Employers: Your Employee Disability Policy May Protect Your Employees, But Does it Protect You?

Litigation relating to disabilities claims made following the termination of an employee’s employment can be very costly for employers if the employers do not have proper disability coverage.  Consequently, employers ought to ensure that the disability policy they carry is appropriate.

Many employers, particularly small employers are not aware of two important facts:

  1. If an employee’s employment is terminated without cause, when does the employee’s disability coverage end: (a) on the date the employee is notified of the termination of their employment; (b) on the employee’s last day of active employment (which is frequently the day the employee is notified of the termination of their employment); (c) at the end of the statutory notice period; or (d) at the end of the common law or contractual notice period (assuming the employee is entitled to more than statutory notice).  Hint: The answer will be determined by the terms of the disability insurance contract.; and
  2. If the disability policy only permits disability coverage for a portion of the notice period (most commonly the statutory notice period) and the employee becomes disabled during the notice period, but after the expiry of the disability coverage, the employer may stand in the place of the insurer and be obligated to pay any disability benefits which otherwise would have been payable by the insurer.

The prudent approach for employers is to purchase a disability policy that permits a dismissed employee’s disability coverage to remain in place during the full notice period.  If the disability coverage is continued and the employee becomes disabled during the notice period, the insurer will be responsible for the adjudication of the claim and for payment of any benefit payments arising from an approved claim.  This assumes the employer does not have an Administrative Services Only Plan, commonly referred to as ASO plan.  Under an ASO plan the employer hires a company to administer and adjudicate disability claims, but the employer is responsible for any benefit payments arising from an approved claim.

Why is this Important?

The absence of a disability policy that remains in force for the full notice period can have severe and costly consequences for an employer.  To put this in perspective let’s look at a case based on the following facts:

  • An employer terminates the employment of a 35 year old employee;
  • That employee was earning a salary of $50,000 per year;
  • The disability policy permitted benefit payments for a “disabled” employee to continue until age 65;
  • The disability benefit was equal to 65% of the employee’s base salary; and
  • The employee has not provided the employer with a Release which precludes a future claim for damages relating to disability benefits.

Assuming the employee becomes disabled during the notice period but after the disability insurance coverage ends, the employer may be liable for paying the employee a benefit equal to 65% of that employee’s base salary until the employee reaches age 65.  This may result in the employer owing the employee $975,000.  This does not take into consideration any additional payments resulting from cost of living adjustments the disability policy may include and may not include the employee’s claim for wrongful dismissal damages.

A Few Points To Consider

  • Employers should review their disability insurance contracts to determine when coverage terminates for a dismissed employee;
  • If the contract does not allow coverage to apply for the full notice period, employers may want to consider whether the cost of insuring the full notice period is prudent relative to the increased premium cost (keep in mind that with many plans the employee pays the premiums, not the employer);
  • If an employee is dismissed and the employer and employee are able to settle all matters arising from the termination of that employee’s employment, the employer should obtain a Release which specifically releases the employer from any future claims for disability benefit payments.
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