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[LEGAL] The 4 legal liabilities of benefit plans

How to avoid being sued over technicalities in your benefit plan

Business owners are often taken to court by their employees over tiny technicalities in their benefit plan. Here’s what can happen, and how to avoid an expensive settlement.

Liability #1: Employees who are “Not Actively At Work (NAAW)”.

All insurance contracts state that if an employee is Not Actively At Work, they are not eligible for coverage.

This is because of risk. Insurance companies don’t ask medical questions when a company
purchases benefits. They assume that people actively at work are healthy and pose no significant underwriting risk. Anyone falling outside of that presents new risks which were not agreed upon when the policy began.

Employees who take time off (apart from sick days, scheduled vacations and maternity leaves) are considered NAAW. Any grey area such as compassionate leave, leave of absence, sick leave, or unpaid vacation, could be construed as NAAW.

Case Study

An employee took 3 months off unpaid to travel. He passed away while abroad. The company
filled out a claim for life insurance, but it was denied by the insurance company because he was NAAW. His spouse sued the company for the lump sum.

In the majority of cases, judges side with weeping widows versus ‘negligent,’ deep-pocketed
employers. Five-figure settlements are not unusual.

What You Must Do

  • As soon as you know that an employee will be NAAW, notify your broker and insurance company immediately in writing.
  • From here, your broker requests to extend benefits.
  • Whichever benefits are not extended must be communicated to the employee in writing.
  • If required, purchase or have the employee purchase additional life or travel insurance for the period they will be NAAW.

Liability #2: An employee refuses life insurance or long term disability (LTD) coverage.

Employers often ask staff to help pay for the benefit plan. Some employees prefer not to join to save money.

Case Study

An employee of a manufacturing firm refused life insurance and LTD. There was nothing in
writing to indicate that the employee refused coverage or understood the importance of the

He passed away soon after. His spouse discovered that there was no life insurance coverage, but still sued and won. The judge said: “The benefit booklet states, ‘this is a booklet for the employees of ABC Co.’ It did not say it was for ‘some’ employees. As an employer, you ought to have acted responsibly and insisted that the employee participate.”

What You Must Do

  •  Make it a condition of employment that employees must join the plan for life insurance and LTD.
  •  If someone refuses, but you want to hire her anyway, present her with a “Refusal of Benefits” form, a legal document to protect you in court.

Liability #3: Late Applicants

Translation: You forgot to submit an enrolment form for a new hire and it is now past her
effective date for coverage; or, an employee opts out of the plan but wants to join at a later date.

Insurance companies expect you to know the rules when administering a plan. If you enrol an
employee after their eligible date, and provide no health evidence, the insurance company does not cover her immediately and assumes that you are aware.

Case Study

An enrolment form was submitted 7 months after an employee’s effective date. She attached the health evidence form but waited another month as it sat in underwriting for approval. During this time, she passed away. The insurance company denied the claim for life insurance, and her spouse subsequently sued and won.

What You Must Do

  • Submit an enrolment form for an employee on the very day they are hired.
  • Notify employees who opt out of health & dental in writing that they might be declined for coverage if they decide to opt-in later. Keep notifications on file.
  • If an employee becomes a late applicant, stay on top of them to fill out the health evidence form and submit it on time.
  • If the insurance company declines them for coverage, make sure the employee is notified in writing.

Liability #4: Out of Country Coverage

If your employees require emergency medical assistance while they are travelling outside of
Canada, it is absolutely critical that they call the number on their out of country card before paying a cent to any foreign hospital, doctor or provider.

When they call in, the insurance company negotiates a fair market price with the medical
provider. If they are not called, it is possible and likely that your employee will be overcharged
and not be able to claim the full amount upon return to Canada.

Case Study

An employee had an accident abroad and paid $20,000 out of his pocket for a hospital stay in a 3rd world country. He did not call the number before he paid. When he tried to claim that amount for reimbursement, he was only reimbursed $1,000 because that was the fair market price according to the insurance company.

He complained to his employer, who felt badly and paid him the $19,000 out of the company’s coffers. When the owner found out, he was shocked, but then realized he had been overcharged and remarked, “I’m from that part of the world. For $20,000, I could build you a hospital in that town.”

What You Must Do

  • Impress upon your employees that they must call the insurance company before settling payment to any medical provider while travelling