There is a general feeling amongst Canadians that there is value in purchasing the “peace of mind” that comes from having protection to cover the negative economic consequences of accident or illness. As such, many Canadians purchase home insurance, life insurance, Canada Pension Plan insurance, automobile insurance, business insurance, and of course, short and long-term disability insurance (“LTD”).
Taken together, the cost of carrying all of these various forms of coverage is significant. It would not be unreasonable to conclude that many Canadians feel these combined coverages offer some level of adequate coverage in the event of disability. However, until they actually make a LTD claim, few Canadians realize that many of the coverages that they have purchased and paid for, often for many years, inure to the benefit of the LTD carrier rather than to them and their families. Consider the deduction of collateral benefits from LTD claims.
Evolution of the Deductibility of Collateral Benefits
LTD claims are governed by principles of contract law. Fundamentally, any entitlement to disability benefits arises out of the private contract of insurance between insurance company and the employee and/or the employer. Even if the contract is negotiated by the employer, pursuant to section 318 of the Insurance Act1, the employee is permitted to proceed with a civil action as if she was a party to the contract with the insurer2.
In LTD contract law, questions of entitlement and quantum, including the deductibility of collateral benefits, will be dependent upon the unique language set out in the contract of insurance. The fact that there are many different contracts of insurance makes it problematic to identify universally applicable principles of law. The Courts have, however, within those limitations, provided some guidance as to how these types of insurance contracts should be interpreted in particular circumstances.
Any discussion regarding deductibility of collateral benefits begins with the seminal tort decision Ratych v. Bloomer3, where the court articulated the oft-repeated phrase that, “it is a fundamental principle of tort law that an injured person should be compensated for the full amount of his loss, but no more”.4
The Supreme Court of Canada followed the Ratych decision with Cooper v. Miller5, where it enunciated two exceptions to the general rule: the “private insurance” exception, and the “charitable gifts” exception. Regarding the private insurance exception, the Supreme Court stated that it applies only where the insured can provide evidence that she paid for the insurance policy herself, either directly or as part of her compensation package. If so, then no deduction ought to be made.
The Supreme Court of Canada had occasion to revisit this area of law more recently, in Waterman v. IBM Canada Ltd.6, and provided a succinct statement of the conclusions reached in Ratych and Cooper:
From this review of the authorities, I reach these conclusions:
- There is no single marker to sort which benefits fall within the private insurance exception.
- One widely accepted factor relates to the nature and purpose of the benefit. The more closely the benefit is, in nature and purpose, an indemnity against the type of loss caused by the defendant’s breach, the stronger the case for deduction. The converse is also true.
- Whether the plaintiff has contributed to the benefit remains a relevant consideration, although the basis for this is debatable.
- In general, a benefit will not be deducted if it is not an indemnity for the loss caused by the breach and the plaintiff has contributed in order to obtain entitlement to it.
- There is room in the analysis of the deduction issue for broader policy considerations such as the desirability of equal treatment of those in similar situations, the possibility of providing incentives for socially desirable conduct, and the need for clear rules that are easy to apply. 7
While the principles set out by the Supreme Court of Canada provide some guidance, it is important to keep in mind that since LTD policies are contracts, it is open to some extent for the disability insurance company to simply contract out of common-law principles grounded in tort-law principles. With this in mind, let us turn our attention to certain specific questions and areas.
Most LTD contracts clearly stipulate that the insurance company is entitled to deduct money paid out to the employee by way of severance. The interface issues between LTD payments, severance payments under the employment standards legislation, and payments for common-law notice, have been an area of significant dispute.
In Henderson v. Canadian General Life Insurance Co.8, the employee was receiving LTD benefits pursuant to a group disability insurance policy for which she paid the premiums. The insurer and employer were, in this case, the same entity. The insured was terminated while still in receipt of LTD benefits, and upon termination was paid severance equal to 17.18 months’ salary. Although the plaintiff continued to be disabled following her termination, the employer/insurer ceased paying her LTD benefits for a period of 17.18 months following termination, effectively deducting the entirety of the severance payment from LTD benefits.
The court reviewed the applicable insurance policy, and concluded that, on the wording of the policy, the severance payment did not fall within the inclusions enumerated in the policy, and that the severance payment constituted capital and was therefore not deductible from the LTD benefit.
The Henderson decision was followed by Canada Life Assurance Co. v. Donohue9. In this case, almost immediately after the insured began receiving LTD benefits, the employer terminated him and paid him a lump sum severance equivalent to 24 months’ salary. The insurer sought to reduce its payment of LTD benefits by the amount of severance received. The court found that whether the severance was deductible was entirely dependent upon the language of the insurance contract, and since the contract itself did not specifically mention “severance” as one of the deductions it would make, the LTD benefits payable could not be reduced by any amount.
Unfortunately, from the perspective of employees, most LTD contracts currently in use have been amended to close the “loopholes” identified in the Henderson and Donahue cases.
Canada Pension Plan
Canada Pension Plan payments may be subject to deduction, depending, once again, upon the applicable contractual language. In a relatively recent Superior Court decision, Holmes v. Desjardins Financial Security Life Assurance Co.10, CPP payments were found to be deductible from LTD benefits because the insurance policy in question employed “clear and unambiguous language”. Of equal importance is the court’s conclusion that indexation would be calculated on the amount of benefit actually paid, as opposed to the amount to which the insured was entitled.
In regards to CPP disability benefits received for dependent children, the Ontario Court of Appeal in Ruffolo et al. v. Sun Life Assurance Company of Canada11, determined that it was permissible to set-off the CPP child benefit from LTD benefits, where the language of the contract contemplated deducting any disability benefits “payable under the Canada Pension Plan”. Therefore, even if the payment is a child benefit, it still qualifies, pursuant to this decision, as a payment under the Canada Pension Plan such that it is deductible from any LTD benefit received by the parent.
Importantly, the Court clarified in this case that such payments were deductible regardless of whether they have actually been paid, since the “disabled parent is entitled to receive them… which is sufficient under the terms of the policy.”12
Notwithstanding that the Ontario Court of Appeal indicated that these benefits are properly deductible, it is worth noting that there are two other appellate courts in Canada where the opposite conclusion has been reached. See: the Alberta Court of Appeal decision in Hennig v. Clarice Life Insurance Co.13 and the Saskatchewan Court Appeal decision in Dubasoff v. Mutual Life Assurance Co. of Canada14.
The question of whether a LTD insurer is entitled to deduct monies received by an accident victim under a structured settlement was addressed in Stitzinger v. Imperial Life Assurance Co. of Canada15. In this case, the insured was already receiving LTD benefits when he suffered additional injuries in a motor vehicle accident. He settled his motor vehicle tort claim, resulting in a structured settlement pursuant to which he was paid money on a monthly basis. A dispute arose as to how to properly characterize the structured settlement payments. The insurer contended that such payments constituted “income” for purposes of its group disability insurance policy, which dictated:
In the event that the total monthly income of a member from all sources during his Total Disability exceeds 85% of his gross pre-disability Monthly Earnings, Imperial Life will reduce the monthly income under this Benefit so that his total monthly income from all sources is no more than 85% of his gross pre-disability Monthly Earnings.16
The policy failed to define any of the terms, “income”, “total monthly income” or “total monthly income from all sources”.
Prior to the accident, the insured earned significantly less than what he was receiving from the structured settlement. In addition, after the accident he also received CPP disability benefits. The insurer argued that these combined benefits exceeded the maximum of 85% of his gross pre-disability monthly expenses, and it should therefore not have to pay him any further amounts of money for LTD payments.
The court rejected the insurance company’s arguments. It found that the dispute could be reduced to determining the proper definition of “income” and concluded that, in this case, the payments made to the insured were not income, but rather they were damages. What is significant about this decision is that the opposite result could easily have been reached, had the judge employed different language in constructing the judgment.
The opposite result was indeed reached in the east coast decision of Carter v. New Brunswick17. The Plaintiff had suffered career-ending injuries in a motor vehicle accident and began receiving LTD benefits. The Plaintiff subsequently pursued a tort action against the other driver and eventually settled the claim for an all-inclusive amount of $665,000. This gave rise to the issue of whether the LTD insurer was entitled to some set-off for the amount received in the settlement as damages for loss of future earning capacity.
The court began its analysis with a review of the subrogation clause of the insurance policy and took careful note of one provision in particular:
4.2(5) If a lump sum payment is made under judgment or settlement for loss of future income or earning capacity, the Claims Administrator will be entitled to make a determination of the amount of compensation this represents on a monthly basis and to reduce the benefits for each month after the settlement or judgment by the amount of the Employee’s overcompensation. The reimbursement agreement form will set out the precise calculation of this amount.
Interpreting this provision, the court found:
The interpretation of subsection 4.2(5), is a three-step process, namely:
- identification of the portion of the global lump sum settlement amount that is attributable to loss of future income;
- conversion of the lump sum figure received for loss of future income to monthly benefit amounts; and
- reduction of future LTD benefit payments in light of the monthly benefit settlement amounts received for future loss of income.18
The court determined that since there was no breakdown provided in the structured settlement, then it was entitled to accept the defendant’s suggestion that the amount of future loss of income was 52.5% of the overall award (in keeping with the approach to calculation introduced in Saskatchewan Health-Care Assn. v. Zipchen19).
The court next deducted legal fees and disbursements from that amount, such that the “lump sum payment made” to the plaintiff as compensation for her loss of future income or earning capacity totaled $242,830.08, which the court subdivided into monthly amounts, in order to determine the appropriate amount to deduct from the plaintiff’s LTD benefit entitlements.
Wrongful Dismissal Damages
In Nicholl v. Wray20, the plaintiff’s employment contract dictated that employment could be terminated at any time, upon provision of either 12 months’ notice or pay in lieu thereof. The employee was also entitled to LTD benefits which were effectively employee funded.
The employee became ill which eventually led the employer to give the employee 12 working months of notice of termination effective January 1, 1992. Two months later, the employee applied for and eventually was awarded, LTD benefits. Although the employer continued to pay salary and benefits until April 1992, it eventually ceased payment of all regular remuneration, effective April 28, 1992. The employee commenced a wrongful dismissal action to recoup the remaining eight months’ payment and was successful.
The issue then arose as to whether those payments were deductible from the LTD payments the plaintiff employee continued to receive. The Court held that such payments were not deductible, since the contract itself had expressly contemplated simultaneous payment of LTD and regular remuneration, and did not disallow same.
This conclusion suggests that, had the employment contract employed different language, for example if it had expressly forbidden receipt of LTD and regular wages simultaneously, then the insurer would have been able to deduct the monies paid under the contract from any LTD paid to that employee. It also suggests that, had the monies awarded been differently categorized, for example, as damages instead of regular remuneration due under the terms of the contract, then, too, the deduction from the LTD payments would likely have been supported by the language of the contract.
Workplace Safety and Insurance Board (WSIB)
As a general rule, a person elects to receive either WSIB benefits or LTD benefits, but cannot opt to receive both. Where LTD benefits have been elected but the person has already received some WSIB benefits, the person is obligated to repay the WSIB benefits, or vice versa.
An important case that deals with the interaction between WSIB benefits and LTD payments is Abdulrahim v. Manufacturers Life Insurance Company21, where the plaintiff had sustained serious injuries while at work and opted to receive WSIB benefits in regard thereto, while simultaneously applying for LTD benefits through his group policy. ManuLife asserted that it was entitled to a set-off for any WSIB monies paid, prompting the plaintiff’s lawyer to advise all parties that they had decided to “de-elect” WSIB benefits, and had chosen instead to proceed with a tort action against the manufacturer of the machinery that had caused the injury.
The central issue to be decided was whether Manulife was permitted to reduce LTD benefits by amount of WSIB benefits that plaintiff would have received he did not elect to proceed with a tort action. The issue turned on proper interpretation of the phrase “receives, or is entitled to receive” as used in the LTD policy. The Court applied the principles of interpretation relating to insurance contracts as set out in Brissette v. Westbury Life Insurance Company22, and concluded that the contract was not clear and should be interpreted in favour of the insured. Since the plaintiff had elected to proceed in tort, the WSIB benefit was not available to him.
Further, consider the case of Richer v. Manulife Financial23. A workplace injury led the injured plaintiff to apply for LTD benefits. The plaintiff commenced a claim for WSIB benefits, as required by his insurance policy, and was advised by WSIB that he was entitled to pursue a civil action for damages against the party responsible for his injuries.
The plaintiff did so, giving rise to the issues of whether the plaintiff would be entitled to receive LTD benefits after having commenced a civil claim and, if so, whether such benefits would be subject to offset of any WSIB benefits that the plaintiff would have been entitled to, had he not decided to proceed with a tort claim.
The Court of Appeal held that the plaintiff was entitled to receive the LTD benefits subject to the offsets of the WSIB claim. Despite the fact that the WSIB deemed the plaintiff as having elected to pursue a civil claim rather than receive WSIB benefits, his application for WSIB benefits had not been finally determined. Thus, “[d]epending on the amount of damages he obtains in his action, the application he has made may still result in the payment of WSIB benefits to him”24.
The Court of Appeal concluded that although the WSIB claim had not yet been determined, entitlement to receive payments was not dependent upon an application for compensation being approved, since the terms of the LTD policy in question allowed for deduction of WSIB benefits. The Court ordered that the insured was eligible to receive LTD benefits in an amount reduced by the amount of WSIB benefits which he would have received had he not elected to commence an action.
This issue was more recently revisited in RBC Life Insurance Co v. Janson25, but in the context of whether it is the net or gross amount which a plaintiff must repay to WSIB. Based on the language of the insurance policy in play, the insurer was found to be entitled to the gross amount paid by WSIB on account of lost earnings, without any deduction for counsel fees.
Courts have also come to the opposite conclusion of that reached in Janson. In Anand v. Belanger26, the Court found that to allow the insurer to recover on the gross amount would be to place the entire burden of pursuing payment upon the shoulders of the insured, and would, in effect, allow the tortfeasor’s insurer a benefit by not having them bear any of these costs.
The approach taken in Anand, however, has since ostensibly been overruled in the recent Ontario Court of Appeal decision of Cadieux v. Cloutier27, where a five-judge panel considered the issue of whether statutory accident benefits (“SABs”) should be deducted from a tort award on a gross basis, or net of the plaintiff’s legal costs incurred in recovering the benefits. While this case was decided in the context of a motor vehicle accident, the reasoning applied is relevant in the LTD context.
In determining that SABs should be deducted from the tort award on a gross basis, the court found that the plain wording of the Insurance Act called for a gross deduction. However, the court specifically left open the possibility that “it may, in some cases, be appropriate to award the plaintiff, as part of the costs of the tort action, some or all of the costs actually incurred by the plaintiff in recovering SABs which would have reduced the amount of the tort award under s.267.8”28.
In endorsing this approach, the court reasoned that it “respects the statutory direction in s. 267.8, while enabling the court to make a fair allocation of the costs of pursuing SABs in appropriate cases.”29 Further, the court stated:
The court has jurisdiction, under s. 131(1) of the Courts of Justice Act, to award “costs of and incidental to a proceeding”. Legal fees and disbursements in pursuing SABs can reasonably be considered incidental to the proceeding where the SABs have reduced the damages payable by the tortfeasor.
…the tort defendant should not be required to pay the costs of the plaintiff’s pursuit of SABs as a general principle or as a matter of course. The issue…is fact driven and depends on the particular circumstances of the case.
That observation is particularly relevant in the settlement context. The amount, if any, allocated to costs by plaintiff’s counsel and the SABs insurer in a settlement disclosure notice should not necessarily determine the costs to be paid by the tort insurer. Many factors can influence the amount allocated to costs.30
In the LTD context, the wording of the insurance policy is the most significant consideration and contra proferentem will apply. However, in cases where the court has found that the plain wording of the insurance policy calls for collateral deduction on a gross basis (i.e. not net of legal fees), the Cadieux decision may prove valuable for plaintiff counsel as a basis for recovering at least part of the deduction in the form of higher cost awards.
Non-Earner Benefits (NEB)
Traditionally, NEBs have not been deducted from LTD benefits. However, that was all upended by the Ontario Court of Appeal in the recent decision of Hamblin v. Standard Life Assurance Co. of Canada31. In this case, the insured was already in receipt of LTD benefits at the time when she was involved in a second accident, in respect of which she elected to receive NEB, since she was not working.
Pursuant to the terms of the group insurance policy, the respondent insurer claimed entitlement to reduce LTD benefits by, “any disability or retirement benefit… payable … under … a provincial auto insurance law”32. The insurer submitted that, since the NEB constituted “any disability benefit” under the policy, so it was entitled to deduct the amount from the LTD. The Court of Appeal agreed and the insured’s submission that the NEB is not an income benefit.
When determining whether a LTD insurer is entitled to deduct collateral benefits, the starting point ought to be a close examination of the common-law principles of the prohibition against double recovery and the private insurance exemption. Those general principles need to be viewed through the prism of the actual wording of the LTD contract of insurance. In areas of contract law such as LTD benefits, the wording of the policy will govern.
While such an argument has likely never been made, it remains the author’s view that if an insurance company is entitled to claim a complete set-off for collateral benefits such as CPP disability benefits, then it ought to be open to argue that, at a minimum, the insurance company ought to provide a credit for all premiums paid by the insured to obtain that benefit. The current state of affairs is ostensibly resulting in unreasonable windfalls benefiting the insurance companies. While insurance companies would argue they have taken these other benefits into consideration in setting premiums, in the author’s experience, there is little, if any, pre-claim underwriting or benefit analysis undertaken at the time of the rate-setting process. If an insurer does not take steps to ascertain what collateral benefits are in place, how can it properly argue that those collateral benefits are factored into the rate-setting process? With respect, the insurer argument does not hold up under close scrutiny.
Further, where there is any ambiguity in the contract, there is an opportunity for creative and courageous counsel to advocate against the unreasonable deduction of benefits. This needs to be viewed, however, with the apparently increasing concern on the part of the judiciary against allowing double recovery and overcompensation by claimants. These are legitimate competing policy objectives that merit a more fulsome and comprehensive debate.
1 Insurance Act, R.S.O. 1990, c. I.8.
2 Note that an exception to this principle arises in some union situations where, pursuant to the terms of the collective bargaining agreement, the parties are obligated to dispute entitlement to disability benefits through the arbitration process rather than the courts.
3 Ratych v. Bloomer, 1990 CarswellOnt 644,  1 SCR 940 (SCC).
4 Ibid at para 22.
5 Cooper v. Miller, 1994 CarswellBC 121,  1 SCR 359 (SCC).
6 Waterman v. IBM Canada Ltd., 2013 SCC 70 (SCC).
7 Ibid at para 76.
8 Henderson v. Canadian General Life Insurance Co., 1994 CarswellOnt 962, 17 OR (3d) 154 (OCJ(GD)).
9 Canada Life Assurance Co. v. Donohue, 1999 CarswellOnt 3038, 46 OR (3d) 82 (OSCJ).
10 Holmes v. Desjardins Financial Security Life Assurance Co., 2014 CarswellOnt 11433, 2014 ONSC 4695.
11 Ruffolo et al. v. Sun Life Assurance Company of Canada, 2009 ONCA 274.
12 Ibid at para 14.
13 Hennig v. Clarice Life Insurance Co., 2003 CarswellAlta 269, 2003 ABCA 70.
14 Dubasoff v. Mutual Life Assurance Co. of Canada, 1995 CarswellSask 62.
15 Stitzinger v. Imperial Life Assurance Co. of Canada, 1998 CarswellOnt 1489, 39 OR (3d) 566 (OCJ(GD)).
16 Ibid at para 2.
17 Carter v. New Brunswick, 2013 CarswellNB 482, 2013 NBBR 239.
18 Ibid at para 39.
19 Saskatchewan Health-Care Association. v. Zipchen, 2007 SKCA 136.
20 Nicholl v. Wray, 1999 CarswellOnt 869,  OJ No. 954 (OCJ (GD)).
21 Abdulrahim v. Manufacturers Life Insurance Company, (2003), 65 OR (3d) 543 (SCJ).
22 Brissette v. Westbury Life Insurance Company,  3 SCR 87 at 92-93.
23 Richer v. Manulife Financial, 2017 CarswellOnt 1713, 2007 ONCA 214.
24 Ibid at para 16.
25 RBC Life Insurance Co v. Janson, 2013 CarswellOnt 8593, 2013 ONSC 3154.
26 Anand v. Belanger, 2010 CarswellOnt 7200, 2010 ONSC 5356.
27 Cadieux v. Cloutier, 2018 ONCA 903.
28 Ibid at para 123.
29 Ibid at para 128.
30 Ibid at paras 129 – 131.
31 Hamblin v. Standard Life Assurance Co. of Canada, 2016 CarswellOnt 17817, 2016 ONCA 854.
32 Ibid at para 5.