My disability claim was denied. When should I sue the insurer?

Many employees are fortunate enough to have long-term disability coverage as part of their remuneration package. Generally speaking, long-term disability insurance is intended as a means of income replacement when injury or illness prevents a person from working.

Many long-term disability insurance policies provide that a person is entitled to benefits from the policy only if that person meets the definition of “total disability”. This term, total disability, is often defined as an inability to perform the essential duties and responsibilities of the person’s own occupation for a period of 24 months, and thereafter, an inability to perform the duties and responsibilities of any occupation for which that person may be reasonably fit by reason of that person’s education, training and experience.

Depending on the nature of the disability, meeting the definition of total disability can be extremely onerous. Often, approval of a long-term disability claim can depend on the level of detail in the supporting medical documentation provided by the person’s treating physician.

When a claim is denied, a person has the right to appeal the decision by providing updated medical documentation that establishes total disability. Frequently, the additional documentation is not enough for the claim to be approved and the appeal is once again denied.

Once the claim has been denied, the person making the claim must make a decision whether to file an appeal with the insurer, or start a court action against the insurer for breach of the terms of the insurance policy.

The Court of Appeal’s decision in Usanovic v. Penncorp Life Insurance Company is an example where the person making a long-term disability insurance claim decided to start a court action against the insurer too late. In this case, the claimant received long-term disability benefits after suffering serious injuries when he fell from a roof. Eventually, the insurer terminated benefits because the claimant no longer met the definition of total disability under the policy. He had already received benefits for 24 months and was no longer considered unable to engage in any occupation for which he was reasonably fit by reason of his education, training and experience.

Unfortunately, he waited roughly 3 years before deciding to start a court action against the insurance company, because he felt that he could not afford to retain a lawyer. Without getting into the specifics, the Limitations Act, 2002 provides that a court action for the denial of long-term disability benefits must be started within two years of the initial denial by the insurance company. In order to get around this law, the claimant argued that the insurance company breached its duty of good faith and fair dealing by failing to advise the claimant that the limitation period expired two years after the date of the initial denial.

As an aside, the duty of good faith and fair dealing is an over-arching principle in all contracts and is a topic that I wrote about here. However, the Supreme Court of Canada clarified that this duty requires that the parties to a contract uphold a basic level of honesty in performing the terms set out in the contract.

In this case, the claimant was asking the Court of Appeal to extend the duty of good faith and fair dealing beyond the terms of the contract of insurance. Specifically, the claimant sought to impose a duty on the insurance company to point out the existence of a limitation period, something that was not required by the terms of the contract of insurance.

The Court of Appeal noted that although no court has imposed such a duty on an insurance company, certain legislatures in Canada have opted to do so, such as British Columbia and Alberta. By contrast, since July 1, 2016, all Ontario disability policies must contain the following statement:

“Every action or proceeding against an insurer for the recovery of insurance money payable under the contract is absolutely barred unless commenced within the time set out in the Limitations Act, 2002.”

The Court of Appeal concluded that, given that the Ontario legislature chose not to impose a duty beyond what is indicated above, the court should not do so either.

This decision underscores the importance of obtaining legal advice once a long-term disability insurance claim has been denied. While the cost of legal representation is a legitimate concern, an option that may be available is a contingency fee retainer wherein legal fees are deferred until a resolution is reached and calculated based on a percentage of the payment received from the insurance company.

This article is intended only to provide general information and does not constitute legal advice. Should you require advice specific to your situation, please feel free to contact me to discuss the matter further.