It is important to have a firm understanding of the differing types of disability insurance as the terms are needlessly confusing. Not only are there two basic types of disability insurance but also there are further variances for individual and group policies.
Two Variations
The two classifications of disability insurance make little sense, but they continue to survive.
The first is technically known as “disability” insurance, which refers to such coverage when it is part of a life insurance policy. The second is defined as “accident and sickness” insurance, which has no life insurance component. The differences remain important today.
Group disability insurance offered through employment is the focus of this aspect of this review. Such insurance is generally known as “accident and sickness” as opposed to “disability”. There are different rules that apply to such different classes of insurance and also different rules which apply to individual policies of accident and sickness and group accident and sickness policies.
The Ontario Law Reform Commission in 1996 recommended that the statute be amended, to eliminate this distinction between “disability” and “accident and sickness” policies and to create one set of rules governing this subject. This proposal made perfect sense, however no action has been taken since. 1 2 The same distinction remains in the legislation of each Canadian jurisdiction.
ASO
There is yet a third form of “insurance”. The employer may also arrange for a third party, usually a known insurer, to administer and adjudicate claims for which the employer then takes the responsibility of paying. This is known as “Administrative Services Only”, or “ASO”. It is reviewed subsequently. It is as a means to offer group accident and sickness coverage.
This type of arrangement has become controversial. ASO contracts to deliver an insurance product without the mandate of government oversight. Industry associations have lobbied the remaining jurisdictions to do likewise, which efforts to date have been unsuccessful.
The bankruptcy of Nortel has been used as a leading illustration of the lack of protection afforded to disabled workers in the event of the insolvency of the employer. In that instance, disabled workers were denied the ability to collect on proven disability claims due to the fact that they were an employer liability. It makes no sense to recognize by legislation the need for insurer solvency and then to allow such a facile method of circumventing this protection to survive.
The federal government outlawed ASO coverages for long term disability covers. No province or territory has done so, although Ontario passed similar legislation which remains pending. See the review here.
Formulation of Benefits
Disability insurance generally allows for a payment expressed as a percentage of earnings at the time of the disability, up to a stipulated maximum. The benefit sum paid will vary by policy but usually is in the range of 60% to 75% of pre-disability income, subject to a stated cap.
The policy may also include a waiver of premium for long term disability (“LTD”) and life insurance, rehabilitation and retraining expenses and contributions to the employee’s pension plan. Sometimes the employer by a separate commitment, offers to maintain the status quo of other medical and health benefits during the period of disability.
Where the employer pays the premiums the benefit is tax-free. For that reason, many companies deduct the premium from the employee’s after-tax earnings and then apply it collectively to the group premium.
Canada Pension Plan (“C.P.P.”) disability is a contracted deduction from the benefit sum. Whether or not the benefit is taxable, the taxable C.P.P. sum reduces the disability payment dollar for dollar. The policy holder, with two children, who believes their disability payment will be $4,000 a month of non-taxable income will be surprised to learn that in fact it is almost half this sum.
Eligibility Tests
Coverage is defined to require “active employment” upon the onset of the disability.
Payments of disability benefits typically commences after the “elimination period”. This initial elimination period may be covered by self-funded employer coverage, insurance, or an ASO plan for “short term” benefits. Alternatively, the employer may provide no coverage at all, requiring the employee to seek Employment Insurance sickness benefits to those who qualify, 3which benefits are available for a 26 week period, following a two week waiting period. The maximum payment is now $650 a week, which is 55% of the maximum insured earnings.
Following a continual disability in the elimination period, generally most policies provide a test for entitlement as the medical inability to perform the insured’s “own occupation”, which is usually for a two year period from the commencement of the disability or the commencement of “own occupation” benefits. The “own occupation” period is usually followed by an “any occupation” period for the remainder of the policy until age 65.
In substance, to make a claim on the policy, the insured must prove:
- That they were covered by the policy at the onset of the disability, as it may be defined by the policy;
- That they were actively employed; and
- That they were continually disabled to the commencement date of the payment and beyond, subject to the medical tests, as noted.
Not an Indemnity
The person need not prove that following the disability, they would have otherwise continued to be employed. Hence, an insured who would have been terminated the day following the onset of the disability or had planned to retire prior to age 65, or would have been terminated due to the insolvency of his or her employer one week after the onset of the disability, will succeed in his claim, other factors being favourable.
In this sense, the person is not truly being indemnified for the loss. In one case, a plaintiff who had been incarcerated for the murder of her spouse, successfully recovered her disability claim.
Common Policy Terms
Group insurance policies are rarely reviewed by the insured members until attending with legal counsel as the need arises, likely upon receiving a notice of rejection of the claim. Union members are protected by the collective ability to review and negotiate the terms by qualified professionals. The individual non-unionized employees form the most vulnerable group.
Disability policies may contain exclusionary provisions, by which the claim is not covered with respect to certain named ailments. In the past, mental disorders were excluded, as was Chronic Fatigue Syndrome, and addiction to recreational drugs or alcohol. Such provisions avoiding coverage due to addictive behaviour or emotional issues are contrary to human rights legislation. 4
Many policies contain terms mandating the insured be “under the regular care of a physician” or submit to a program of rehabilitation. It is often an issue as to whether such clauses are enforceable, particularly the direction to improve a toxic lifestyle by eliminating the behaviours such as smoking, drinking and slovenliness.
Non-Employment Covers
Disability insurance can be provided by other means other than directly by the employer. Professional associations or alumni organizations may offer this facility, as do banks and trust companies to assist the insured pay its mortgage debt or other loan. Retailers and credit card issuers may also provide this coverage.
Group insurance coverage usually does not require medical underwriting, although generally a term in the policy will forbid a claim within a statutorily imposed time period of two years following the commencement of coverage, based on symptoms or a diagnosis which pre-date the coverage. The premium is typically much less expensive than a private policy.
This review focuses on disability issues arising from an employment relationship. Group disability benefits provided in this manner are usually “accident and sickness” benefits as opposed to “disability” payments in the technical sense of the definition.
All these issues will be discussed in detail.