Thursday, June 29, 2006

Fidler-Case Comment-Thumbs Up

Fidler arises out of a conflict well known to employers, insurance companies and disabled people. Someone claims disability benefits on the basis of fibromyalgia and chronic fatigue syndrome - very real conditions which are easy to fake. The insurance company suspects malingering and terminates benefits. The claimant brings legal action. The insurance company concedes entitlement at the courthouse steps.

Since the insurance company conceded that Ms. Fidler was genuinely disabled, there was no doubt she was entitled to the unpaid benefits with interest. But could she also get damages reflecting the anxiety her battle with the insurer created? Should the insurer pay punitive damages as well?

The trial judge found the company didn't act in the kind of bad faith necessary for punitives, but it did interfere with the "peace of mind" at the heart of insurance, and it insurance companies know they have to pay for that. The Court of Appeal interfered with the trial court's finding of good faith, but the SCC properly slapped them down for that. I agree with this part of the decision. Chief Justice Finch of the BC Court of Appeal commented that the company must have acted in bad faith in denying the benefits, since it agreed to settlement before trial -- "the civil equivalent of a guilty plea". But since we want civil guilty pleas, just like we want criminal ones, we shouldn't punish defendants for them. The incentives implicit in a rule like "Punitive damages if you settle, but not if you go to trial" are scary to cotemplate.

The part of the decision which will be of broader interest is the SCC's willingness to give damages for the emotional consequences of the denial of benefits.

Historically, common law courts recognized both that negative emotions are foreseeable consequences of breaches of contract, and that compensation for this distress is not normally part of a commercial bargain. So they ruled that "emotional distress" can't normally be a head of damages for breach of contract. However, if "peace of mind" is what the breaching party was selling, then such damages are available.

This made oodles of sense. Including emotional damages in an ordinary contract action is in nobody's ex ante interests. The financial risk of contract breach would depend on the emotionality of the other side, which makes it unpredictable and creates an incentive to exaggerate these emotions. On the other hand, there is undoubtedly a narrow category of contracts for which protection against these emotions is precisely what is sought, and paid for, and courts should therefore enforce damages for emotional distress in these cases.

The Court's discussion of this doctrine is open to two interpretations. On one view, they are simply rationalizing the doctrine and noting that it is consistent with fundamental principles of contract law. The real inquiry, they say, is whether one of the contracting parties took on the risk of emotional damage to the other in the event of its own breach. If this is just a more precise way of putting what we already knew, then the Pithlord thinks it is all good.

The downside would be if the Court's decision is taken to mean that all the existing case law on which contracts are for "peace of mind" is thrown out. This would mean a lot of commercial and legal uncertainty for no benefit. The Pithlord thinks that what the Court has said in Fidler is consistent with the old cases, but it would have been more reassuring if the Court had said that too.

Still, all in all, a good job. The Court cleaned the law up a bit, but with a sensible overall result.

Case Comment of Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30

No comments: