Offsets & Collateral Issues: What’s Left?
There is not one rule regarding when a benefit is offset or deducted from long term disability payments. The starting point for any analysis is the particular policy wording.
The idea of having Offsets is that they permit the insurer to offer lower premiums while avoiding “double recovery”.
Lawyers should be careful not to broadly apply any particular “rule of deductibility”. Every case must be viewed in the context of the policy. As such, we are not only applying caselaw principles we must also apply contextual contractual of a relied upon decision to the particular case “at bar”.
GENERAL CONTRACT INSTRUCTION
The Supreme Court of Canada in Consolidated-Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co.,  1. S.C.R. 888 has confirmed that the onus is on the plaintiff to prove that she has a right to the benefit. The onus is on the defendant to prove entitlement to an Offset.
The principles of statutory construction permit/require a court to attempt to determine the intention of parties to the contract. The Supreme Court states as follows with respect to insurance contract construction:
Even apart from the doctrine of contra proferentem as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. It is trite to observe that an interpretation of an ambiguous contractual provision which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided. Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract.
Notably, the SCC states that when all other rules of statutory construction fail to enable the court to ascertain the meaning of a document, then the contra preferentum principle (if the words of a contract are ambiguous the contract should be interpreted against the one who wrote the words) is used.
Sopinka J. in Brisette v. Westbury Life Insurance Co. 3 S.C.R. 87 summarized the rules of construction relating to interpreting insurance contracts as follows:
(1) The court must search for an interpretation from the whole of the contract which promotes the true intent of the parties at the time of entry into the contract.
(2) Where words are capable of two or more meanings, the meaning that is more reasonable in promoting the intention of the parties will be selected.
(3) Ambiguities will be construed against the insurer.
(4) An interpretation which will result in either a windfall to the insurer or an unanticipated recovery to the insured is to be avoided.
The Supreme Court of Canada in Non-Marine Underwriters, Lloyd’s of London v. Scalera,  1. S.C.R. supports the line of cases at paragraph 70, that “coverage provisions should be construed broadly and exclusion clauses narrowly…therefore one must always be alert to the unequal bargaining power at work in insurance contract, and interpret such policies accordingly”.
The Federal Court of Justice in Manuge v. Canada, 2012 FC 499 (CanLII) quotes with approval from the Supreme Court of Canada in Jesuit Fathers of Upper Canada v Guardian Insurance Co of Canada, 2006 SCC 21 (CanLII), first noting the wording of the the Supreme Court of Canada at paragraph 41:….
“…discussed the special interpretive rules that apply to insurance contracts. In doing so, the Court was cognizant of the unequal bargaining power that exists when the insurance agreement is formed. The following passages from the decision are instructive:
27 Insurance policies form a special category of contracts. As with all contracts, the terms of the policy must be examined, in light of the surrounding circumstances, in order to determine the intent of the parties and the scope of their understanding. Nevertheless, through its long history, insurance law has given rise to a number of principles specific to the interpretation of insurance policies. These principles were recently reviewed by this Court in Non-Marine Underwriters, Lloyd’s of London v. Scalera,  1 S.C.R. 551, 2000 SCC 24 (CanLII). They apply only where there is an ambiguity in the terms of the policy.
28 First, the courts should be aware of the unequal bargaining power at work in the negotiation of an insurance contract and interpret it accordingly. This is done in two ways: (1) through the application of the contra proferentem rule; (2) through the broad interpretation of coverage provisions and the narrow interpretation of exclusions. These rules require that ambiguities be construed against the drafter. . . .
29 Second, the courts should try to give effect to the reasonable expectations of the parties, without reading in windfalls in favour of any of them. In essence, “the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract” (Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC),  1 S.C.R. 888, pp. 901-902; Non-Marine Underwriters, at para.71).
30 Finally, the context of the particular risk must also be taken into account. . . .
VARIOUS DEDUCTIBILITY ISSUES:
CANADA PENSION PLAN DISABILITY BENEFITS
Majority of policies permit the deduction of CPP disability benefits. As such, many insurers require that a person apply for the benefit.
Dependant benefits – court of appeal ruled that these benefits were properly deducted as “disability benefits”. This despite the fact that the parent did not have “entitlement” to the monies (Ruffolo v. Sun Life Assurance Company of Canada, 2009 ONCA 274).
Taxation – does the insurer receive the gross deduction or net deduction? Ontario arbitration decisions have permitted insurers to deduct the gross amount. However, in the context of deductions from Income Replacement Benefits the Ontario Court of Appeal in Bapoo v. Co-operators General Insurance, 1997 CanLII 6320 should be used as authority that only the net amount is deducted. The court reasoned that this was a “just” result.
MY NOTE – the court of appeal struggled in this decision. Insurers will rely on cases establishing “availability” to mean something less than “receipt”. As such, the issue of net versus gross deduction is still alive depending on the specific contract wording.
Early CPP Retirement Pension (lumpsum) as an Offset – There is no disability test threshold for accessing early retirement pension. However, obtaining this stops a person from being able to access the CPP disability benefits. In North Bay Regional Health Centre v. OPSEU, Local 662, 2014 CanLII 37462 (ON LA) the Arbitrator held that the LTD insurer could offset the entire amount as it was “income”.
WSIB BENEFITS (Loss of Earning)
Issues regarding deductibility are generally benefits that have not yet been paid buy may be in the future. We can mostly agree on how to deal with a past benefit. For example, if a policy says WSIB disability benefits are deductible, and your client is receiving the benefit, then the insurer gets a credit. Issues develop when for whatever reasons a person has yet to obtain the benefit.
The Ontario Court of Appeal in Richer v. Manulife Financial, 2007 ONCA 214 held that an LTD insurer could deduct the value of a claimants WSIB loss of earning benefit, despite the fact that the claimant did not actually receive the benefit because he elected to opt out of WSIB in order to pursue his tort losses. The relevant policy wording was a deduction for a benefit the claimant is “entitled” to receive.
The Ontario Court of Appeal, at paragraph 19, quotes with approval from the Supreme Court of Canada in Madill v. Chu reasoning that “entitled to receive” means an insurer is entitled to reduce benefits on satisfactory proof the insured could have successfully claimed the benefit.
Legal costs in obtaining the offset – The Superior Court in RBC Life Insurance Co. v. Janson, 2013 ONSC 3154 ruled that the insurer was entitled to the entire benefit offset despite the 10% fee charged by the lawyer. The court relied on the policy wording in concluding that this was what was contracted for as the issue of legal fees had been contemplated and determined not to be excluded from the deduction.
PRACTICE NOTE – where facing an issue of appealing a benefit, have the insurer agree prior to a legal fee being reduced from the deductible amount.
Caselaw is unsettled. The Plaintiff should argue that severance is compensation for years of service as oppose to salary continuation as such not deductible.
The court in Re Canada Life Assurance v. Donohue, 1999 CanLII 15096 (ON SC) ruled that the insurer could not deduct severance as it did not specifically contract for that to be deducted. The Superior Court in Henderson v. Canadian General Life Insurance Co. 1994 CanLII 7226 (ON SC) also ruled severance was not deductible as it considered the compensation “capital” as oppose to income.
The Ontario Court of Appeal in Sills v. Children’s Aid Society of Belleville, 2001 CanLii 8524 (ON CA) ruled that damages in a wrongful dismissal claim were not deductible. The OCA found that it was reasonable to assume that an employee would not willing negotiate and pay for a benefit that would allow their employer to avoid responsibility for a wrongful act.
Deductions from “General” pension plans:
Federal Court of Justice in Manuge v. Canada ruled that a disability insurer could not deduct payments received by the class of benefit holders from their Pension Act payments as these payments were not “income” as defined by the policy. The court accepted that the payments were compensatory in nature as oppose to income, as part of the reasoning in determining that the policy did not deduct for these payments.
The decision is a classic example of the court “working” to interrupt the contract against the insurer.
NOTE – in the background to any court decision may be is the determination of “income” and the applicability of a decision to Family proceedings and/or Tax proceedings.
What is available?
We have already seen above the court deeming a benefit availability where the person did not actually receive it (“yet”). How can you distinguish? One way would be to rely on cases like Cambridge Memorial Hospital LTD. V. O.N.A., 2011 CanLII 76525 (ON LA) where the arbitrator rules the HOOPP disability pension was not available because the claimant would have had to give up a right to elect this benefit (free accrual in the pension). The divisional court in Timmins District Hospital and ONA confirmed this type of analysis.
PRACTICE NOTE – specific policy wording should be examined and generally counsel should insist that deductions should only be made for “income” that was “earned” during the period of benefit even if all received during a benefit period.
The policy will answer all but the most complex questions when facing a deductibility issues. Where the policy is “silent”, counsel often has a good opportunity to argue that the deduction is not available. However, insurers have favourable caselaw regarding the “available” issue. Further, insurers do a good job modifying their policies to account for previous “losses”. As such it is up to plaintiff counsel to keep pushing to create new exposures.