|
Courts
Limit Disability Insurance Offsets
(1993), The Canadian Journal of Life Insurance
By
Richard Hayles
Disability
policies often provide that benefits are to be reduced by the
amount of certain payments, called "offsets," which
the insured receives from third parties.
Not all policies
provide for offsets. When insurers do stipulate for offsets,
they usually intend to catch any payments which could be characterized
as income replacement.
This serves several
purposes. First, by tying benefits income to the insured's pre-disability
employment income, the insurer and the employer guarantee that
the insured will receive an adequate income during any period
of disability. Second, limiting the insurer's cost of benefits
allows the insurer to charge a more competitive premium. Third,
capping benefits at a certain percentage of the insured's pre-disability
income prevents the insured from recovering disability income
in excess of his employment income, eliminating a motive for
malingering and fraud.
In law, however,
it is the precise wording of the policy, rather than the intention
of the insurer, that counts. As the cases summarized below illustrate,
insurers have to be careful to word their policies so as to
clearly identify all of the payments they wish to deduct from
benefits.
Canada Pension Plan Benefits
Most offset clauses provide for the deduction of Canada Pension
Plan disability benefits. The Plan provides for more than one
type of disability benefit, however, and although CPP benefits
payable to the insured on his own behalf are rarely the source
of any controversy, the treatment of benefits for dependent
children has been disputed in both Saskatchewan and Ontario.
In the Saskatchewan
case of Dubasoff v. Mutual Life, one clause
in the policy provided an offset for CPP benefits, "excluding
benefits for dependant children." Another clause (called
the "all source maximum" clause) stated that where
the insured receives income from "other sources,"
the policy benefit is reduced so that his total disability income
is no greater than 85% of his employment income. The term "other
sources" was defined in the policy to include income from
a government plan "that becomes payable only after the
member becomes totally disabled."
The insured received
both his own CPP disability benefit and an additional children's
benefit under the Plan. Both benefits were paid to the insured
in one cheque, but for tax purposes
Revenue Canada considered the children's benefit to be income
of the children rather than of the insured.
The CPP legislation
said that a children's benefit "shall be paid to each child
of a disabled contributor;" however, it also provided that
payment was to be made to the adult who had custody of a minor
child.
The court concluded
that the specific language excepting "benefits for dependant
children" from the offset provision of the policy outweighed
the more general wording of the all source maximum clause, and
held in favour of the insured.
The outcome in
Dubasoff may be contrasted with the result
in Ormonde v. London Life, an Ontario case
in which the policy contained an "all source maximum"
clause similar to the clause in the Dubasoff
policy, but made no specific reference to the CPP child's benefit.
The court characterized the childs' benefits as "payments
for the maintenance and support of children of a disabled contributor"
to the Plan. They therefore were to be included in the policy
offset for "other benefits payable on account of the disability
of the employee."
Severance Pay
In Henderson v. Canadian General Life, the
plaintiff was an employee of the defendant insurer and as such
was covered under a group disability policy issued by the defendant.
The policy contained an all source maximum clause limiting disability
benefits so that the plaintiff's "total monthly income
from all sources" would not exceed 85% of her salary.
The policy specified
that "total monthly income from all sources" included
"earnings from employment" as well as "loss of
salary benefits payable because legal responsibility for the
loss lies with a third person."
The plaintiff was
injured in a car accident and went on long-term disability.
Seven months later the defendant terminated her employment,
providing a severance payment equal to about 17 months' salary.
Although the plaintiff's
entitlement to disability benefits continued, the defendant
argued that it was permitted to deduct the severance payment.
The Ontario court rejected the defendant's argument that the
payment represented income replacement due to the legal liability
of a "third person." Since the employer and the insurer
were one company, there was no "third person" who
was legally responsible for the plaintiff's loss of salary.
The court also
refused to find that the severance pay constituted either employment
earnings or "monthly income from all sources," and
this conclusion is of greater general significance to insurers.
Although the payment
was calculated by reference to the plaintiff's monthly salary,
it was not earnings from employment because the plaintiff was
no longer employed. The court referred to some older income
tax cases which had established that severance payments were
capital rather than income, and therefore exempt from income
tax. Since the payment to the plaintiff was capital in nature,
it could not constitute "monthly income" under the
policy.
The court did point
out that it was open to the insurer to reword its policy so
as to specify that severance pay would be offset against disability
benefits.
These cases demonstrate
the importance of including specific language in the policy
to capture each type of income replacement payment the insurer
wishes to deduct from benefits.
|
