In the recent decision of Kerwin v. Manulife Financial, the Ontario Superior Court dismissed a summary judgment motion by Manulife, declining to find that funds received in a retirement package are deductible from long term disability benefit payments.

As a background, the Plaintiff was injured in a motor vehicle accident. He received short term disability benefits and then participated in a gradual return to work. His employment was ultimately terminated by his employer. He reached a settlement with his employer after his termination for a lump sum of $314,843 as part of his retirement package in exchange for giving up his right to sue them for his dismissal.

In the meantime, Manulife agreed to pay long term disability benefits to the plaintiff at the rate of $7,497.76 per month. Manulife made LTD payments for two weeks, and then stopped making payments until 2 years later. It took the position that the plaintiff was not entitled to LTD payments during that two year period because the amount paid in his retirement package was deductible from LTD benefits pursuant to the policy. The wording of the policy stated:

The Amount of Disability Benefits payable is the Benefit Amount shown in the Benefit Schedule, less any amount of benefits the Employee receives, or is entitled to receive, from the following sources for the same or related Disability:

  1. earnings or payments from any employer, including severance payments and vacation pay;

The benefit amount payable will be further reduced so that the Employee’s total income from All Sources does not exceed 85% of the Employee’s pre-disability Earnings if this Benefit is taxable, or 85% of the Employee’s pre-disability Net Earnings if the Benefits is non-taxable.

An action was commenced by the plaintiff for the full amount of LTD benefits being withheld. Manulife brought a summary judgment motion stating that it had grounds to deduct the retirement payment from LTD benefits as it was a form of income replacement, and arguing that the full amount of the retirement package should be deducted from the monthly LTD benefits payable.

Alternatively, the plaintiff took the position that he was paid the lump sum payment in exchange for his agreement not to bring an action against his employer, and this should not be deducted from his LTD benefits. The plaintiff further argued that the onus is on the insurer to prove the amount the plaintiff received as a lump sum fits within one of the specific policy deductions. Finally, the plaintiff argued that a retirement package is not a payment intended to be an income replacement.

In the decision, Justice Emery found that there was insufficient evidence to make a decision on the merits of the claim. He found that the basis upon which the claimant negotiated his retirement package with his employer is a genuine issue requiring trial. As such, the summary judgment motion was dismissed.

Interestingly, it does not appear that this issue has yet arisen in the Ontario courts. As such, it is still unclear whether retirement packages can be included as income that can be deducted from LTD benefit payments. If the courts ultimately find that they can be deducted, it will be incumbent on insurers to ensure that they have the full details of any retirement packages as early into the claim as possible to avoid overpayments.

Reference: Kerwin v. Manulife Financial, 2017 ONSC 7166 (CanLII)

Gabe Flatt

Gabe Flatt has an insurance law practice that has focused exclusively on insurance defence for the past 8 years. He has developed an expertise in complex priority and loss transfer disputes as well as general coverage issues.

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