Suing Your Disability Insurer for Bad Faith in Ontario

When a disability insurer cuts off the benefits you paid for while you are too sick to work, it is not just a contract dispute. Insurers owe their policyholders a duty of good faith, and when they break it, Ontario courts have shown they will make them pay well beyond the benefits themselves. The extra damages can dwarf the claim.

Do disability insurers owe you a duty of good faith?

Yes. An insurer cannot deny coverage or delay payment simply to take advantage of a claimant's financial vulnerability or to gain leverage in a settlement. It has to investigate fairly, weigh the medical evidence honestly, and pay valid claims. When it instead treats the claim as something to defeat, it breaches that duty, and the breach is a wrong the court can compensate and punish on its own, separate from the unpaid benefits.

What does insurer bad faith look like?

• Terminating benefits based on brief surveillance clips that show only light activity, while ignoring the full medical picture.
• Preferring a paper review by a contracted doctor over your treating physicians without good reason.
• Repeatedly denying benefits without warning or a fair explanation.
• Taking an adversarial stance from the very start of the claim.
• Cutting off a vulnerable, unwell claimant to pressure a cheap settlement.

Aggravated damages for the distress it causes

A wrongful denial hits people when they are least able to absorb it, and courts recognize that harm. In Lyons v. Canada Life Assurance Co. (2002 CanLII 18089), the court awarded 235,000 dollars in aggravated damages for the way the insurer handled a disability claim. These damages compensate for the mental distress, anxiety, and financial pressure a bad-faith denial inflicts, and they are separate from, and on top of, the benefits the insurer should have paid all along.

Punitive damages: when the insurer is punished

Where an insurer's conduct is truly high-handed, courts add punitive damages to denounce and deter it. In Fernandes v. Penncorp Life Insurance Company (2014 ONCA 615), the insurer terminated benefits based on surveillance showing only brief light activity, contradicting its own expert who supported total disability; the Court of Appeal upheld 200,000 dollars in punitive damages plus aggravated damages. And in Baker v. Blue Cross Life Insurance Company (2023 ONCA 842), where the insurer repeatedly denied benefits without warning and relied on flawed opinions from contracted physicians while ignoring the claimant's own doctors, the Court of Appeal upheld a striking 1.5 million dollars in punitive damages as necessary to deter systemic misconduct.

What drives the size of these awards?

The worse and more deliberate the conduct, the larger the award. Courts look at how reprehensible the insurer's behaviour was, how vulnerable the claimant was, whether the misconduct looks systemic rather than a one-off, and whether the insurer stood to profit from wrongly denying claims. A single administrative error is unlikely to attract punitive damages; a pattern of ignoring medical evidence and stonewalling a sick claimant is exactly what does.

What should you do if your insurer is acting in bad faith?

1. 1.Keep every letter, form, and phone note, and a record of the medical evidence you sent and when.
2. 2.Ask the insurer, in writing, to explain the specific medical basis for its decision.
3. 3.Do not accept a lowball settlement offered while you are under financial pressure.
4. 4.Get advice promptly. There are limitation deadlines, and a free review can assess both your benefits and a bad-faith claim.

A bad-faith claim usually rides on top of the fight for the benefits themselves, so start with your denied LTD claim and watch for the change from own occupation to any occupation, a common flashpoint. If the insurer is leaning on video, see how surveillance is actually used and challenged.

About the Author

Omar Haddad

Legal Writer, Mirza Law

Omar Haddad is a legal writer at Mirza Law in Toronto. He writes about termination, medical and disability leave, and what the law protects when an employee is let go.

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