Your employer advises you that there will be a change in your disability benefits coverage provider. You will no longer be covered under an insurance company for your long term disability benefits. Instead, you will be covered under a Health and Welfare Trust (“HWT”) or an Employee Life and Health Trust (“ELHT”). A current example is OTIP, Ontario Teachers Insurance Plan, which recently transitioned to an ELHT.
Alternatively, you might be part of an association, organization or union that already has a Health and Welfare Trust or Employee Life and Health Trust in place. NECA-IBEW for instance, have had a Welfare Trust Fund in place for many years.
You might not give a second thought to this benefits structure but, there can be significant implications for employees whose benefits are decided under an insurance policy/plan as opposed to a Trust.
What is the difference between insurance and a Health and Welfare Trust?
An employee may be eligible to receive disability benefits as part of a group disability benefits policy/plan. A group disability benefits policy/plan is typically a contract of insurance issued by an insurance company to an employer (the policyholder) under which eligible employees may qualify for and receive disability benefits. When an eligible employee submits a claim for disability benefits, that claim is adjudicated/administered by the insurance company. If the employee qualifies for disability benefits, those benefits are, more often than not, paid for by the insurance company.
A Health and Welfare Trust (HWT) introduced in 1986 and an Employee Life and Health Trust (ELHT) introduced in 2010, are trust vehicles used by corporations to manage healthcare costs for their employees.
Before February 2018, employers could choose to provide benefits through an HWT or an ELHT however since February 2018, no new HWTs could be established and existing HWTs had to transition to ELHTs by December 2022.
Section 144.1(2) of the Income Tax Act[1] outlines the criteria for an ELHT. When disability benefits claims are submitted in this context, they can be adjudicated/administered by a third party, the corporation or the Trustees. If the employee qualifies for disability benefits, those benefits are paid from the Trust funds.
Taxability
With an insurance policy/plan the taxability of long term disability benefits will depend upon how premiums are paid. If premiums are fully paid for by the employees, benefits received will be rendered non-taxable. If any portion of the premium is paid by the employer, benefits will typically be taxable in the hands of the employees.
Disability benefits received pursuant to a HWT or ELHT are always taxable in the hands of the recipients.
If litigation has been commenced in relation to a denied taxable long term disability benefit payable under an insurance policy or plan, the employee may still be able to receive some tax benefit with the use of the 2005 Supreme Court decision in Tsiaprailis v. Canada[2]. In that decision the court applied the surrogatum principle by considering the nature and purpose of a settlement payment for taxation purposes. The court held that the portion of the settlement intended to compensate for past benefits was taxable within the meaning of the Income Tax Act.
When it comes to long term disability benefits received under a HWT or ELHT, all benefits, both past and future, are fully taxable and the principles of the Tsiaprailis decision are inapplicable.
Adjudication Standards
Insurance companies are regulated under the Insurance Act[3] and they have a contractual duty to act in good faith.
“The duty of good faith…requires an insurer to deal with its insured’s claim fairly. The duty to act fairly applies both to the manner in which the insurer investigates and assesses the claim and the decision whether or not to pay the claim. In making a decision whether to refuse payment of a claim from its insured, an insurer must assess the merits of the claim in a balanced and reasonable manner. It must not deny coverage or delay payment in order to take advantage of the insured’s economic vulnerability or gain bargaining leverage in negotiating a settlement. A decision by an insured to refuse payment should be based on a reasonable interpretation of its obligations under the policy.”[4]
There are various cases in our law that have assessed whether insurance companies have breached the duty of good faith in order to determine whether an insurance company would be liable for extra-contractual damages such as punitive damages.
Although trusts are not regulated under the Insurance Act, and it is unclear yet whether they are covered under the decisions applicable to insurers related to extra-contractual damages, trustees do owe a fiduciary duty in their decision making.
Fiduciary relationships exist when one party is obligated by law to act in the best interests of the other. This requires trustees to act honestly, in good faith, and solely in the best interests of the beneficiary. It could be argued that this is a higher standard than the duty of good faith.
Caselaw has established that an administrator of a health care plan owes a fiduciary duty to those persons who must rely on the administrator to act in good faith, in accordance with the governing documents where the individual may be seriously affected by the exercise of the administrator’s discretion.[5]
Conclusion:
Whether you have been denied disability benefits under an insurance policy or plan by an insurance company or your benefits have been denied by your Health and Welfare Trust (“HWT”) or Employee Life and Health Trust (“ELHT”), it is important to speak with an experienced disability lawyer who understands the nature of dealing with and litigating against these entities.
Please contact us online to submit a request for a free 1 hour consultation to review the nature of your long term disability benefits claim denial.
This blog was written by Leanne Goldstein of Leanne Goldstein Law, P.C.. Leanne is an insurance and disability lawyer. Her practice is focused on long term disability benefits, critical illness, and life insurance claims. Leanne also deals with workplace related disability issues. Leanne is a Lexpert ranked lawyer. This Blog is not intended to be legal advice, it is made available for educational purposes. By viewing this blog, you understand that there is no solicitor-client relationship between you and the blog publisher.
[1] Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)
[2] Tsiaprailis v. Canada, [2005] 1 S.C.R. 113, 2005
[3] Insurance Act, RSO 1990, c I.8
[4]702535 Ontario Inc. v. Lloyds London, Non-Marine Underwriters 2000 CanLII 5684 (Ont. C.A.)
[5]Burke v Hudson’s Bay Co. 2010 SCC 34, (2010) 2 SCR 273; Garcia v MacKinnon 2014 ONSC 4410.