By Richard Hayles

Under standard group life and health insurance practice, day-to-day administration of the group plan is usually carried out by personnel in the employer's human resources department. Their responsibilities include enrolling employees in the plan, answering questions about the terms of the insurance, and advising departing employees about conversion rights.
It is inevitable that administrative errors occur, particularly where the plan in place is complex and covers a large group of employees. Applications are lost or delayed. Employees receive incorrect or incomplete information regarding coverage, or they are misinformed about their rights on termination.
The employee or his family, having relied on the plan for income support in the event of illness or death, may find that the expected coverage isn't in place. Naturally, courts are reluctant to let these indivduals suffer the consequences.
Cases going back to the 1970's establish that the insurer can be held vicariously liable for the employer's errors in administering the group insurance plan. More recently, courts have begun to impose this kind of liability on the employer directly. Liability could arise in four kinds of fact situations, as outlined below.

Enrollment Errors

All group plans contain provisions which restrict coverage to certain types of employees, usually by requiring that an individual must have worked full-time for a stated period before enrolling. Usually it is the employer who takes the application and makes an initial determination as to who qualifies, although the insurer may reserve the right to examine applications and reject individuals based on medical grounds.
In Pittman v. Manufacturers Life (1993), 21 C.C.L.I.(2d) 32 (Nfld. C.A.); lv. ref'd 21 C.C.L.I.(2d) 32n (S.C.C.), the employee gave the employer an application for optional insurance on the life of his wife. The coverage had to be approved by the insurer. The employer failed to forward the application, however, and the wife died before the insurance was in place. The court, having found that the insurer as principal was vicariously liable for the negligence of its agent, the employer, went on to conclude that agency law permitted a finding that the employer was jointly liable as the law "imputes commission of the same tortious act" to both principal and agent.
In most cases of this kind the insurer, anxious to renew the group policy, will pay the entire judgment in order to retain the employer's goodwill. In the meantime, however, the employer's personnel are embroiled in embarrassing and time-consuming litigation, and if the the insurer goes out of business, the employer could be effected financially as well. Employers should ensure that reliable office procedures are in place, and insist that the insurer provide appropriate training for the personnel who will administer the plan.

Policy Information and Advice

A busy personnel department receives many employee inquiries during the course of a day, dealing with anything from vacation schedules through overtime rights to payroll deductions. Although there is no case law directly on point, the principles established in Pittman could result in substantial liabilities if an employee relies on incorrect information regarding the requirements of the application or the terms of the policy. If the application includes a medical questionaire, for instance, the employer could interpret a question incorrectly. Other possible errors include assuring an unqualified employee that she is enrolled in the plan, or providing an incorrect or incomplete explanation of policy exclusions.
Cases involving mortgage insurance establish that a loans officer is under no obligation to answer questions about the terms of the policy, but if the officer does respond, the answer given must be accurate and complete: Morse v. Central Trust (1987), 25 C.C.L.I. 128 (N.S.T.D.). Insurance policies are complex. If the employer can't ensure that its human resources personnel are trained to respond to questions, inquiries should be deferred to the insurer.

The Exit Interview

In Tarailo v. Allied Chemical (1989), 68 O.R.(2d) 288 (H.C.J.), appeal settled (1992), 7 O.R.(3d) 318n, the employer forced the employee to resign after a series of absences and unacceptable incidents in the workplace. A year later, the employee wrote the employer explaining that he had been mentally ill and asking for reinstatement. The employer did not give the employee his job back, nor did it advise him that his illness could provide the basis for a claim under the group insurance program. The court concluded that an employer who has explicit notice of a disability has a duty to assist the employee in submitting a claim for long-term benefits.
The court put limits on this duty in a recent Ontario case in which an employee who resigned in order to work for a competitor later died of AIDS. His estate sued for death and disability benefits, arguing that signs of the illness were apparent to the employer prior to the resignation. In the absence of any express notice of the employee's condition, however, the court held that there was no duty to advise the departing employee that he would lose his coverage, and granted summary judgment dismissing the action: Bueckert Estate v. IBM Canada (Aug. 26, 1999, S.C.J., C. Campbell J., File No. 94-CQ-52785). In Beaird v. Westinghouse (1999), 43 O.R.(3d) 581, the Ontario Court of Appeal doubted that the failure to assist an employee to apply for benefits would in itself constitute a cause of action, but implied that such a claim could justify additional damages in a wrongful dismissal action.
Although the standard of care imposed on employers is low, the duty is real. Since it is difficult to predict the circumstances in which employers will be held liable, employers should inform all departing employees of their right to convert the group coverage to individual insurance, and advise them of the time limits for submitting any existing claims. Employees should be told that they will lose their coverage if they fail to exercise their conversion rights, and this advice should be confirmed in writing.

Mergers and Re-organizations

When two companies are combined, the merged company will eventually want to replace two existing group insurance plans with a single program. This could be done at the time of the merger, or on the expiry date of one of the two group policies. Either way, the company will want to ensure that all the employees of the new entity will be covered under the same terms, and that there are no gaps in coverage.
If one plan is simply replaced with the other, an employee who received medical treatment for a condition shortly before the merger may find that a disability arising after the merger isn't covered because the new policy contains an exclusion for pre-existing conditions. In addition, the new policy will state that coverage applies to employees who have worked full-time for a certain period of time, and the employer must obtain assurances from the insurer that this will encompass employees of both of the merged companies.

Richard Hayles practises life and disability insurance litigation in Toronto.

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