Most policies contain a term which allows the insurer an offset for payments such as worker’s compensation benefits, C.P.P. disability pension payments and income earned, apart from rehabilitative income, from other employment. Typically income from rehabilitative employment allows for a formulaic reduction, less than the full sum earned, as an incentive for the insured to engage in this process.

Other Income Earned

The policy wording will be important in cases of dispute as to the requirement to offset other income earned.¹ The cases are anecdotal but reveal the substantive issue.

In one case, the plaintiff was successful in her claim for LTD benefits at trial, after which an issue arose as to whether the insurer was entitled to deduct the earnings the plaintiff had achieved for on-line tutoring as “other income” under the policy, the provision for which read as follows:

The amount of monthly benefit will be reduced by the following benefits or payments resulting from the employee’s disability if, on or after the date the employee became totally disabled, he begins to receive such benefits or payments, or would be entitled to receive them had he made satisfactory application.²

While the plaintiff was disabled and not in receipt of benefits, she had earned a Master’s degree in Nursing, and earned tutoring income. The plaintiff argued that the policy requires an offset only where such income sums are received “resulting from her disability” which was not applicable on these facts. The Court determined that, given that the plaintiff had already enrolled in the master’s program prior to her disability, the resulting income was not one “resulting from her disability”.

The Court also found the policy term ambiguous and hence construed the term against the insurer.

This issue was again the subject of a judicial review ³  in a case in which the plaintiff had sued for damages as a result of car accident which resulted in a settlement of $800,000. The amount of $500,000 was paid into a structured settlement, which was conceded to represent a future income loss.

After deduction of legal fees and Family Law Act claims, the sum of $120,000 was paid attributed to the remainder. It was agreed that some portion of this lump sum represented a past income loss.

The group disability policy provided that in the event the plaintiff’s monthly income from all sources during the period of disability exceeded 85% of his gross pre-disability earnings, the insurer would reduce the benefit sum so that his total monthly income from all sources was capped at 85% of such sum.

The policy defined total monthly income from all sources to include the following:

Total monthly income of a member from all sources will include all of the following:

1. any monthly income payments under this benefit;

2. any monthly earnings or payments from the employer;

……

The policy provided no further definition of “income”, “total monthly income”, or “total monthly income…from all sources”.

The court reviewed the policy wording which stated that “monthly income” included certain sources as were set forth. As the list was not exhaustively defined, the court concluded that the intention of the parties could not be inferred from what was omitted from the list, including as in this instance:

judgment sums stated to compensate for loss of earnings or lost earning capacity, moneys derived from investment of lump-sum awards for loss of earnings or lost earning capacity, and periodic payments funded by annuities, pursuant to a judgment implementing a structured settlement.

The judge saw that the word “income” could be used to include not only funds earned from one’s endeavours, but also was capable of including periodic payments derived from investments or annuities.

The court noted that the judgment which provided for the structured payments described the payment as one “for damages”. In addition, it was noted that at common law, a judge in a tort action was allowed to make only one lump sum award for damages. The ability to order a structured payment was derived from amendments to the Courts of Justice Act.

The question then became one of whether the periodic payment of damages was “income” within the policy. That question was answered in the negative.

The assertion hence by the insurer for the set-off failed. It is to be noted that the insurer also unsuccessfully made a subrogation submission which is discussed under this heading.

The May 2012 decision of Mr. Justice Barnes of the Federal Court ⁴ also considered a similar issue in a motion before him in a class action brought on behalf of former members of the Canadian Forces.

The case involved a challenge by the plaintiff in a class action proceeding that the LTD sum paid to disabled Canadian Force members should not be reduced by sums made to such persons under the Pension Act.

The SISIP, this being the disability plan, provided for an offset of “total monthly income benefits payable to the member under the Pension Act”, the key word being “income”.

The Class asserted that the sum received under the Pension Act was not a form of income replacement, but rather “non-indemnity benefits intended to compensate CF members for impairments to their quality of life and limitations on their activities of daily living”.

The court noted that in October 2000, the Pension Act was amended to provide for benefits to all members disabled from military service however occurring. Such members who were able to continue their military service could collect this sum and their normal compensation without offset.

Section 35 of the Pension Act provided for the manner in which the disability pension was to be calculated, which is reflective of the medical and non-medical assessment referring to medical impairment and quality of life issues.

Once the assessment had been completed, the results were measured against a scale graded in increments from 5% to 100% disability, allowing for a corresponding increment in the basic pension benefit.

The judge noted that it was clear that the pension was not intended as an income replacement. In fact, the entitlement to such a pension was not dependent upon a finding that the applicant cannot work. The court concluded that the benefit “was intended to compensate for the loss of amenities of life and for the personal limitations and sacrifices that arise from disabling injuries”.

The Court concluded that the pension sum could not be income as defined in the SISIP.

In addition the court added that the contra proferentem principle of interpretation would also lead to the same end.⁵

Severance Payment

The Ontario Supreme Court in its 1999 decision written by Mr. Justice LaLonde ⁶ considered a policy which dealt with the relationship between disability benefits and a severance payment resulting from termination of employment.

Canada Life discovered in January of 1998 that Donohue had been terminated and had received 24 months’ severance. It sought by this proceeding to offset the LTD claim by the severance sum received.

The policy wording allowed for the insurer’s liability to be offset from “any continuation of salary from his Employer”.

Again, the court found the answer was in the apparent ambiguity in the policy terms and found in favour of the insured. The insurer’s appeal was dismissed by way of a brief endorsement.

Justice Mandel ⁷ also considered a similar issue ⁸ in a case in which the plaintiff was employed by the insurer. Again the results were predicated upon the wording of the policy.

The offsets allowed by the policy included the following: (1) loss of salary benefits payable because legal responsibility for the loss lies with a third person; (2) earnings from employment; (3) total monthly income from all sources.

As to the first issue above, the court determined that the loss of employment and the resultant claim was not with a third person as the insurer and employer were one and the same.

With respect to the second argument, the severance was not seen as earnings. Further it was seen as a capital payment and not income caught by the third inclusionary term.

It is to be noted that the insurer intended to and did not argue the principle of double recovery, which presumably was related to the subrogation right.

This issue was again considered in the 1997 decision of the Nova Scotia Supreme Court. ⁹

The plaintiff sued both the employer for wrongful dismissal and the insurer for LTD benefits. The claim against the former succeeded, resulting in an award of 24 months compensation, as did the claim for LTD benefits.

The issue was whether the claim against the insurer was offset by the severance payment awarded. The policy wording under the heading “Integration” contemplated the reduction of the LTD sum by CPP and Workers’ Compensation benefits, as is customary, and in addition to this, the following:

• any retirement or pension disability benefits,
• any sick leave or salary continuation benefits from the Employer (including any severance pay)

The court did not decide the issue based purely on the wording of the policy but rather concluded that it was bound by the Supreme Court of Canada decision ¹⁰ which referenced insurance plans as containing a provision that disability benefits are to be reduced by various sources of income, including “wage continuation plan benefits”.

The LTD sum was hence reduced by the severance award. The court did order that the costs of the severance claim be set on a pro rata basis relative to what each defendant would share from the award based in on a 58% to 42% allocation of costs.

This issue will generally be determined by the policy wording. The reference to Sylvester is not determinative as is discussed here. It is often possible to obtain common law wrongful dismissal damages and LTD contemporaneously.

Workers' Compensation Benefits

Most policies will stipulate that there is an off-set to the insurer of any workers’ compensation (“WC”) benefits received or that the insured is “entitled to receive”.

The sole issue for debate arises in a context where the insured party has declined WC no-fault benefits and has elected instead to sue a third party, such as a manufacturer of defective equipment which has allegedly caused the work place injury.

There is some conflict in the case law; however, the Court of Appeal decision ¹¹ below is likely the last word on this subject, apart from any variation in the policy wording which may arise.

Madam Justice Himel in her June 2004 decision ¹²reviewed the interplay between WC entitlement and the LTD policy terms. The court in this instance found that the notional offset sought by the insurer would not prevail.

The plaintiff had injured himself at work, and was paid WC benefits. He also applied for LTD benefits  following the approval of the WSIB application.

The plaintiff sued the manufacturer of the machinery, “de-elected” WC which the Board agreed to allow, provided that the plaintiff repay the benefits received to date in the sum of roughly $11,000. It also advised that if the plaintiff wished to continue benefits, it would consider bringing an action on his behalf. All further payments were to be suspended, pending the plaintiff’s response. No repayments were made.

Manulife confirmed approval of the LTD, less WSIB sums per month as if this sum was paid. The policy allowed a set-off for sums the employee received or “was eligible to receive” and also stated that if the employee did not apply for a benefit to which he was entitled, the amount to which he was entitled would be estimated and deducted.

The plaintiff here, the court determined, was not sitting on his rights, but rather had exercised his statutory right to sue the third party. The judge determined that she was “not prepared to interpret this insurance policy in a manner that would deny that right”.

Furthermore, the insurer maintained by the policy the right of subrogation in the tort claim. The clause in question must be read narrowly in favour of the insured, the court decided. The court also read the clause mandating the deduction as ambiguous and hence to be interpreted restrictively.

The court concluded that Manulife was not allowed to deduct the notional sum of WSIB payments from the disability sum.

Madam Justice Wein ¹³considered the same issue of the plaintiff’s decision to decline entitlement to worker’s compensation benefits and elect to sue civilly.

The plaintiff initially applied for Worker’s Compensation Board (“WCB”) and then advised that he would not do so by electing to sue civilly. The technical status of his application for benefits to the Board was important to the final determination of this issue. The Act deals with this circumstance where a claim is filed and then the claimant elects to sue civilly. In effect, the claim remains in suspense, pending the results of the civil action, as was later noted by the Court of Appeal.

The court determined that he was in breach of the policy term and denied LTD payments.¹⁴

This decision was reversed in part by the Court of Appeal, which agreed that the claim for WCB had been filed and was being “processed”, so to speak, pending the outcome of the civil claim. Hence the plaintiff was compliant with the policy and entitled to LTD payments.

The Court, however, also held that the sum payable by Manulife was to be reduced by the WC payments which the insured would have received, had he not made the election to sue. The issue of subrogation was hence moot.

The 2002 decision of the Nova Scotia Court of Appeal ¹⁵considered the method of calculating the overpayment of WC payments and whether the surplus should be carried forward in favour of the insurer. The policy terms were not revealed in the decision.

The plaintiff received WC benefits and CPP disability sums which exceeded the eligible sum of LTD by roughly $150 per month. These two payments were received for the elimination period prior to the commencement of eligibility for LTD payments. Upon the commencement of the LTD claim, accordingly no benefits were payable. The WC payments ceased in June of 2000.

The insurer argued that the monthly surplus of $150, plus the WC payments in the first 17 weeks, should be carried forward to delay the eligibility of LTD for a further nine to ten months. Such submissions were rejected on the initial motion and on appeal.

Deductibility of Legal Fees

The recent decision in May of 2013 of the Ontario Superior Court written by Grace J., ¹⁶considered the issue of the deductibility of legal fees from the sum to be repaid to the insurer, following a successful WC administrative process.

The plaintiff was injured at work and had received LTD benefits which were defined to be 70% of pre-tax monthly earnings less CPP or WC sums.

The plaintiff was denied WC payments, appealed this decision and was successful in recovering a retroactive and prospective loss of earnings benefit and a non-economic loss benefit. In calculating the sum to be repaid to the LTD insurer, the plaintiff sought to deduct his legal fees for the WC application and appeal.

The court determined that the policy terms were clear and unambiguous in stating that the entire sum received should be repaid in response to the first submission of contra proferentem.

A further argument was made that the policy was one of indemnity and hence the make whole philosophy of subrogation should allow only recovery of the true sum received by the plaintiff, post legal fees.

This submission failed as the court determined that recovery was contractual and not based on a subrogated right.

A third argument was made that the insurer was unjustly enriched, which also was met with the view that the agreement prevailed.

This case, apart from one’s views of the merits of the decision, clearly stands for the proposition that a fight for WC sums and resultant disposition of fees should be discussed with the insurer at the outset and apart from the wording of the policy, an agreement should then be struck, not following apparent success.

The legal arguments aside, it does seem inherently unfair for the plaintiff to bear the entirety of legal costs to recover a sum that allows for a considerable return to the insurer, particularly given that the WC administrative appellate process does not allow for recovery of fees in part or in whole. It would not have taken a creative imagination to have read into the policy an ambiguity to allow for a contrary result.

Offsets for Family Members CPP

Most policies contain a provision requiring the insured to apply for a CPP disability policy which will typically reduce the LTD benefit not only for the sum received by the applicant, but also for family dependents. Often the policy will also mandate that there must be an appeal of any denial of CPP.

This issue of the offset for family members has, to date, been challenged unsuccessfully. ¹⁷

Usually the policy will state that the cost of living adjustment provided by the CPP will not offset the LTD.

The CPP is a taxable payment. Where the LTD sum received is non-taxable income, the gross taxable CPP sum will operate to reduce the non-taxable LTD benefit, a result that does not seem equitable. It is unlikely the insured person has any contemplation that the “tax free” benefit as set out in the policy document will be offset dollar for dollar by the taxable CPP sum.

Commuted Pension Payment

The Queen’s Bench of Manitoba ¹⁸considered the impact of a commuted pension payment upon the plaintiff’s entitlement to LTD benefits.

The plaintiff was employed as an air traffic controller for over 30 years. He suffered a heart attack in late 1999 and was medically unable to work for roughly one year. He returned to work in October of 2000 after which he was again required to take a medical leave on November 23, 2001. He continued to receive LTD benefits.

On November 28, 2003 he retired from his employment and subject to the issue of the election of the mode of pension payments, became entitled to receive a pension sum. All parties agreed that the plaintiff was medically disabled and save death, would be entitled to disability benefits through to age 65.

The plaintiff sought to receive a lump sum equal to the commuted value of his pension to be transferred into an RRSP, without the offset to the LTD sum.

The “Offset Provision” of the policy stated that a disabled person’s income benefit is reduced by:

6. All pension benefits payable under the NAV CANADA Pension Plan (NCPP) and/or the Public Service Superannuation Act (PSSA) , as detailed in Appendix.

The Court saw no ambiguity in this clause and determined that the commuted payment would cause the LTD to be set-off by the sum received.

Of some note to this issue are the guidelines of the Canadian Life and Health Insurance Association which state that any reductions in the benefit payable should be set out in the disclosure statement which is delivered to the insured with the policy.

Certain jurisdictions require that any reduction in the sum payable be stated clearly in the policy.

Ontario, by section 299, which applies to “accident and sickness” policies, requires that such a “reduction” or “exception” be stated under a heading by this description or described in the provision allowing for the benefit.

B.C.’s accident & sickness terms with respect to individual and not group policies also requires the exception or reduction be set out.

These provisions are common place in Canadian insurance statutes.