our monthly benefit reinstated. That’s fair — it’s the income you and your family depend on. But in some cases, Ontario and Alberta courts have found that an insurer didn’t just get the decision wrong. They handled the claim so unfairly that they were ordered to pay the claimant significantly more than the benefits owed — sometimes hundreds of thousands of dollars more.
This is called bad faith, and the additional compensation is known as aggravated damages and punitive damages. Here’s what that means, how courts decide it, and how to know if it might apply to you.
Table of Contents
- Insurance Is a Contract Built on Good Faith
- What Bad Faith Looks Like in an LTD Claim
- What Compensation May Be Available
- The Cases That Set the Rules
- Which Disability Insurers Can Be Sued for Bad Faith?
- What Our Lawyers Look For When Reviewing a Potential Bad Faith Claim
- Does This Apply in Alberta Too?
- Signs It’s Worth Asking a Lawyer About Bad Faith
- What to Do if You Suspect Your Insurer Acted in Bad Faith
- Frequently Asked Questions
Insurance Is a Contract Built on Good Faith — on Both Sides
When you and your employer pay premiums for disability insurance, you’re not just buying a financial product. You’re buying peace of mind: the promise that if you become too sick or injured to work, the insurer will be there.
Canadian courts treat that promise differently than an ordinary commercial contract.
Insurers have a legal duty of good faith. They must investigate claims fairly, consider all relevant medical evidence, communicate honestly, and make decisions based on a balanced review of the file.
A denial that turns out to be wrong is not automatically bad faith. Insurers are allowed to dispute claims they genuinely believe don’t meet the policy’s definition of disability. Bad faith involves something more: unfair, dishonest, misleading, reckless, or unreasonable conduct in the handling of the claim itself.
What Bad Faith Looks Like in an LTD Claim
Bad faith rarely shows up as one obvious act. More often, it’s a pattern that becomes visible once the entire claim file is reviewed — not just the denial letter, but everything behind it.
Broadly, the conduct courts have scrutinized falls into a few categories:
- How the medical evidence was handled — whether treating specialists were genuinely weighed, or quietly set aside in favour of a file review by a doctor who never examined the claimant
- How surveillance was used — whether footage was assessed in context, or stretched to mean more than it showed
- How the claim was communicated — repeated “still under review” delays, shifting reasons for denial, or decisions that were never clearly explained
None of these, alone, guarantees a finding of bad faith. But together, they’re the kind of pattern that has led Canadian courts and juries to award significant damages beyond what the policy itself promised.
What Compensation Can Be Recovered Beyond Unpaid Benefits?
- Compensatory damages — the disability benefits that should have been paid, including past benefits owed and, where appropriate, future benefits.
- Aggravated damages — compensation for mental distress caused by the wrongful denial itself. Disability insurance exists to provide financial and emotional security; when an insurer wrongfully takes that away, the resulting stress and hardship may be compensated even without proof of a separate wrongdoing beyond the contract breach. These awards are typically modest relative to punitive damages — often in the five-figure range — but they don’t require the same high bar of proof.
- Punitive damages — a separate, much rarer category, intended not to compensate the claimant but to punish the insurer and deter the same conduct against future policyholders. Punitive damages require proof of a marked, serious departure from the duty of good faith — not just an incorrect decision.
The Cases That Set the Rules
Whiten v. Pilot Insurance Co. (2002, Supreme Court of Canada) is the foundational Canadian case on punitive damages against insurers. It wasn’t a disability case — a homeowner’s insurer denied her fire claim and accused her of arson despite the evidence — but the Supreme Court’s ruling that insurers owe policyholders a duty of good faith, and that egregious claims-handling can justify a serious punitive award, became the framework every LTD bad faith case is built on. The Court upheld a $1 million punitive damages award.
Fidler v. Sun Life Assurance Co. of Canada (2006, Supreme Court of Canada) brought that framework directly into disability claims. Sun Life had terminated a claimant’s LTD benefits; the Court found the denial was wrong and awarded damages for mental distress, recognizing that years spent without promised income protection causes real harm beyond the lost money. At the same time, the Court drew an important line: Sun Life’s decision, while incorrect, reflected a genuine — if mistaken — belief about the claimant’s capacity to work, not the kind of deliberate or reckless conduct that justifies punitive damages. Fidler is the case that shows both sides of the line in a single decision.
Fernandes v. Penncorp Life Insurance Company (2014, Ontario Court of Appeal) involved a bricklayer denied LTD benefits after significant back injuries, despite strong supporting medical documentation. His insurer relied on weak surveillance footage to argue he could return to physically demanding work. The court found the insurer had failed to assess the claim fairly against the full evidence, and the Court of Appeal upheld roughly $236,000 in compensatory damages, $25,000 in aggravated damages, and $200,000 in punitive damages.
Baker v. Blue Cross Life Insurance Company of Canada (2023, Ontario Court of Appeal) is the high-water mark. A Humber River Hospital employee suffered a stroke and was denied ongoing LTD benefits after Blue Cross concluded — over her treating physicians’ objections — that she could return to work. At trial, a jury found Blue Cross had ignored contrary medical evidence and conducted roughly 375 hours of surveillance that didn’t actually undermine her claim, building what the Court of Appeal described as a closed loop of information that disregarded anything inconsistent with denial. The jury awarded $1.5 million in punitive damages — the largest such award in a Canadian LTD case — plus roughly $1 million in costs, and the Court of Appeal upheld it.
Together, these cases show both sides of the line: an insurer can be found wrong, and even owe substantial back benefits, without facing punitive damages — and an insurer that handles a claim with genuine recklessness toward the evidence can face damages well beyond what the policy itself ever promised.
Which Disability Insurers Can Be Sued for Bad Faith?
The duty of good faith applies to every disability insurer operating in Canada. Kotak Law has taken on claims against insurers including:
- Manulife
- Sun Life
- Desjardins Insurance
- Canada Life
- Great-West Life
- Blue Cross
- Equitable Life
- Empire Life
- London Life
- RBC Insurance
- Industrial Alliance (iA Financial Group)
- SSQ Insurance
- AIG
- Cigna
- Fenchurch
- OTIP
- Teachers Life
The issue is never simply which insurer denied the claim. It’s whether the insurer handled the claim fairly and met its legal obligations.
What Our Lawyers Look For When Reviewing a Potential Bad Faith Claim
When someone contacts Kotak Law after a denial, we look beyond the denial letter itself — we look at how the claim was actually handled, start to finish.
Internal medical reviews. Did the insurer set aside treating specialists in favour of a non-examining consultant’s file review?
Surveillance evidence. Was footage interpreted fairly, in the context of the claimant’s actual diagnosis and limitations — or stretched to suggest more than it showed?
Vocational assessments. Was there a genuine, evidence-based basis to conclude the claimant could perform another occupation?
Internal claim notes. Do the insurer’s own records reveal hesitation, disagreement, or shortcuts in how the decision was reached?
Consistency of rationale. Has the stated reason for denial shifted over time, without new medical evidence to explain the change?
Pattern of delay. Were repeated “still under review” responses used to put off a real decision?
In our experience, bad faith is almost never obvious from the denial letter alone. It surfaces once we obtain and review the insurer’s file, internal communications, and medical assessments. Not every unfair-feeling denial amounts to bad faith — but these are the patterns we know to look for, and insurers know we look for them.
Does This Apply in Alberta Too?
Yes. The duty of good faith and the principles governing aggravated and punitive damages come from Supreme Court of Canada decisions that apply nationwide. Alberta courts apply the same general framework as Ontario courts when assessing whether an insurer’s conduct crossed the line from a wrong decision into bad faith.
Procedural rules and limitation periods do vary by province, which is one more reason to get advice from a lawyer licensed where you live.
Signs It’s Worth Asking a Lawyer About Bad Faith
- Your insurer’s position contradicts what your own specialists have said in writing
- You were followed, photographed, or asked about your social media activity, and the insurer’s read on that surveillance doesn’t match your actual limitations
- You’ve been told for months that your file is “still under review” with no clear answer
- The stated reason for your denial has changed more than once
- You felt pressured to accept a settlement quickly, or before you’d had a chance to get legal advice
- Your benefits were terminated right at the switch from “own occupation” to “any occupation,” without meaningful new medical evidence
What to Do if You Suspect Your Insurer Acted in Bad Faith
- Don’t sign a release or settlement before getting legal advice — including a reconsideration request prepared by the insurer.
- Request your complete claim file in writing. This often contains the internal notes and assessor communications that reveal how the decision was really made.
- Preserve your own records — denial letters, emails, call logs, and notes on anything that felt evasive or inconsistent.
- Don’t rely solely on the insurer’s internal appeal process. It’s run by the same company that denied you, and it can simply delay your ability to pursue a stronger legal remedy.
- Speak with a disability lawyer as early as possible. Limitation periods are strict, and early involvement makes it easier to preserve evidence of how the claim was actually handled.
Frequently Asked Questions
Does a denied claim automatically mean my insurer acted in bad faith? No. An insurer can be wrong without acting in bad faith. Bad faith requires evidence of unfair, dishonest, reckless, or unreasonable conduct — not just an incorrect outcome.
Can I sue my disability insurer for emotional distress? Potentially. Aggravated damages may be available where a wrongful denial causes significant mental distress, separate from the unpaid benefits themselves.
How much can I recover in punitive damages? There’s no fixed formula. Courts look at how serious and deliberate the misconduct was, and whether the insurer is a large company for whom a smaller award wouldn’t act as a real deterrent. Most cases don’t involve punitive damages at all — they resolve with payment of the benefits owed. Where they are awarded, amounts have ranged from the tens of thousands of dollars up to the $1.5 million awarded in Baker v. Blue Cross.
What’s the typical range for aggravated damages? These tend to be more modest than punitive damages — commonly in the five-figure range, depending on the severity and duration of the distress caused by the denial.
Do I have to prove bad faith to get my benefits paid? No. A straightforward breach of contract claim — showing you meet the policy’s definition of disability — is enough to recover your unpaid benefits. Bad faith and punitive damages are an additional claim layered on top, available only where the insurer’s conduct was particularly unfair.
Can I obtain the insurer’s internal claim file? Often, yes. Internal notes, surveillance reports, medical reviews, and correspondence can become available through the litigation process, and they’re frequently where the strongest evidence of bad faith is found.
What if my benefits were terminated after the switch from “own occupation” to “any occupation”? This is one of the most common points at which LTD benefits are cut off. The insurer still has to support that decision with credible, current medical and vocational evidence — not just point to the policy language.
What if I already appealed the denial internally? You may still have legal options. Limitation periods keep running during an internal appeal, so don’t rely on that process alone to protect your rights.
How long does an LTD lawsuit take? Timelines vary significantly. Some claims resolve through negotiation or mediation within months; others proceed through litigation and take longer.
How long do I have to take legal action? Limitation periods are strict and depend on your province and the date of denial. Waiting to get advice is one of the most common ways claimants lose options they didn’t know they had.
If Your Claim Was Denied, You Don’t Have to Take the Insurer’s Word for It
At Kotak Law, disability litigation isn’t a side practice — it’s what we do every day for clients across Ontario and Alberta. If your claim has been denied, terminated, or delayed, we’ll review your denial letter, policy, and medical evidence at no cost. If we believe the insurer handled your claim unfairly, we’ll explain your options — including whether a claim for aggravated or punitive damages may apply.
Call 1-888-GOKOTAK (1-888-465-6825) for a free, no-obligation consultation. You pay nothing unless we recover compensation for you.
This article is intended for general information purposes only and does not constitute legal advice. Every disability claim is different — contact Kotak Law to discuss the specific facts of your case.
