Active Employment

The first step in a successful disability application will be for the plaintiff to demonstrate that they were in “active employment” at the time the disability arose, which is a term of all disability policies.

The need for active employment is based on the insurer’s assessment of the risk which will change dramatically should the employee not be reporting to work on a regular basis as was initially contemplated. If, for example, the person insured was given a six month leave of absence, the nature of the risk would change from that contemplated when the policy was issued. The insured may be scuba diving in the Caribbean or heli-skiing in the Rocky Mountains, which was not the contemplated risk when the policy was issued.

Such a policy term was debated in a case of the Ontario Superior Court in 2006. ¹ The case reflects the principled need for “active employment”, although in this particular context, the insurer’s submission was doomed from the outset.

The trial judge found that the plaintiff announced on May 8, 1989 that he had Hepatitis C and then took sick leave for the month of May to “investigate his illness and put his house together”. The insurer argued that the plaintiff was not in active employment when medical treatments commenced one month later. This would have required a very narrow interpretation of the “active employment” clause in the insurer’s favour.

The court did not accept this interpretation of the policy based on the definition of the policy and also found the clause to be ambiguous. As to the definition of active employment alone, the court found that such absence due to a medical leave, or other similar forms of leave, ² must be considered “active employment”, all of which makes entire sense. Might the insurer deny liability because its insured was off work sick? The argument made no sense.

Employer's Quagmire

This requirement of active employment presents real difficulties for the employer when it chooses to terminate an employee without providing working notice. The employee, apart from the statutory notice period in Ontario only, will be without disability insurance for the common law notice period. The employer cannot purchase alternate coverage, given the requirement of active employment for a new policy. The employer is then exposed to a claim for disability benefits which normally would have been insured. This claim can be significant as there is no “reasonable notice” cap on the damages to be claimed, apart from the usually stated maximum age of 65.

Qualifying for coverage when employment has ceased

As noted, the basic starting point for disability insurance is that the disability must commence during the period of “active employment” and be proven to be continuous throughout the elimination period and through to the date of the commencement of the disability cover.

Accordingly, even when the commencement date of disability benefits may fall on a date when the insured is no longer employed, this will not defeat coverage where the above conditions have been met.³

For example, presume the employee becomes ill on January 1, the coverage date is set for March 1, and a termination on February 1. The employee remains insured as long as the employee can show the existence of an interrupted medical issue from January 1 forward. The timing of a medical diagnosis will be very important.

The Ontario Court of Appeal came to the same conclusion in its 2018 decision. ⁵

However, the termination of the employment relationship, whether involuntary or otherwise, will not preclude recovery of disability benefits if the employee can show that he was disabled when the employment ceased and that the disability continued through the elimination period. The same components of the above tests will apply and if met, will allow for recovery.

An illustration of this principle is found in a case in which the plaintiff resigned from her employment due to health problems, then subsequently advanced the claim. She was successful in showing she was suffering from a medical disability when she submitted her resignation, which then was shown to have continued through the qualifying period.⁶

Employer Liability

A claim for lost disability benefits may also be made against the employer directly where the disability occurs within the common law notice period on the theory that had working notice been provided, the employee would have been insured under the LTD policy. ⁷

Such a claim is not limited to the notice period, but rather will be made for the financial loss suffered for the entirety of the period of the disability. In essence, the employer takes on the liability of the insurer due to its default in not providing working notice, a conclusion which may have dramatic financial consequences to the employer.

One solution for the employer to avoid such a claim, particularly where there is an evident serious medical risk, is to provide the correct number of months of working notice and hence continue “active employment” for this period. ⁸

This will shift the risk of a disability claim from the employer to the insurer.⁹ A second alternative is to enter into a settlement agreement in exchange for a release. There is no third alternative. ¹⁰