noloss.

We agree that the set off should have been $534.98 monthly before Mr. Brine’s discharge from bankruptcy. But we disagree thatthe quantum of damages is excessive. [60] From October 1, 1998 through Mr. Brine’s bankruptcy discharge on May 1, 2000, the total set off (using the Pro Rata clause asthe judge directed) should have been 19 (months) x $534.98 = $10,164.62. Had that amount been set off, against the baseline $88,274.00in Ms. Jako’s affidavit, the outstanding debt owed by Mr. Brine at the date of his discharge from bankruptcy would have been$88,274.00 less $10,164.62 = $78,109.38.

After the discharge, National Life was not entitled to set off this $78,109.38 against ongoingdisability benefits. By August 2003, National Life had set off the full amount. So Mr. Brine lost $78,109.38. We prefer this approach tothe judge’s more diffuse analysis that led to the quantum of $62,036.81 (¶ 301-3). [61] There is no cross-appeal to request this Court to raise the judge’s award from $62,036.81 on this head of damages. The Court ofAppeal may not determine an un-appealed ground of appeal: R. v. Mian, 2014 SCC 54 , [2014] 2 S.C.R. 689.

Accordingly, wedismiss National Life’s ground of appeal on this point, and the award remains at $62,036.81. 2. Duty of Good Faith [62] First we will address National Life’s argument that the judge applied the wrong test. Next we discuss Mr. Brine’s cross-appealthat two additional items breached the duty of good faith. Last will be National Life’s submissions that the judge erred in her identifiedbases for finding that National Life breached the duty. (

a) The Test [63] National Life cites the following passage from Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30 , [2006] 2S.C.R. 3: 71 ... But an insurer will not necessarily be in breach of the duty of good faith by incorrectly denying a claim that is eventuallyconceded, or judicially determined, to be legitimate. In this respect, we respectfully

part company with Finch, C.J.B.C. who, in awardingpunitive damages, characterized Sun Life’s concession that Ms. Fidler was entitled to benefits as “the civil equivalent of [a] ‘guilty plea’”(para. 78). The question instead is whether the denial was the result of the overwhelming inadequate handling of the claim, or theintroduction of improper considerations into the claims process. [Emphasis added] 72 Ultimately, each case revolves around its own facts. As O’Connor J.A. stated in 702535 Ontario: What constitutes bad faith will depend on the circumstances in each case.

A court considering whether the duty has been breachedwill look at the conduct of the insurer throughout the claims process to determine whether in light of the circumstances, as they thenexisted, the insurer acted fairly and promptly in responding to the claim. [para. 30] [64] National Life says Justice Bourgeois did not specifically address whether its handling of Mr. Brine’s case was “overwhelminglyinadequate” or whether there was an “introduction of improper considerations into the claims process”. [65] In our view, Justice Bourgeois did not mistake the test.

[66] The judge (¶ 189-192) reviewed the authorities. Later she began her analysis by agreeing with National Life’s caution: [266] As a starting point, I acknowledge and agree with the position advanced by National Life that not every breach of a "peace ofmind" contract of insurance, or every mis-step shown to have occurred will constitute a breach of the duty of utmost good faith. TheCourt must be cautious to not peer through the critical glasses which hindsight may tempt one to wear.

In assessing National Life'sconduct, the Court must be concerned with why a decision was made or a position advanced, and the information upon which such wasbased at the time. It is further important to articulate that the duty of utmost good faith extends over the duration of the life of a policy.

Although considerations such as privilege may arise once litigation is commenced, the fact that a legal claim has been filed does notserve to remove or lessen the duty to act in good faith. [67] In Fidler, ¶ 63, the Chief Justice and Justice Abella for the Court said that “the legal standard to which Sun Life and otherinsurers are held is correctly described” by Justice O’Connor in 702535 Ontario Inc. v. Lloyd’s London Underwriters (2000), (ON CA), 184 D.L.R. (4th) 687 (Ont. C.A.), at ¶ 29-30, which read: 29 The duty of good faith also requires an insurer to deal with its insured’s claim fairly.

The duty to act fairly applies both to themanner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim. In making a decisionwhether to refuse payment of a claim from its insured, an insurer must assess the merits of the claim in a balanced and reasonablemanner. It must not deny coverage or delay payment in order to take advantage of the insured’s economic vulnerability or to gainbargaining leverage in negotiating a settlement. A decision by an insurer to refuse payment should be based on a reasonable

interpretationof its obligations under the policy. 30 This duty of fairness, however, does not require that an insurer necessarily be correct in making a decision to dispute its obligationto pay a claim. Mere denial of a claim that ultimately succeeds is not, in itself,

an act of bad faith. Justice Bourgeois (¶ 189) described as “particularly helpful” Justice O’Connor’s description of the duty in ¶ 27-32 of 702535 OntarioInc. [68] Justice Bourgeois (¶ 192) referred to the

summary of the law in Kings Mutual Insurance Co. v. Ackerman, 2010 NSCA 39, ¶37, which stated: ...one thing that can lead to a breach of the duty of good faith and an award of punitive damages is the denial of a claim which resultedfrom the overwhelmingly inadequate handling of a claim; Fidler, supra, para. 71. [69] Importantly, the judge’s reasons show that, in her view, National Life clearly did not act fairly in handling several aspects ofMr. Brine’s claim. She carefully recounted the evidence and identified what gave her great difficulty.

She cited the “reasonablestandard”, mentioned by Justice O’Connor, to dismiss aspects of Mr. Brine’s submission that National Life had acted in bad faith. As wewill discuss, the judge held the view that National Life introduced improper considerations into the management of Mr. Brine’s claim.That responded to a component of the test in Fidler, ¶ 71. The judge did not consider her conclusion – that National Life breached itsduty - was a close call.

Though she did not use the words “overwhelmingly inadequate”, essentially she found that National Life’shandling of the claim over a span of years failed that standard. [70] The judge did not err in formulating the test. [71] We turn to the judge’s application of the test. First are Mr. Brine’s grounds of cross-appeal that the judge should have identifiedtwo additional breaches of National Life’s duty of good faith. (

b) National Life’s Allegation of Fraud [72] In the bankruptcy, National Life claimed that Mr. Brine’s debt for the overpayment was excluded under s. 178(1)(

d) becauseMr. Brine was a fiduciary and the debt arose from “fraud, embezzlement, misappropriation or defalcation.” [73] After Mr. Brine’s discharge from bankruptcy, National Life filed its 2001 lawsuit that led ultimately to the decision underappeal. National Life’s pleadings tracked the language of s. 178(1)(d). National Life withdrew its allegations of fraud andmisappropriation only during closing arguments before Justice Bourgeois. [74] At the trial before Justice Bourgeois, Mr.

Brine contended that National Life’s allegations of fraud and misappropriationconstituted bad faith. [75] The judge disagreed: [290] National Life has made allegations of wrongdoing against Mr. Brine, which argue a breach of the duty of utmost good faith. These allegations are contained both in the pleadings and in documentation in support of National Life's application to bring an actionnotwithstanding his bankruptcy. Notwithstanding that the Court has found that Mr.

Brine did not act in a fraudulent manner, theevidence available to National Life was such that making such allegations was not outside the reasonable range of positions available toan insurer. The Court has concerns that during that time period the insurer preferred to believe Mr. Brine, despite his known mentalcapacity, purposefully withheld information based upon its file review. I cannot conclude such amounts to bad faith. … [76] On this appeal, Mr. Brine submits that the judge erred.

He says that National Life’s allegations of fraud and misappropriationdid not have a reasonable basis in fact and the insurer did not conduct any investigation on the matter. [77] The judge found that making the allegations in its 2001 Statement of Claim “was not outside the reasonable range of positions”available to National Life. There is evidential support for the judge’s finding. In the circumstances, when it issued its Statement ofClaim, National Life had a reasonable basis for its belief that Mr. Brine had withheld information from it concerning his receipt of CPPand PSSA benefits.

[78] This is a factual matter. The judge made no palpable and overriding error. We dismiss this ground of Mr. Brine’s cross-appeal. (

c) National Life’s

Interpretation of the Pro Rata Clause [79] Mr. Brine’s cross-appeal asserts that the judge erred by not characterizing National Life’s

interpretation of the Pro Rata clause,respecting the timing for recovery of the overpayments, as a breach of its duty of good faith. The judge (¶ 268) said the insurer’s positionwas “not unreasonable or arbitrary in light of the policy provision in question. It was reflective of a possible

interpretation of the policy.” [80] According to Mr. Brine, the test is not whether the

interpretation was “possible”, but whether it was “fair and reasonable”: Bhasin v. Hrynew, 2014 SCC 71 , [2014] 3 S.C.R. 494, at ¶ 55, ¶ 59-71, Fidler, at ¶ 63 and 702535 Ontario Inc. He says thejudge applied the wrong test. [81] The judge repeatedly cited the principle from the authorities that the insurer must act “reasonably”. Her reasons said NationalLife’s

interpretation of the Pro Rata and Temporary Reductions provisions was “not unreasonable”. She did not misapply the test. Wedismiss this ground of Mr. Brine’s cross-appeal. [82] Next are the judge’s three bases for ruling that National Life breached its duty of good faith, all challenged by National Life. (

d) Discontinuance of Rehabilitation Services [83] The judge cited National Life’s discontinuance of rehabilitation services. [84] First, a factual

summary. [85] The Policy did not oblige the insurer to make rehabilitation services available to its insured. However, National Life decided toinvolve a rehabilitation counselor because of Mr. Brine’s young age and the possibility that he may be able to return to work. In aDecember 1, 1995 letter to Mr. Brine, National Life advised that such services would be provided to assist him with his “efforts to returnto the workforce, where practical”. [86] Dr. Rosenberg, Mr. Brine’s treating psychiatrist, was not consulted by National Life about the commencement of rehabilitationservices for his patient.

In his first report in relation to Mr. Brine to National Life, which was dated October 6, 1995, Dr. Rosenbergstated: ...His sleep is non-restorative, his energy and ambition are dissipated; his concentration is constantly preoccupied with matters relating tohis dismissal from work. He cries on a daily basis, has had vague thoughts of suicide, and markedly increasing irritability. He views hisfuture as being bleak. ... His estimate is that he is functioning at a level of 40% of his normal, with which I would concur. ... [87] Dr.

Rosenberg’s November 27, 1995 report said that “[t]he prognosis for most depressive illness is good to excellent”. His May28, 1996 report said: The prognosis for Mr. Brine’s major depressive episode is still good to excellent, although I am unable to provide a time frame regardingimprovement to a point where he will be able to return to the workplace. Currently, Mr. Brine has a GAF (Global Assessment ofFunctioning) of 55-60, with moderate symptomatology of depression and moderate difficulty in social and occupational functioning. When Mr.

Brine’s GAF is improved to a level of at least 70-80, it would be appropriate to consider rehabilitation efforts and a possiblereturn to the workplace. However, at this time, it is felt that Mr. Brine’s symptomatology still is sufficient enough to prevent a return tothe workplace. [Emphasis added] [88] In her report to the insurer dated January 22, 1996, rehabilitation counsellor Suzanne Azzie recounted her meeting with Mr.Brine and his wife, and repeated Dr. Rosenberg’s view at that time that Mr. Brine was functioning at only 30% of capacity and unable toundertake any kind of employment.

She indicated that she would maintain a weekly follow-up with Mr. Brine, which she did bytelephone. She also met with him in May 1997 when he was in Ontario for the hearing before the Human Rights Commission. Mr. Brinetestified that he was buoyed by the involvement of this well-respected rehabilitation specialist. [89] Ms. Azzie sent periodic updates to National Life. Her last report dated July 11, 1997 said that Dr. Rosenberg had recentlyadvised her that Mr. Brine’s condition was not getting better. Dr.

Rosenberg’s Attending Physician’s Initial Long-Term DisabilityBenefits Statement dated July 29, 1997, which National Life received in December 1997, noted that Mr. Brine then had a GAF score of60-65. He never advised National Life that Mr. Brine had reached a GAF of 70-80. [90] In June 1998, thirty months after rehabilitation had begun, National Life suspended Ms. Azzie’s rehabilitation services to Mr.Brine. Ms. Jako testified that she had reviewed his entire file, including medical reports, and suspended those services until she had moreinformation on his condition. National Life required Mr.

Brine to attend an independent medical examination with Dr. Allan D. Peterkinin Ottawa. His August 11, 1998 report gave Mr. Brine’s GAF as 60 to 65, and concluded with this

summary: From a strictly psychiatric point of view, Mr. Brine’s symptoms do not prevent him from working at this time. He is rageful but notseverely depressed or suicidal and there is no history of psychosis or severe anxiety disorder. The absence of any work or re-trainingchallenge may indeed worsen Mr. Brine’s chronic rage symptoms as he finds himself ruminating about the workplace on a daily basis.

Ongoing counselling with a maximizing of his medical treatment and decreasing of his alcohol intake may assist him in working throughhis anger in such a way that would sustain a return to the workplace. [91] After receiving the Peterkin Report, National Life terminated the rehabilitation services.

[ 92 ] Justice Bourgeois found that National Life had breached its duty of good faith. The following passages encapsulate the judge’s reasoning: [274] In my view, National Life cannot escape its obligation to manage in good faith the provision of this benefit, just because it was not obligated to provide it in the first instance. National Life chose to provide rehabilitation services. It chose to provide such services contrary to the recommendation of Dr. Rosenberg. The duty of utmost good faith attaches to its management of this benefit. Ms. Jako made the decision to suspend Mr.

Brine’s rehabilitation services, and further decided not to subsequently re-instate them. As referenced earlier, the Court has concern with respect to her evidence regarding her rationale for these decisions. [275] …If Mr. Brine had no reasonable chance of returning to work, she [Ms. Jako] testified the continuation of rehabilitation services would be unwarranted. … [276] …What elicits concern however is the “last” Rosenberg report Ms. Jako repeatedly pointed to as justification for suspending rehabilitation services and her view that Mr.

Brine was not improving sufficiently to participate in rehabilitation services. That report was dated July 30, 1997, nearly 11 months prior to suspending Ms. Azzie’s services. There was no current medical information on file as to Mr. Brine’s actual condition in June of 1998. None was sought from Dr. Rosenberg prior to suspending services, nor was Ms. Azzie consulted. Instead, the Peterkin IME was requested. [277] Dr. Peterkin did not opine that Mr. Brine was incapable of returning to work. To the contrary, he was of the view that his present condition did not prevent him from working.

That was the very issue on which Ms. Jako testified she wanted an objective independent opinion, in order to decide whether to continue with rehabilitation services. Despite the opinion saying Mr. Brine was capable of returning to work, Ms. Jako did not re-instate rehabilitation services. [278] Challenged in cross-examination, Ms. Jako provided two explanations for not acting on the very opinion she had sought to obtain. Firstly, the list of treatment recommendations made by Dr. Peterkin was so onerous; she did not feel it was “fair” to expect Mr.

Brine to attempt a return to work while implementing such treatment. Secondly, she testified she became aware shortly thereafter that Mr. Brine had qualified for CPP, and in such circumstances claimants never return to work. … … [282] With respect to Ms. Jako’s explanation that rehabilitation was not re-instated due to Mr. Brine’s receipt of CPP benefits, I cannot accept such as a valid rationale for concluding Mr. Brine was incapable of returning to work, and thus rehabilitation was not warranted. Firstly, Ms. Jako did not have access to the medical information which supported the successful CPP application.

Secondly, such a finding was contrary to the very recent opinion of Dr. Peterkin. Finally, National Life made no attempt to discuss with Mr. Brine whether he would want to participate in rehabilitation notwithstanding his receipt of CPP benefits. [283] …Ms. Jako acted on obviously outdated medical information from Dr. Rosenberg and made no attempt to collect current information as to Mr. Brine’s status or the advisability of stopping rehabilitation once it had been started. Upon receipt of the Peterkin report, Ms. Jako ignored the very opinion for which she had suspended rehabilitation in order to obtain.

Again, she forged ahead with her own view, without seeking clarification or important input from those more suited to offer insight. Ms. Jako’s handling of the above constituted a breach of National Life’s duty of utmost good faith to their insured. [ 93 ] Under the heading “Long-Term Disability Benefit”, the Policy’s “Rehabilitation” provision spoke of a rehabilitation program to be “approved in advance by the Insurer”. But the provision did not specify how or when National Life may terminate such an approved rehabilitation service.

National Life says it was under no obligation to approve rehabilitation in the first place. So how, asks National Life, may its discontinuance of the service be in bad faith? [ 94 ] In Bhasin , the Supreme Court of Canada expanded the implied duty of good faith from insurance, and similar implied contractual duties from other particular contexts, into a general contractual duty.

Justice Cromwell for the Court said: [55] This Court has also affirmed the duty of good faith which requires an insurer to deal with its insured’s claim fairly, both with respect to the manner in which it investigates and assesses the claim and to the decision whether or not to pay it: [citing Fidler and 702535 Ontario Inc. ]. … … [65] The organizing principle of good faith exemplifies the notion that, in carrying out his or her own performance of the contract, a contracting party should have appropriate regard to the legitimate contractual interests of the contracting partner.

While “appropriate regard” for the other party’s interests will vary depending on the context of the contractual relationship, it does not require acting to serve those interests in all cases. It merely requires that a party not seek to undermine those interests in bad faith. … … [93] A

summary of the principles is in order:

(1) There is a general organizing principle of good faith that underlies many facets of contract law.

(2) In general, the particular implications of the broad principle for particular cases are determined by resorting to the body of doctrine that has developed which gives effect to aspects of that principle in particular types of situations and relationships.

(3) It is appropriate to recognize a new common law duty that applies to all contracts as a manifestation of the general organizing principle of good faith: a duty of honest performance, which requires the parties to be honest with each other in relation to the

performance of their contractual relations. [95] Bhasin’s ruling involved an implied contractual duty of honest dealing. At issue here is the insurer’s implied contractual duty ofgood faith. Bhasin makes it clear that these sibling duties stem from the same root – what Justice Cromwell termed “the organizingprinciple of good faith that underlies and manifests itself in various more specific doctrines governing contractual performance” (¶ 63and also ¶ 55 and 93). From that common perspective, Bhasin helps us to understand the scope of the insurer’s implied duty. [96] In Bhasin, the contract literally gave Can-Am unfettered discretion to terminate the contract by notice.

Article 3.3 said that thecontract would renew unless [either party] notifies the other in writing at least six months prior to the expiry of the Initial Term or any renewal Term that thenotifying party desires expiry of the Agreement, in which event the Agreement shall expire at the end of such Initial Term or RenewalTerm, as applicable. [quoted in Bhasin, ¶ 95] [emphasis added] Can-Am submitted that

Article 3.3 unambiguously allowed no scope to imply any restriction on Can-Am’s authority to terminate bynotice (see ¶ 31). [97] Similarly, National Life says that the Policy did not restrict its unfettered discretion whether to provide, and therefore terminate,Mr. Brine’s rehabilitation services. [98] In Bhasin, the trial judge, to whom the Supreme Court deferred for the facts, found that Can-Am had acted dishonestly in theexercise of its contractual discretion to terminate by notice. From this, the Supreme Court of Canada held that Can-Am breached itsimplied duty, and owed damages.

Justice Cromwell said: [103] … I conclude that Can-Am breached the 1998 Agreement when it failed to act honestly with Mr. Bhasin in exercising the non-renewal clause. [99] As with any implied contractual term, there may be an issue whether an express term excludes the implication. Bhasin’soutcome is helpful on that point. Bhasin’s contract was more explicitly directive than National Life’s Policy.

Article 3.3 expresslypermitted Can-Am to send a notice of termination and said that, after the notice, “the Agreement shall expire”. If Can-Am’s literallyunfettered power to terminate had been a complete defence, Mr. Bhasin’s claim would have failed. Yet Can-Am breached its impliedduty.

The contract’s explicit acknowledgement of the discretion and its directed consequence did not exclude the implied standard thatmust accompany the exercise of the discretion. [100] Similarly National Life’s bad faith - if we uphold the judge’s findings in that regard - pertains to whether it breached its impliedcontractual duty of good faith to Mr. Brine. [101] Bhasin’s broad organizing principle and its outgrowth duties do not just tack an extra sanction onto the breach of an explicitcontractual term.

Neither are the duties of honest dealing in Bhasin, or good faith in the insurance context, just executive summaries ofthe contract’s written terms. They are independent implied contractual obligations that derive from the existence of the contract. WhetherNational Life breached its duty of good faith is not predicated on the condition precedent that National Life breached an explicitprovision of the Policy. [102] This view is supported by the Ontario Court of Appeal’s ruling, on an interlocutory appeal, in Kang v. Sun Life Assurance Co. ofCanada, 2013 ONCA 118.

The insured sued the insurer for breach of the duty of good faith in the administration of the policy. The judgeof first instance struck the insured’s claim because “it cannot be a breach of good faith and fair dealing to administer insurance policies inaccordance with their terms” (see ¶ 12 of the OCA’s decision).

The Court of Appeal reversed the ruling, noting: 34 As for the first breach – that Sun Life failed to administer the policies in accordance with MetLife’s misrepresentations – neitherthe motion judge nor the respondents produced a Canadian authority for the proposition that an insurer who has complied with theexpress terms of the contract cannot have breached its duty of good faith and fair dealing. The plaintiffs, however, point to Shelanu Inc.v.

Print Three Franchising Corp. (2003), (ON CA), 64 O.R. (3d) 533, a case involving a franchisor-franchiseerelationship, in which this court held, at para. 71, that “the fact that contractual terms are ultimately complied with, does not mean thatthere has been no breach of the duty of good faith”. As this proposition may apply in the insurance context, and as its scope has yet to bedetermined, this first branch of the plaintiffs’ duty of good faith claim could possibly succeed. [103] We turn to Justice Bourgeois’ application of the test.

Fidler, ¶ 63, 71-72, and its adopted passage from 702535 Ontario Inc., posethe questions: Did National Life deal with Mr. Brine’s claim “fairly?” Was its handling of rehabilitation “overwhelmingly inadequate?”Did National Life introduce “improper considerations”. The insurer’s duty to act fairly applies to “the manner in which it investigates andassesses the claim and to the decision whether or not to pay it” (Bhasin, ¶ 55, Fidler, ¶ 63). [104] Justice Bourgeois found that National Life’s assessment of Mr. Brine’s rehabilitation potential was influenced by improperconsiderations. She found that Ms.

Jako disregarded the medical evidence that rehabilitation could assist Mr. Brine to return to workdespite that National Life earlier had identified that medical evidence as pivotal. Without asking Mr. Brine, Ms. Jako assumed that,because Mr. Brine qualified for CPP, he would never return to work and rehabilitation was pointless. The judge said “I cannot acceptsuch as a valid rationale”. Essentially the judge found that Ms. Jako applied an improper consideration. [105] There is no palpable and overriding error in the judge’s findings.

Given these facts, in our view the judge was entitled to concludethat improper considerations generated National Life’s decision to terminate rehabilitation. The provision of rehabilitation, though notmandated by the Policy, was an element of National Life’s assessment of Mr. Brine’s claim to which the duty of good faith attaches. [106] We dismiss this ground of National Life’s appeal.

(

e) Late Production of Rubens Report [ 107 ] In 2002, National Life asked Mr. Brine to attend a psychiatric assessment by Dr. Mark Rubens. Dr. Rubens’ report included: 9. The patient's occupational future, of course, also remains uncertain. Potentially, again, some changes might be made in this area (providing the patient with rehabilitation counselling, for example, and directing him into other possible areas of work). However, the availability of such counselling, and the patient's willingness to participate in such a process in an open-minded and co-operative way has to be considered somewhat doubtful.

Again, there is potential for improvement, but the actual circumstances at present are not favourable. 11. I believe the impairments I have summarized here would also be relevant to any occupation I could imagine a person of Mr. Brine’s experience and maturity being able to realistically work at. As I shall discuss presently, however, I think that this patient can and should at this point begin to expand his activities in various ways, and that such activities can at this point begin to include activities relevant to possible future occupational involvements.

To define these matters more specifically, however, a transferable skills analysis would be required, as well as the involvement, perhaps for a somewhat prolonged period of time, of a rehabilitation counsellor or specialist. Dr. Rubens’

Summary included: ... The identification of possible alternative occupations for this patient by means of a formal transferable skills analysis, and involvement with a rehabilitation specialist over a relatively prolonged period of time would be helpful, but may not occur in practical terms. This patient is suffering from a psychiatric illness of moderate to severe intensity. This affects his capacity to participate effectively in rehabilitation and occupational activities.

The prognosis, both clinically and occupationally, remains uncertain as there are as yet many unpredictable elements in this patient’s ongoing illness and future course. [ 108 ] National Life did not contact Dr. Rubens to clarify his recommendations and reservations. Neither did it contact Mr. Brine to assess his willingness to participate in rehabilitation services. [ 109 ] National Life did not provide a copy of the Rubens Report to Mr. Brine for ten years – i.e. , until the week before trial.

In this regard, the judge wrote: [285] Closely related to the decisions surrounding rehabilitation services is National Life's request for and response to the Rubens report. … that report, received by National Life in April of 2003, was not disclosed to Mr. Brine until the week prior to trial. The Court heard no evidence as to why that report was requested, nor was the letter of request to Dr. Rubens provided which may have shed some light on that point. The report does provide some assistance in that Dr. Rubens notes he was asked by the referral source to comment on "the severity of Mr.

Brine's depression and whether the effect of it, or any other condition, prevents him from performing his own or any other occupation" as well as whether Mr. Brine could benefit from "anger management". [286] …the Rubens report contains statements relevant to whether or not rehabilitation services could have been of assistance to Mr. Brine. ... On the surface, the comments do appear to be generally supportive of rehabilitative efforts being implemented, subject to Mr. Brine's openness to participating in such efforts. The problem is that the Court did not have the opportunity to hear from Dr.

Rubens directly on that issue, and cannot reach a conclusion one way or another, as to what, if anything, he was recommending. [287] The late disclosure of the Rubens report had several consequences. Mr. Brine's counsel was deprived of the opportunity to inquire further as to Dr. Rubens' opinion, and to have Dr. Rosenberg subsequently comment on same in a more meaningful way than was afforded to him. Mr. Brine was deprived of the opportunity to have Dr. Rubens' comprehensive recommendations considered in a timely fashion by his own treating physician. Mr. Brine was deprived of the opportunity to utilize Dr.

Rubens' views as support for his request to re-initiate rehabilitation services. [288] Mr. Brine was entitled to be provided with a copy of the Rubens report. It is a certainty that if his counsel had sought an order compelling disclosure, it would have been granted. Counsel's failure to "push the envelope" in that regard did not however, derogate from National Life's obligation of timely disclosure. Holding the report in excess of a decade prior to disclosing same is, on its face, inconceivable. No explanation for this omission was offered. None. Not that it got lost.

Not that there was a mistaken belief it had been disclosed. Not that there was a view held until the eve of trial that it was subject to a claim of privilege. None. [ 110 ] The judge held that National Life’s failure to produce the Report breached its duty of good faith: [289] At this juncture, the Court could stop and simply find that the failure to disclose the Rubens report in a timely fashion constituted a breach of National Life's duty of utmost good faith. More in my view is required. Why did National Life fail to disclose the Rubens report?

Based on the evidence of National Life's approach to this matter, and the lack of any form of reasonable explanation, I conclude that the report was purposefully withheld as it, at a minimum, would have triggered renewed requests for rehabilitation, and at worst, provided evidence supportive of Mr. Brine's claim to provide such services. National Life did not want to face the consequences which would have arisen from a timely disclosure in April of 2003. Instead, it chose the latest possible opportunity to disclose, days before trial, effectively preventing Mr.

Brine from exploring the possible ramifications of the report.

[ 111 ] National Life argues that Mr. Brine did not plead its failure to produce the Rubens Report, so it should not have been considered as a particular of bad faith. National Life submits that parties may not raise un-pleaded issues. [ 112 ] Mr. Brine pleaded that National Life breached its duty of good faith. He did not plead the late production of the Rubens report as a particular. However, the significance of the Rubens Report only became apparent when National Life produced it just days before the trial, and after the parties had agreed to final amendments to the pleadings.

Even then, National Life counsel or witnesses might have given a reasonable explanation for the delay during the trial. Only when its representatives were cross-examined did Mr.

Brine and his counsel realize that no explanation was offered. [ 113 ] In these circumstances, it is our view that the judge did not err by considering, as a factor in her good faith analysis, National Life’s unexplained failure to disclose the Rubens Report on a timely basis. [ 114 ] As to the substance of the breach, we repeat the judge’s strong findings: [289] …the report was purposefully withheld as it, at a minimum, would have triggered renewed requests for rehabilitation, and at worst, provided evidence supportive of Mr. Brine’s claim to provide such services.

National Life did not want to face the consequences which would have arisen from a timely disclosure in April of 2003. Instead, it chose the latest possible opportunity to disclose, days before trial, effectively preventing Mr. Brine from exploring the possible ramifications of the report. [ 115 ] There is no basis to say that these findings are palpably wrong. Given the findings, this is not just neglectful tardiness. It is a deliberate attempt by the insurer to handicap its insured.

The judge’s findings on the Rubens Report and the termination of rehabilitation services mutually reinforce the judge’s findings that National Life introduced improper considerations into the handling of Mr. Brine’s rehabilitation. [ 116 ] We dismiss National Life’s ground of appeal on the Rubens Report. [ 117 ] We note that National Life’s appeal counsel were not involved during the trial. (

f) T4 Slips for Disability Benefits [ 118 ] National Life and Mr. Brine differed diametrically on the tax treatment of his disability benefits. The insurer classified them as taxable and issued T4 slips showing them as such, except during the claw-back period which ended in 2003. Based on legal and accounting advice, Mr. Brine considered them non-taxable and did not claim them as income. This led to reassessments by the Canada Revenue Agency. [ 119 ] The judge summarized the events: [292] In 2006, Mr.

Brine successfully appealed a ruling of the Minister of National Revenue, the substance of which asserted that the income received as disability benefits from National Life in the 2003 tax year, should have been claimed as taxable income. Mr. Brine disagreed, arguing the benefits were non-taxable and the Tax Court agreed with him. Ms. Antonini testified National Life was aware of that decision. Notwithstanding my concerns regarding the overall reliability of her evidence, I accept that National Life knew, or ought to have known about the Tax Court ruling in 2006. It continued to issue Mr.

Brine T4 slips showing the benefits as being taxable income which prompted continued disputes for Mr. Brine with Revenue Canada. Based on the ruling, he did not claim the income, but because a T4 slip was issued, Revenue Canada made repeated contacts with him inquiring as to his failure to claim, and again re-assessed his income in the 2009 taxation year to include the income issued by National Life. This prompted yet another appeal to the Tax Court in 2010 on the identical basis as the 2006 matter. Mr. Brine was again successful.

National Life continued to issue T4 slips showing the disability benefits as taxable. [ 120 ] Justice Bourgeois found that National Life’s treatment of the issue breached its duty of good faith. She reasoned: [293] National Life submits it did not alter its approach to the taxability of Mr. Brine’s benefits post-2006 because he had never asked it to do so, and it took the view, according to the evidence of Ms. Antonini, that based on information from the Treasury Board, that the 2006 ruling of the Tax Court was incorrect. At this point, given Mr. Brine’s prior communications, National Life was well aware of Mr.

Brine’s views regarding the taxability of his benefits, as well as the fact that he found dealing with that issue an added stressor. … [294] The Court was presented with no evidence of substance as to National Life’s attempts to seek clarification from the Treasury Board, or from any other appropriate source, with respect to any direction it may offer regarding what response, if any, to the Tax Court decision was warranted. There is no evidence as to what information, if any, may have been received. No such evidence was contained in the National Life file materials relating to Mr. Brine’s claim.

What is certain is that National Life had in 2006 an unappealed decision of the Tax Court of Canada which found the disability payments it was paying to Mr. Brine to be not taxable. What is certain is National Life knew Mr. Brine had earlier taken issue with National Life issuing T4 slips classifying the disability benefits as taxable.

What is certain is that National Life knew its insured was disabled due to depressive illness and he had advised that this matter added to his mental stress. [295] I agree entirely with the submissions of National Life’s counsel that it is not responsible for making a determination as to the taxability of benefits paid under the policy. In my view, however, in light of the circumstances known to it in 2006, National Life had an obligation to pro-actively ascertain whether it should alter its previous approach to classifying the benefits as taxable. It was, as part of its obligation to manage Mr.

Brine’s claim fairly, required to either implement the Tax Court’s decision, or present a very good reason why it did not. Ms. Antonini’s evidence that contact was made with the Treasury Board, is questionable in terms of its reliability, and even if believed, falls far short of justifying why National Life ignored a court decision directly related to the benefits it was issuing. In my view, National Life breached its duty of utmost good faith by failing to meaningfully address and consider whether it should continue to classify Mr.

Brine’s disability benefits as taxable income following the 2006 Tax Court decision. [ 121 ] In the Court of Appeal, National Life points out that Mr. Brine first raised the issue of taxability in 1998, that in 1999 National

Life contacted the Treasury Board, and the Treasury Board then advised that the benefits were taxable. According to National Life, nothing changed before it received the 2006 Tax Court decision. National Life alleges that then, as in 1999, it consulted the Treasury Board. [ 122 ] The judge found otherwise. She said there was no substantive evidence that National Life consulted or received advice from the Treasury Board after the 2006 Tax Court Decision. [ 123 ] National Life also submits that it was not responsible for determining the taxability of benefits paid under its policies.

This, it maintains, means that the judge erred by stating (¶ 295) that its obligation to manage Mr. Brine’s claim fairly required it to “pro-actively ascertain whether it should alter its previous approach to classifying the benefits as taxable” and to “implement the Tax Court decision”. [ 124 ] The submission misses the judge’s point. Nobody suggested that National Life should have made a tax ruling. That was the Tax Court’s job. If there had been evidence, for example, that after the 2006 Tax Court ruling, the Treasury Board had instructed that ruling was under appeal and National Life

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