Mental Disability: Insurance & Negligence Issues

 

When a Mentally Disabled Employee Resigns: Disability Insurance and Negligence Remedies

A resignation will ordinarily bring the employment relationship to an end. It does not necessarily extinguish disability insurance rights that arose before the resignation. Nor does it necessarily protect an employer that failed to provide information or assistance required to preserve those rights.

This issue assumes particular importance where an employee resigns while suffering from a mental disability. The disability may impair the employee’s ability to understand:

  • that they are medically unable to work;
  • that disability benefits may be available;
  • that an application must be submitted;
  • that strict filing deadlines apply;
  • that medical evidence is required; or
  • that resignation may jeopardize access to valuable benefits.

Human rights law may require the employer to inquire into whether the resignation was influenced by disability. Separate from that human rights remedy, two civil remedies may also arise:

  1. a claim to enforce the employee’s disability insurance or benefit rights; and
  2. a negligence or contractual claim against the employer for causing the loss of those rights.

These remedies overlap, but they are analytically distinct.

The first remedy: enforcing the disability benefit entitlement

The first question is whether the employee became disabled while still covered by the disability plan.

A resignation occurring after the onset of disability does not necessarily eliminate a claim that had already arisen. The employee’s rights will depend upon the wording of the plan, including:

  • the definition of disability;
  • the requirement that the employee be actively at work;
  • the elimination or qualifying period;
  • the date on which coverage terminates;
  • continuation-of-coverage provisions;
  • notice and proof-of-claim requirements; and
  • contractual limitation periods.

The critical date is often the date on which the disabling condition first prevented the employee from performing the work required by the policy. If the employee became disabled while still employed and insured, a later resignation or termination may not defeat the accrued claim.

Tarailo v Allied Chemical Canada Ltd.

The leading authority involving mental illness is Tarailo v Allied Chemical Canada Ltd.

Tarailo experienced serious employment and behavioural difficulties. He resigned after being advised that his employment would otherwise be terminated. It was later established that he had been suffering from a serious mental illness and had become disabled before his employment ended.

His wrongful dismissal claim was unsuccessful. The employer had legitimate grounds for ending the employment relationship because he was incapable of performing his position.

The disability benefit claim, however, succeeded.

The court found that Tarailo had been a permanent full-time employee when his illness prevented him from working. His entitlement to disability benefits arose before his resignation. The employer could not extinguish that entitlement by threatening dismissal and then accepting his resignation.

The case therefore separates two questions:

  • Was the employer entitled to end the employee’s active employment?
  • Was the employee already entitled to disability benefits when the employment ended?

An employer may succeed on the first question and still be liable on the second.

The Ontario Court of Appeal later described Tarailo as a case in which the employee became disabled before his discharge and was therefore contractually entitled to short-term and long-term disability benefits.

The employer as agent of the insurer

Group disability insurance is commonly arranged through the employer. The employee may have little or no direct contact with the insurer until a claim is submitted.

The employer may:

  • distribute the benefit booklet;
  • provide application forms;
  • explain the claims procedure;
  • calculate the elimination period;
  • collect medical documentation;
  • submit materials to the insurer;
  • maintain absence and eligibility records; and
  • communicate the insurer’s requirements to the employee.

Where the insurer has delegated these administrative functions to the employer, the employer may be treated as the insurer’s agent for those purposes. The employer’s failure to perform the delegated function may then bind the insurer or expose both the employer and the insurer to liability.

The existence of an agency relationship is fact-specific. It depends upon the policy documents, the benefit booklet, the division of responsibilities between the employer and insurer and the functions the employer actually undertook to perform.

An employer is not automatically the insurer’s agent for every purpose. Courts have distinguished administrative functions delegated to the employer from substantive decisions that remain exclusively within the insurer’s control.

The employer’s undertaking in Tarailo

In Tarailo, the employer had undertaken in its benefits material to assist employees in completing the forms required for disability claims.

After receiving correspondence disclosing Tarailo’s illness and treatment, the employer had reason to appreciate that he might have been mentally incapable of identifying and pursuing his entitlement. The employer possessed the necessary forms but did nothing to assist him.

The court found that the employer owed Tarailo a duty to assist with the claim and was acting as the insurer’s agent for that limited administrative purpose.

The employer was not required to decide whether Tarailo met the policy definition of disability. That was a matter for the insurer. Its obligation was to give him the information and assistance required to place the claim before the insurer.

Herbert v Manulife Financial

The Alberta decision in Herbert v Manulife Financial provides another example.

The employer had been assigned the administrative responsibility of providing the employee with the forms required to apply for long-term disability benefits. The employee’s application was delayed because the employer refused or failed to provide them.

The employer was found to be the insurer’s agent for that administrative function. The insurer could not rely upon a delay caused by the failure of the party to which it had delegated responsibility for providing the forms. 1

Ferguson v Halton

The obligation to assist was stated directly in Ferguson v Halton.

Ferguson took medical leave and sought information about his employment benefits. His employer did not give him the complete long-term disability plan documents, the necessary forms or accurate information concerning the application process and its deadlines.

The court stated that, as his employer, Halton owed Ferguson a duty to assist him in applying for long-term disability benefits. The employer’s own evidence confirmed that its disability-management staff ordinarily tracked employees approaching the end of short-term disability and sent them long-term disability application packages.

That system was not properly followed in Ferguson’s case.

Ferguson’s eventual application was several years late. The court nevertheless concluded that the employer’s persistent failure to provide accurate and complete information had created unnecessary confusion and contributed to the delay. 2

Resignation or termination does not necessarily defeat an accrued claim

In Ferguson, the employer argued that the employee was no longer covered because his employment had ended before he submitted the formal application.

The court rejected that argument. The termination-of-coverage language applied to future claims, not to a disability claim that had arisen while Ferguson remained employed and covered.

The court relied upon the Ontario Court of Appeal’s decision in MacIvor v Manufacturers Life Insurance Co., which similarly held that the end of employment did not eliminate an insured claim arising from a disability that occurred during the period of coverage. 3

The principle is important, but it is not universal. The result will always depend upon the particular policy language and the date on which the disability arose.

Relief from forfeiture for a late application

A mentally disabled employee may fail to give timely notice or submit proof of claim within the period required by the policy.

A late application is not invariably fatal.

Where the employee has imperfectly complied with an insurance requirement—as opposed to never having acquired coverage—a court may have jurisdiction to grant relief from forfeiture. The precise statutory source and test will depend upon the province.

In Ontario, Ferguson applied three considerations:

  1. the reasonableness of the claimant’s conduct;
  2. the seriousness of the contractual breach; and
  3. the disparity between the value forfeited and the prejudice caused by the breach.

The court considered the employee’s medical circumstances, the employer’s failure to provide accurate information, the absence of material prejudice and the potentially enormous value of the lost benefits.

Ferguson faced the possible loss of income benefits equal to 65 percent of his salary until age 65. The court granted relief from forfeiture and allowed the disability claim to proceed, although it did not decide whether Ferguson was medically entitled to benefits.

Relief from forfeiture preserves the opportunity to have the claim adjudicated. It does not prove that the employee was disabled within the meaning of the policy.

What the employee must prove against the insurer

Even where the employer failed to assist, the employee must ordinarily establish the underlying insurance entitlement.

This will generally require proof that:

  • the employee was covered by the plan;
  • the disability began while coverage remained in effect;
  • the employee satisfied the applicable definition of disability;
  • the elimination period was completed;
  • any exclusion or limitation does not apply;
  • the employee provided, or should be relieved from failing to provide, the required notice and proof of claim; and
  • benefits would have been payable but for the administrative failure or delay.

The employer’s misconduct cannot create insurance coverage that never existed. It may, however, prevent the employer or insurer from relying upon an administrative failure that the employer caused.

Negligence Claim vs the Employer

The second civil remedy is a claim against the employer for negligent administration of the benefit plan.

The claim is not simply that the insurer should pay under the policy. It alleges that the employer’s failure to exercise reasonable care caused the employee to lose benefits that otherwise would have been available.

The ordinary negligence analysis requires proof of:

  1. a duty of care;
  2. a breach of the required standard of care;
  3. factual and legal causation; and
  4. compensable loss.

A parallel claim may also be framed in contract where the employment agreement, benefits booklet or established plan procedures expressly or impliedly required the employer to provide access to the benefit program.

The scope of the employer’s duty

Depending upon the plan and the circumstances, reasonable administration may require the employer to:

  • advise the employee that disability coverage exists;
  • provide an accurate benefit booklet;
  • identify the insurer or plan administrator;
  • provide claim forms promptly;
  • explain the application process;
  • disclose material deadlines;
  • advise of the consequences of missing those deadlines;
  • transmit completed documents properly;
  • avoid supplying inaccurate or misleading information;
  • maintain coverage and premiums as required;
  • advise of termination or conversion rights; and
  • respond reasonably to an employee whose medical condition may impair the ability to protect their own interests.

The duty is particularly compelling where the employer knows that the employee is medically unwell, knows that the absence may become prolonged and controls access to the forms or information needed to commence the claim.

Menard v Royal Insurance Co. of Canada

Menard v Royal Insurance Co. of Canada is particularly significant in the context of resignation and mental disability.

Menard was a long-service employee who had experienced emotional and psychological difficulties. Her employer was familiar with that history and had previously raised disability benefits with her during an earlier period of illness.

Menard later submitted a resignation stating that she was unable to cope with workload and stress. The employer knew that she was distressed and observed during the departure process that she was tearful and under significant pressure.

Despite those circumstances, the employer accepted the resignation and failed to discuss disability benefits with her.

The court found that Menard was medically disabled when she resigned. It concluded that the employer, which operated a self-funded disability program, was obliged to assist her in making a disability claim.

Damages were awarded for the disability benefits lost from the end of the employment relationship to the date of trial. 4

The importance of Menard lies in the employer’s knowledge. The resignation could not safely be treated as an ordinary departure when the employer knew of the employee’s medical history, observed current distress and knew that disability benefits might provide an alternative to resignation.

Negligent administration of a benefit plan

The negligence principles are not limited to mental disability or long-term disability insurance.

In Card Estate v John A. Robertson Mechanical Contractors (1985) Ltd., the employer failed to advise the employee that life insurance coverage had ended and that the group coverage could be converted to an individual policy. The employer was held responsible when the employee died without the replacement coverage. 5

In Barkley v Sooter Studios Ltd., an administrative error caused the insurer to be advised incorrectly that the employee’s employment had ended. The error resulted in the loss of insurance benefits, and the employer was found negligent. 6

These cases demonstrate that benefit-plan administration is not a merely clerical matter. An employer entrusted with that function must exercise reasonable care because an error may eliminate insurance protection at the very moment it is needed.

Grams v Maple Leaf Metal Industries Ltd.

In Grams, the Alberta Court of Queen’s Bench held that an employer was required to exercise reasonable care in administering its group insurance plan.

The employment arrangement included the opportunity to enroll in the plan. As a necessary part of that obligation, the employer was required to provide sufficient information about:

  • the available coverage;
  • the applicable enrolment deadlines; and
  • the consequences of failing to enrol on time.

The employer’s failure to provide adequate information amounted to both negligence and breach of an implied contractual obligation.

The employee was not free from responsibility. He had failed to make reasonable inquiries about the coverage. The court therefore apportioned the loss equally between the employer and the employee. 7

The case demonstrates that an employee’s own conduct remains relevant. A mentally capable employee who receives clear information but ignores it may be found contributorily negligent or may fail to establish that the employer caused the loss.

Mental disability may materially affect that analysis. A person experiencing a serious psychiatric episode may not have the same practical ability to understand the plan, request the forms or comply with deadlines.

Perlett Estate v Riverside Health Care Facilities Inc.

The Ontario Court of Appeal addressed negligent administration of group life insurance in Perlett Estate v Riverside Health Care Facilities Inc.

The employee’s estate alleged that the employer had failed to advise her properly of an opportunity to obtain enhanced life insurance benefits and had administered the enrolment process negligently.

The trial judge accepted that the employer had been negligent but dismissed the civil action on the basis that the employee was unionized and the dispute belonged in arbitration.

The Court of Appeal reversed that jurisdictional conclusion. The essential nature of the claim did not arise from the collective agreement, which contained only limited provisions concerning the payment of premiums and the provision of an information booklet. Judgment was granted for the value of the enhanced insurance benefit.

8

For unionized employees, jurisdiction remains dependent upon the legislation and the wording of the collective agreement. Where the substance of the benefit dispute arises from the collective agreement, exclusive arbitral jurisdiction may apply.

The duty is not unlimited

The authorities do not establish that every employer must diagnose every employee, prevent every resignation or volunteer comprehensive insurance advice whenever employment ends.

Liability depends upon factors such as:

  • what the employer knew about the illness;
  • whether disability was apparent or had been disclosed;
  • whether the employee was absent or unable to work;
  • whether the employer controlled the claims process;
  • what the plan documents promised;
  • whether the employer had undertaken to assist;
  • whether the employee asked for information;
  • whether forms or information were withheld;
  • whether the employee was capable of protecting their own interests; and
  • whether the employer’s conduct actually caused the loss.

In Beaird v Westinghouse Canada Inc., the Ontario Court of Appeal described it as questionable whether a free-standing cause of action for failing to acknowledge and support an LTD claim existed on the facts before it. The Court emphasized that Tarailo involved a contractual undertaking in the employer’s benefits material to assist employees with claims. 9

The safer proposition is therefore not that every employer invariably owes a broad duty to secure disability benefits. The duty is strongest where the employer has undertaken or been assigned responsibility for administering the plan and knows, or should know, that the employee may require access to disability benefits.

Causation: would the claim have succeeded?

A failure by the employer is not enough by itself. The employee must prove that the breach caused a compensable loss.

This will normally require evidence that:

  • the employee would have applied had proper information or assistance been provided;
  • the application would have been submitted within the required period;
  • the employee met the policy definition of disability;
  • the insurer probably would have approved the claim; and
  • the benefits were lost because of the employer’s failure rather than for an independent reason.

Where the evidence establishes only the possibility of coverage, damages may be assessed as a lost opportunity rather than the full value of the policy. Where entitlement would have been established on a balance of probabilities, the claim may include the value of the benefits that should have been paid.

Damages

The potential damages can be substantial.

If an employee became permanently disabled while covered but lost the claim because the employer failed to provide forms or information, damages may include:

  • unpaid short-term disability benefits;
  • unpaid long-term disability benefits;
  • future benefits to the policy termination age;
  • lost life insurance or waiver-of-premium protection;
  • lost pension or benefit accruals;
  • interest; and
  • consequential financial loss caused by the absence of income replacement.

Future long-term disability damages must be valued in accordance with the policy. Relevant considerations may include:

  • the monthly benefit;
  • the change from an “own occupation” to an “any occupation” definition;
  • benefit offsets;
  • taxation;
  • the possibility of medical recovery;
  • rehabilitation provisions;
  • termination age;
  • mortality;
  • present-value discounting; and
  • other policy contingencies.

The loss may be enormous where the employee is young, the disability is chronic and the policy provides benefits to age 65.

Aggravated and punitive damages are not automatic

A failure to protect disability benefits does not automatically support aggravated or punitive damages.

In Beaird, the trial judge awarded both aggravated and punitive damages arising from the employer’s handling of the disability claim. The Ontario Court of Appeal set those awards aside.

The Court held that there was no separate actionable wrong supporting aggravated damages and that the employer’s conduct did not approach the high level of harsh, vindictive, malicious or reprehensible conduct required for punitive damages.

Compensation for the value of lost benefits is distinct from an award intended to compensate for mental distress or punish misconduct. Additional damages require their own legal and evidentiary foundation.

Evidence required in a claim

A mentally disabled employee considering these remedies should obtain:

  • the complete disability policy or plan specifications;
  • the benefits booklet provided to employees;
  • the employment agreement;
  • insurer-employer administrative agreements, where producible;
  • short-term and long-term disability forms;
  • correspondence concerning leave, resignation and benefits;
  • medical evidence addressing the date disability began;
  • medical evidence concerning the employee’s capacity at the time of resignation;
  • evidence of what the employer knew;
  • records of requests for forms or information;
  • internal benefits and termination checklists;
  • evidence of the employer’s customary disability-management procedures;
  • the insurer’s claim file; and
  • actuarial evidence concerning the value of lost benefits.

The medical evidence must address more than diagnosis. It should explain whether the condition prevented the employee from working and whether the condition impaired the employee’s ability to understand or pursue the benefit claim.

A practical framework for employers

An employer receiving a resignation from an employee who may be mentally disabled should not treat benefits administration as an afterthought.

The prudent approach is to:

Review what is known

Consider prior medical leaves, current medical information, statements of inability to cope, behavioural changes, hospitalization, requests for leave and other objective indications of disability.

Clarify the employment decision

Determine whether the employee genuinely intends to resign and whether the resignation may have been influenced by illness.

Identify available benefits

Review short-term disability, long-term disability, life insurance, pension, health coverage and any conversion rights.

Provide accurate information

Give the employee the plan booklet, claim forms, insurer contact information, application deadlines and an explanation of the claims process.

Do not decide the medical claim internally

Unless the plan is self-funded and the employer is the decision maker, the employer should transmit the claim for adjudication rather than deciding that the employee is not disabled.

Preserve the record

Document what information was provided, what forms were sent, when they were sent and what follow-up occurred.

Allow the insurer to decide entitlement

The existence of misconduct, performance concerns or a valid basis for ending active employment does not necessarily answer whether the employee became disabled while insured.

Conclusion

The resignation of a mentally disabled employee may create issues extending well beyond the validity of the resignation itself.

The first civil remedy is a claim to enforce disability benefit rights that arose while the employee remained covered. A resignation or termination does not necessarily extinguish a disability claim that accrued before employment ended.

The employer may also be treated as the insurer’s agent where it has been assigned responsibility for providing forms, information or other administrative assistance. Its failure may bind the insurer or support relief from a missed filing requirement.

The second remedy is a negligence or contractual claim against the employer. An employer that carelessly administers a benefit plan, withholds essential information or fails to perform responsibilities it has undertaken may be liable for benefits the employee consequently loses.

Mental disability gives these principles particular force. An employee suffering from serious mental illness may be unable to recognize the disability, appreciate the availability of insurance or complete the process required to protect the claim.

The law does not make the employer the employee’s universal guardian. It does, however, require reasonable care where the employer controls access to valuable benefit rights and knows that the employee may be unable to protect those rights without assistance.

An employer may be entitled to accept that the employee can no longer perform active employment. It cannot necessarily use that conclusion, or the employee’s resignation, to defeat disability insurance rights that had already arisen.

Footnotes

  1. Herbert v Manulife Financial, 2002 ABQB 891, 326 AR 128.
  2. Ferguson v Halton, 2018 ONSC 5675.
  3. MacIvor v Manufacturers Life Insurance Co., 2018 ONCA 381.
  4. Menard v Royal Insurance Co. of Canada, 2000 CanLII 22596 (ON SC), 1 CCEL (3d) 96.
  5. Card Estate v John A. Robertson Mechanical Contractors (1985) Ltd, (1989) 26 CCEL 294, referenced in EE v ER)
  6. Barkley v Sooter Studios Ltd., 2001 BCSC 476.
  7. Grams Estate v Maple Leaf Metal Industries Ltd., 2006 ABQB 146.
  8. Perlett Estate v Riverside Health Care Facilities Inc., 2005 CanLII 18184 (ON CA), 254 DLR (4th) 338. The case is sometimes referred to by the names of the executors, Martin and Arlene Grinsell.
  9. Beaird v Westinghouse Canada Inc. (1999), 43 OR (3d) 581 (CA).