The Right to Reimbursement

When a personal injury action proceeds through to trial, in many cases the plaintiff has had, and may continue to have, access to income replacement benefits — otherwise known as short-term and long-term disability benefits — from an employer or insurer. In circumstances in which the plaintiff has a valid claim against a third party for recovery of income loss, questions arise concerning who gets what credit in connection with those income replacement benefits.

Leaving aside specific statutory provisions that apply in the case of motor vehicle accidents, two main issues arise with respect to income replacement benefits paid and payable in this type of scenario. The first involves whether income replacement benefits the plaintiff has received ought to be deducted from any amount he or she recovers from the tort defendant on account of loss of income. The second issue involves whether the payor of those benefits is entitled to recover any portion of the benefits back from a plaintiff who recovers damages on account of income loss from the tort defendant.

DEDUCTIBILITY OF INCOME REPLACEMENT BENEFITS

In Ratych v. Bloomer1, the Supreme Court of Canada observed that the primary aim of the law of torts in awarding damages for personal injury must always be to compensate victims for losses actually sustained. Accordingly, as a general rule, income replacement benefits received by a plaintiff ought to be brought into account and deducted from awards for lost earnings. This general rule is subject to two exceptions. The first relates to charitable gifts. The second exception is the “private insurance exception.” This bars the deduction from a tort damage award of benefits derived from private policies of insurance, funded independently by the plaintiff.

To prove that income replacement benefits are in the nature of “private insurance,” plaintiffs must cite evidence of some type of consideration given up by them in return for the benefits. Accordingly, the issue often boils down to who paid the premiums in respect of an income replacement policy — the plaintiff, or his or her employer. Where an injured employee can show the benefits received flowed from some form of payment made directly or indirectly by the employee, the analogy with a private insurance policy is a strong one, and a good argument for non-deduction exists.

In Lavaute v. Canada(Attorney General)2, the current status of the law regarding the general rule of non-deductibility and the “private insurance exception” from Cunningham are summarized as follows:

• The general rule is that a plaintiff in a tort action cannot recover twice for any loss arising from an injury.

• There is a “private insurance exception” to the general rule. To qualify, a plaintiff must show evidence that the benefits he or she received were in the nature of an insurance. In other words, the plaintiff must show evidence that he or she provided some type of consideration in exchange for the benefit.

• If the benefits do not fall within the “private insurance exception,” then they must be deducted from the damages recovered, unless the third party who paid the benefits has the right of subrogation.

PAYOR’S RIGHTS OF RECOVERY

Contractual right to reimbursement v. common law principles of subrogation

A second issue arises with respect to whether a payor is entitled to recover income replacement benefits it has paid out to an employee who has a cause of action to recover income loss from a third party. In this regard, a distinction is to be made between a pure contractual right to reimbursement and a common law right of subrogation. Specifically, if there is an express provision within the underlying plan, policy, or an accompanying reimbursement agreement stating that benefits must be repaid upon recovery of income loss from a third party, then the situation is one of a contractual right of reimbursement and common law principles of subrogation do not come into play. Provided that valid consideration for entering into the contract exists, then the contract for reimbursement will, on first appearance, be enforceable. ³

As noted by Craig Brown and Julio Menezes, “the right of subrogation in insurance arises under common law and its operation is governed by common law principles. The general principles have, however, been modified by statute in Canada. In addition, the parties to an insurance contract may modify them for the purposes of that contract (emphasis added).”⁴

In the case of British Columbia Life & Casualty Co. v. Meek5,Supreme Court of British Columbia Justice W. B. Scarth explained the distinction between the common law right to subrogation and the right to subrogation (or perhaps more appropriately “reimbursement”) that arises by virtue of the terms of the contract as follows: “The parties may, by the terms of the contract, provide that one party is entitled to be subrogated to the rights of the other,” Scarth wrote in the decision. “…If subrogation is a matter of contract, one looks to the terms of the contract to determine the parties’ rights and obligations.”

In Meek, Scarth found a contractual right of reimbursement, due entirely to express provisions within the underlying documentation, overrode common law principles of subrogation. At Paragraph 28 of his decision, he stated: “Here, one must look to the contract, including the Reimbursement Agreement, in order to determine the parties’ rights and obligations. They are clear…They impose an obligation on the employee to recover from the third party the benefits paid by CU&C and to indemnify CU&C for those benefits.”

Meek was discussed in detail in the subsequent case of British Columbia Life & Casualty Co. v. Mallette6.1619 (Prov. C. J.).In particular, it is noted that in Meek, the additional provisions in the contract between the insured and the insurer, as well as in the reimbursement agreement, “…imposed an obligation on Meek to recover from the third party an amount sufficient to reimburse the benefit plan for all of the benefits advanced. The provisions were also found to eliminate any right Meek might have had to deduct from the debt any legal fees incurred in recovering the damages, and that as a result, Meek was required to repay her benefits in full despite the fact that she had not been fully indemnified by her wage loss claim.”

Accordingly, it is clear a distinction is to be made between a pure contractual right to reimbursement, versus a common law right of subrogation. If there is an express provision within the underlying plan, policy or reimbursement agreement stating that benefits must be repaid upon recovery of income loss from a third party, then the situation is one of a contractual right of reimbursement. Common law principles of subrogation do not come into play, and reimbursement flows regardless of whether or not the plaintiff has been made whole by the third party tortfeasor (the party that has committed a civil wrong) in connection with his or her income loss.

Common Law subrogation

Separate and apart from a contractual right to reimbursement is the question of whether a payor of income replacement benefits may be entitled to recover any portion of the amounts it has paid according to common law principles of subrogation. Essentially, this question turns on:(1) whether the underlying policy or plan is properly considered a contract of indemnity, and (2) whether the plaintiff has been made whole in connection with his or her loss.

Regarding a contract of indemnity, in Gibson v. Sun Life Assurance Co. of Canada7, the judge reviewed Glynn v. Scottish Union & National Insurance Co. ⁸ and wrote: “The basic principles of insurance law as they apply to such a contract [ie. a disability be nefit policy] are well settled so far as the right of subrogation is concerned; if the policy is a contract of indemnity the doctrine of subrogation applies; if it is not a contract of indemnity, there is no right of subrogation.”

The mere classification of a policy as accident and sickness insurance, or some other category of insurance, does not determine whether the policy is truly an indemnity policy. That determination rests on how closely the policy bases benefits on an estimate of the insured’s actual loss of income. The key factor in this determination is how the benefit quantum is derived. Policies that pay a stated amount without reference to the insured’s income would not be classified as income replacement.

Where the benefit is stated as a proportion of the insured’s pre-disability income, the policy may or may not be one of income replacement. The court will look at the offsets stipulated in the policy. If the policy allows the insurer to deduct most of the insured’s potential post-disability receipts, it will likely be deemed an income replacement policy, giving rise to common law rights of subrogation on the part of the payer.

The common law principle that an insured must be made whole before the insurer is entitled to subrogate has been consistently applied by Canadian Courts in cases relating to income replacement benefits. ⁹ The same principle has more recently been applied in Robichaud v. Clarica Life Insurance Co. ¹⁰ The Robichaud case discusses subrogation rights in the context of disability benefits, and relies on the Supreme Court of Canada’s statement in Somersall v. Freidman. ¹¹ According to that decision, “it has long been the law, in the absence of contractual terms to the contrary, that the insurer’s right of subrogation will not arise until the insured has been fully indemnified.”

The requirement that a plaintiff be fully indemnified before a payor can exercise its rights to subrogation may not always be a simple rule to apply. Plaintiffs often do not recover 100% of their actual loss in tort litigation; instead, they often accept settlements that fall somewhere short of making them whole. A related issue is whether a plaintiff has been fully indemnified if the need to pay legal fees renders his or her net indemnification less than 100%. In Confederation Life Insurance Co v. Causton, ¹² the court held that if legal fees or other costs reduce indemnification to only partial indemnification, then the insurer does not have a right to subrogation. As the court put it: “There is no requirement that an insured plaintiff pay for legal services ‘out of pocket’ so that his or her insurer may encroach upon the litigation damage award.”

CONCLUSION

Interesting issues arise in connection with deductibility, reimbursement and subrogation rights in respect of income replacement benefits. The general rules are straightforward. Income replacement benefits received by a plaintiff are to be deducted from any recovery of income loss from a tort defendant, unless they fall with the private insurance exception. Where there is a clear contractual right to reimbursement, the payor is entitled to recovery of the benefits paid to a plaintiff who recovers damages on account of income loss, irrespective of whether the plaintiff has been made whole in respect of his or her income loss. In the absence of a clear contractual provision, common law rights of subrogation come into play. Under contracts of indemnity, a payor’s right of subrogation will not arise until the insured has been fully indemnified.

1 [1990] 1 S. C. R. 940]

2 [2004] N. S. J. No. 335]

3 see, for example Cunningham, supra at page 122; Robichaud v. Clairca Life Insurance Co. [2007] O. J. No. 3648 at paragraph 13; and Confederation Life Insurance Co. v. Causton (1989), 38 C. C. L. I. 1 (B. C. C. A.)

4 Insurance Law in Canada (1982) Carswell Co., at page 314

5 [2005] B. C. J. No. 1619 (S. C.)

6 [2005] B. C. J. 1619 (Prov. C. J.)]

7 (1984) 45 O. R. (2nd) 326 (H. C. J)

8 [1963] 2 O. R. 705, 40 D. L. R. (2d) 929 (C. A.)

9 (see, for example Confederation Life v. Causton (1989) 60 D. L. R. (4th) 372 (BCCA) and British Columbia Life and Casualty Company v. Meek (1999) 10 CCLI (3rd) 10 (BCSC)

10 [2007] O. J. No. 3648 (S. C. J.)]

11 [2002] 3 S. C. R. 109, at paragraph 53]

12 [1989] B. C. J. No. 1172 (C. A.)]

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The issue often boils down to who paid the premiums in respect to an income replacement policy — the plaintiff, or his or her employer.

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The requirement that a plaintiff be fully indemnified before a payor can exercise its rights to subrogation may not always be a simple rule to apply.