OTTAWA—The Supreme Court of Canada upheld a lower court ruling that found that aggravated damages can be awarded in the absence of bad faith merely on a finding that an insurance company wrongfully denied a claim.

The court's ruling in Sun Life Assurance Co. vs. Fidler held that the lower courts were correct in awarding aggravated damages for mental distress arising from a breach of contract.

In this case, Connie Fidler's long-term disability benefits were terminated because her insurer, Toronto-based Sun Life, decided that she was capable of returning to work in some capacity despite suffering from chronic fatigue syndrome and fibromyalgia. The trial judge found that Ms. Fidler "genuinely suffered significant additional distress and discomfort arising out of the loss of disability coverage," a finding upheld on appeal.

The Supreme Court, though, overturned a decision by the British Columbia Court of Appeal to award Ms. Fidler punitive damages. The trial judge concluded that Sun Life did not act in bad faith, which would have allowed punitive damages to be awarded. The Court of Appeal overruled the trial judge's decision, but the Supreme Court reinstated it, saying that the trial judge's conclusion was the product of a thorough review of the relevant evidence.

The Fidler decision is significant because insurers will face the possibility of paying damages for the foreseeable loss of "peace of mind" whenever they deny claims, even if they do so in good faith, said Craig Brown, a professor of the Faculty of Law at the University of Western Ontario and the co-author of a recent report called "The Impact of Recent Legal Developments on Liability Insurance."

"This will surely give insurers greater pause than they now exercise when thinking of denying claims," he said in an e-mail.

Sun Life is studying the court's decision, as likely will other disability insurers, and will continue to review its practices, a spokesman said in an e-mailed statement.

A rigorous process to validate claims, though, is in the best interests of all policyholders, as it helps to manage costs for employers providing benefits to employees, according to the statement.

"Like many disability claims, this case was complicated and highly subjective," the spokesman said in its statement. "The Court agreed with the trial judge's finding of no improper purpose on the part of Sun Life and dismissed the claim for punitive damages."