THE EMPLOYERS' EDGE
Negative influence leads to liability: Employer liable for LTD decision of insurer
We have previously written about the dangers of mishandling employee benefits in termination situations [view BLOG]. However, a recent British Columbia Supreme Court decision also illustrates the potential danger employers can face in the handling of ongoing benefit claims for current employees.
In Nayyar v. Manufacturers Life Insurance Company and Costco Wholesale Canada Ltd. the employer, Costco, subscribed to a benefit plan with and administered by Manulife Financial. Under the terms of the plan, Costco acted as the insurer for Short-Term Disability (“STD”) and for the first 24 months of a Long Term Disability (“LTD”). After that point, Manulife became the insurer and administered its own policy with respect to employees who could no longer perform the essential duties of any position with Costco. Costco also had a “Rapid Re-employment Program” that was intended to assist employees in returning to work through (discretionary) rehabilitation assistance.
This type of scenario is relatively common for large employers: to self-insure, up to a point, but to have a third-party insurer administer the plan. In this way a large employer can control its costs, but have the third party make decisions with respect to benefit entitlement and payouts. One significant advantage to the employer in separating that decision-making function is to avoid potential liability with respect to any benefits or compensation for disabled employees; the courts have recognized the separation between the contractual employment relationship and insurance benefit entitlements, and as long as the employer is acting in good faith it can avoid that type of specific liability.
However, in this case the court’s decision to find Costco liable for LTD benefits hinged on the actions of Costco’s disability manager. While LTD benefits were initially approved, based on the disability manager’s advice Manulife proceeded to handle the claim in an aggressive and almost adversarial manner, eventually terminating Ms. Nayyar’s benefits when she did not meet their demands for an Independent Medical Examination. Determining that the disability manager’s suspicions with respect to Ms. Nayyar’s claim, as strongly voiced to Manulife, had influenced Manulife’s decision to ultimately wrongfully terminate her LTD benefits, Judge Paul Walker was FAST to condemn Costco’s and Manulife’s handling of the claim; further, his scathing 143-page decision displayed how FURIOUS he was with the treatment received by Ms. Nayyar. In addition to finding that Ms. Nayyar was entitled to lost LTD benefits, Judge Walker also awarded Ms. Nayyar $3,500 in mental distress damages.
While both Costco and Manulife are appealing this decision, and we will continue to monitor the outcome, it is important for employers to recognize that, even where a third-party administers the insurance plan, the employer still has good faith obligations vis-à-vis the employees. Although we suggest that, in the absence of specific bad faith conduct on the part of the employer, the court would be hard-pressed to find the employer liable for the specific decisions/actions of its insurer, it is important to be aware of the duty to deal in good faith in all aspects of the employment relationship. This includes the administration of insurance and benefit plans, and the lawyers at CCP can help you deal with all of these obligations, whether you are a large self-insured employer or a small employer offering benefits to employees for the first time.
Please Note: This blog has been prepared as an informational service for our clients and other interested parties. It is not intended to constitute legal advice, a complete statement of the law or opinion on any subject. Although we endeavour to ensure the accuracy of the content, no one should act upon the information provided without a thorough examination of the law after the facts of a specific situation are fully considered.