Administrative Services Only
An ASO agreement typically puts in place "an insurer" whose only function is to assess the medical eligibility of claims submitted, which are then paid or denied in turn by the employer. In essence, the employer has contracted out the claims adjusting process to a third party. This structure, for reasons noted, is highly controversial and should be outlawed in every jurisdiction.
The Insurance Act of each jurisdiction takes pains to regulate the financial solvency of insurers to assure the public that when the moment arrives to submit a claim, that there is no issue as to the ability of the insurer to pay its claims. The ASO process abandons this well-intended regulatory step and places the risk of obtaining payment for valid submissions to the risks of the solvency of the employer.
Payments as Earnings
The Federal Court of Appeal has determined that the sums paid under the terms of an ASO contract are defined as earnings for purposes of the Employment Insurance Act, section 2(1), as was decided by the Federal Court of Appeal in May of 2003. 1
Prior controversy on this topic was resolved by the Federal Government 2 which now requires that such ASO payments be subject to CPP contributions.
Is ASO Insurance ?
Richard Hayles 3describes ASO arrangements put in place by the employer as one of contract between the employer and its employees and not insurance. Norwood and Weir came to the same conclusion. 4
It is apparent why such conclusions would be logically made. However, both statements are wrong as three significant decisions, (1) Canada v. Confederation Life Insurance, (2) Kopet v. SFU, (3) Gerber v. Telus, as discussed below, have each come to the opposite conclusion.
The Ontario Superior Court 5in a July 1995 decision, considered the status of claims made by retired employees for major medical and dental benefits which had been provided under an ASO agreement. 6
The Court found that the provision of the medical benefits was “insurance” as such term was defined in the Insurance Act and hence the claimants qualified for priority status as policyholders.
The finding was of academic value only, as the court declined the claim for other reasons. If this truly was insurance, the employer was in violation of the Insurance Act registration requirements and was trading in insurance illegally. 7
A decision of the Supreme Court of B.C 8came to the conclusion that to sue the employer as an ASO provider, the correct limitation period was that set out in the Insurance Act, concluding that the employer met this definition of an insurer in this statute, and hence the claim was found to be statute barred.
The British Columbia Court of Appeal agreed with the analysis of Blair J. in the Ontario case and also found that this ASO obligation of the employer met the definition of insurance.
One point noted in the above decision was that under B.C. law, the employer is required 9to give notice to its employees that the provided benefits are not insured which then relieves the employer from registration requirements under the Insurance Act. Alberta has a similar notice requirement.
In a decision of the British Columbia Court of Appeal, one argument made by the employer was that a “peace of mind” contract and its principles ought not to apply as the ASO term was a term of employment and not insurance. The court disagreed, finding that the essence of the ASO was a contract of insurance. 10
Given these cases, it should thus follow that ASO providers should be registered and licensed and meet the solvency requirements of the relevant legislation, which has not been done.
These three cases and the legislated notice requirement regrettably aid and abet the mission of employers to save premium costs and in turn expose innocent members of the public to be deprived of the protective purpose for which each jurisdiction’s Insurance Act was intended, namely the regulated solvency of the providers of insurance.
The example of the demise of Nortel and the consequential dramatic loss suffered by otherwise qualified disability recipients is often cited as the forewarned omen.
This became the motivation for the federal government and Ontario to prohibit the use of ASO. The remaining provinces and territories would be wise to follow in kind.
Statutory Limitations
The federal Minister of Finance has mandated by law that federally regulated employers, when choosing to offer insured long-term disability, do so by insurance and not ASO contracts.
To this end, the Federal government amended the Canada Labour Code was by the addition of Division XIII.2, Section 239.2(1) and related sections.
The amendments require real insurance for any disability coverage which covers a period of greater than 52 weeks, which allows for a lengthy short term period to be self-funded.
British Columbia legislation states that insurance licensing requirements do not apply to what is described as “plan sponsors”, which includes a group of employers or unions, that provide uninsured employee benefits, provided that the plan sponsor gives to the employees written notice that the benefits are not insured and that the sponsor is not subject to insurance licensing regulation.
Alberta law has a similar disclosure requirement.
The movement to this effect had been sponsored by the Canadian Life & Health Association, admittedly a conflicted industry spokesperson, on the theory that the consumers of such services need the protection of audited and monitored insurance carriers.
This submission does make perfect sense, given the highly regulated world in which public insurers are required to submit, presumably with the legislated intent to protect members of the premium paying public. To deny these protections through the blunt instrument of an ASO and hence expose the public to the risk of an employer insolvency makes no sense.
Ontario followed by passing amendments to the Insurance Act. 11The proposed amendments apply only to long-term disability benefits, defined as those payable after a twelve month period of disability.
The effective date of the amendments to the Insurance Act is yet to be proclaimed, originally, presumably to give those companies providing ASO services presently time to convert to conventional insurance. That time has come and gone. The Act remains unrevised on this issue. 12
ASO Provider & Peace of Mind Contracts
The arbitral decision of Arbitrator Daniel Harris in 13 a decision made in October of 2009 reviewed the employer’s liability for moral and punitive damages when it had chosen to and followed the advice of an ASO.
The final decision in the ASO agreement to accept or reject the disability was that of the employer.
The arbitrator found that the employer and the administrator, Cowan, “walked lock-step” and the employer exercised no independent discretion, as was its obligation. The arbitrator noted that the employer was aware of :
Cowan’s malicious and unsupported accusations and the Hospital was content to ride along with Cowan’s behaviour. I find it adopted Cowan’s actions and assessments.
An order was made that the employer compensate the grievor for her emotional suffering and for punitive damages. The quantum was to be determined at a further hearing.
To the same end is the 2003 decision 14 of the B.C. Supreme Court, written by Madam Justice Morrison, and was upheld on appeal. Awards were made of both aggravated and punitive damages of $35,000 and $150,000 respectively.
The trial judgment found liability on both defendants. It is to be noted that the claim against the ASO provider was in contract and not in tort.
On appeal, the claim against Manulife was dismissed as there was no privity in contract between the plaintiff and this defendant. The trial judgment was otherwise upheld, apart from an issue as to the scale of costs.
The breadth of the application of this case is limited as the employer admitted in its defence that it stood in the position of the insurer and bore the final decision to accept or reject the disability application.