Court ruling sweeps in changes to LTD claims

Advisors are in the hot seat after a court took a hard line with carriers that played fast and loose with one insured man’s contractual rights

The Nova Scotia Court of Appeal recently rendered its decision in a case between Bruce Brine (insured) who had a long-term disability policy with his employer and Industrial Alliance who insured Brine that could set in motion serious changes in this particular segment of living benefits with results both positive and negative.

Brine was diagnosed with depression in 1995 and began receiving benefits under the plan. Then things began to unravel.

While Industrial Alliance accepted coverage and started to pay disability benefits, it stopped paying after bringing an action against Brine for overpayments he received for retroactive disability pension benefits.

“Under the policy, the insurer was to be the last payor. Mr. Brine recovered amounts from other sources. The insurer then stopped paying any disability benefits in order to recover these amounts. Mr. Brine entered bankruptcy. After his discharge from bankruptcy, the insurer continued its cessation of disability benefits until the overpayments were recouped. Then the insurer resumed the disability benefits,” wrote the Nova Scotia Court of Appeal in its November 17 decision. “At trial, the insured claimed that the insurer had breached the terms of the policy, on recovery of overpayments, and the insurer’s duty of good faith.”

Good faith in this case was the ongoing provision of rehabilitation services that medical practitioners had found could get Brine back to work but Industrial Alliance stopped providing under the assumption that the insured’s qualification for CPP disability benefits meant the insured would never return to work.

“This was bad faith even though the Policy did not require the Insurer to provide rehabilitation,” reads the NSCA decision. “Once the Insurer decided to provide these services it had to continue them, and communicate about them, in good faith.”

Furthermore, the Court of Appeal found that Industrial Alliance breached the policy by clawing back the overpayment instead of pro-rating it as the policy’s wording instructed.

Why should advisors care?
“The standard of good faith applies to discretionary services like rehabilitation once offered,” wrote Stewart McKelvey. “Insurers will have to be cautious when deciding to commence rehabilitation benefits, as they will not be permitted to stop them even in the face of it appearing the insured will not return to work.
Advisors will have to more careful about the LTD policies they recommend to clients given insurance companies are likely to be very careful about approving rehabilitation in the future.
“Disability insurance is a peace of mind contract’” writes the Nova Scotia Court of Appeal in its judgement.