A disability insurer cannot set off damages with a right of subrogration. A reimbursement clause may be necessary.

Successful appeal by the Insurer from a decision confirming the Insured’s entitlement to past and future disability benefits under a group insurance policy.

This case was summarized in the Lawyers Weekly.

Wilson v. Great-West Life Assurance Co., [2008] N.B.J. No. 303, New Brunswick Court of Appeal, J.E. Drapeau C.J.N.B., W.S. Turnbull and A. Deschenes JJ.A., July 31, 2008

The Insured was injured in a highway accident and began receiving monthly disability benefits under a policy issued to her employer.  The Insured obtained judgment against the driver of the motorcycle on which she was riding at the time of the accident, including an award of damages for past and future loss of income.  The Insured repaid all the disability benefits she had received under the disability policy, but contested the Insurer’s entitlement to any part of the award for future loss of income on the basis that the Insurer had no rights of subrogation under the policy after the entry of the judgment. The Insurer eventually ceased paying disability benefits to the Insured, giving rise to her application for judicial confirmation of her entitlement to past and future disability benefits. The Application Judge found that the Insurer had breached the policy in stopping payment of disability benefits to the Insured.

The only issue before the Court of Appeal was whether the policy was a contract of indemnity.  If it was a contract of indemnity, the parties agreed that the appeal must be allowed and the Insured’s application for benefits dismissed.  The Insured argued that the policy was not a contract of indemnity because it only provided partial indemnity for any loss of income (60% of her basic monthly rate of earnings) and also that a policy identical to the one at issue in this case was found to be a non-indemnity contract in Mutual Life Assurance Co. v. Tucker (1993), 119 N.S.R. (2s) 417 (C.A.), [1993] N.S.J. No. 56 (QL).

The Court of Appeal considered the distinction between non-indemnity and indemnity policies, noting that if the policy is one of indemnity, equity steps in and vests in the Insurer a right of subrogation, which in insurance cases is regulated by the broad underlying principle of securing full indemnity for the Insured on the one hand, and, on the other, of holding him accountable as trustee for any advantage he may obtain over and above compensation for his loss.  The Court of Appeal found that the Application Judge had erred in stating that “a policy providing LTD benefits is [not] an indemnity policy” and that the correct view is that a policy providing LTD benefits may be a contract of indemnity, depending on its terms.  The Court of Appeal reviewed case authorities which indicate that long-term disability insurance policies are presumptively ones of indemnity, unless the terms of the policy conclusively indicate a contrary intention. The Court of Appeal commented that there was nothing in the terms of the policy in question to displace this presumption and conclusively establish an intention to create a non-indemnity contract.

The upshot of the provisions in the Insurer’s policy was that it did not provide coverage unless the employee was both totally disabled, from a medical standpoint, and without employment income.  If the disability benefits were payable under the policy, the basic amount would be calculated as a fraction at the Insured employee’s rate of earnings and then reduced by specific income benefits. Therefore, what the policy provided was, at a minimum, partial indemnity for the employee’s disability-related loss of income and the Court concluded that it therefore met the essential requirements of a contract of indemnity.

The Court of Appeal allowed the Insurer’s appeal and set aside the decision of the Application Judge’s finding that the group disability policy was not a contract of indemnity.  The Insured was thefore not entitled to continue receiving disability benefits from the Insurer.

This case was originally summarized by Shanti Davies and originally edited by David W. Pilley.

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