Watch your language – health benefits coverage questions can cause illness for employers

Two recent decisions highlight unexpected liabilities that can arise for employers regarding health benefits plans.  These two cases demonstrate the importance of clarity in communications with employees about plan coverage and in the plans themselves.

Negligent misrepresentation - Feldstein v. 364 Northern Development Corporation

Mr. Feldstein had cystic fibrosis.  After being provided with working notice of termination by his employer, Feldstein sought new employment with 364.  Feldstein alleged that during the interview process he had made specific inquiries to determine whether 364’s long-term disability (LTD) plan would cover him despite his pre-existing condition.  Feldstein said he was given assurances that clearly indicated he would be covered, and he relied on this representation when deciding to accept employment at 364.  Unfortunately, Feldstein’s health deteriorated shortly after he commenced employment at 364, and his entitlement to disability benefits fell significantly short of full coverage due to a “Proof of Good Health” requirement that he did not meet. 

Feldstein brought an action in negligent misrepresentation against 364 on the basis that but-for the representations made during the interviews he would not have accepted employment with 364, and he would have found employment with an employer that had a LTD benefit  plan that would have covered him.  The hiring manager for 364 disputed that he made the alleged representations, but correspondence between 364 and the insurer after Feldstein made his claim demonstrated that the employer did not understand the Proof of Good Health requirements of the plan.  The trial judge accepted that Feldstein had a clear recollection about the employer’s assurances regarding coverage since the circumstances being so personal to him.  The judge decided that 364 owed Feldstein a duty of care in the interview process and subsequently failed to meet the requisite standard of care by making uninformed statements about the LTD plan.  Feldstein’s reliance was found to be reasonable in the circumstances.  364 was liable to Feldstein for the difference in what he received under the LTD benefits and what he had expected to receive as full coverage during a 40 month period of time —a total of $83,336.80.  The judge also awarded Feldstein $10,000.00 in aggravated damages for the considerable stress and anxiety he endured while receiving only partial benefits.

Personnel involved in recruitment should not make statements about terms and conditions of employment unless they are certain of their accuracy and understand that they may be binding the employer.  Health benefits and other components of compensation such as stock options and long term incentive plans are usually governed by complicated plan documents, and eligibility decisions under health benefits plans are frequently determined by a third party administrator or insurer.  A known answer to routine questions can be provided, but it is also prudent to refer the applicant to the plan documents for further guidance.  Additionally, while employers can attempt to limit liability arising from pre-hire communications through specific language in employment agreements, Feldstein also demonstrates that it is a good practice to take notes during the job selection process to document statements made about terms and conditions of employment being offered. 

Ambiguous plan language - Tyson v. Holloway

Ambiguous language in insurance plans will be interpreted in favour of the insured employee and can result in coverage that was not intended.  Given the growing number of self-insured plans in place, employers can be directly impacted by the costs associated with such unintended coverage.

Tyson had a history of headaches and for several years received doctor-prescribed treatments for migraines.  She was hired by the Calgary Board of Education in a full-time capacity and was consequently enrolled in the Alberta School Employee Benefit Plan (the “Plan”).  Three days later, a CT scan revealed a tumour in her brain.  Tyson was denied LTD coverage on the basis that she was claiming for a “pre-existing condition” which was defined by the Plan as “an accidental injury or illness for which an Employee received medical attention, consultation, diagnosis, or treatment during the 12 months before the Employee became covered under this Plan.”  Tyson argued that her tumour had not been diagnosed prior to her enrolment in the disability plan.  The trustees asserted that “diagnosis” referred to a process of discovering the source of a condition, which in this case started well prior to Tyson’s enrolment in the Plan.

The court found that the two proposed definitions of the term “diagnosis” were equally plausible.  In the face of this ambiguity, the court interpreted the term against the trustees and in favour of Tyson.  In doing so, the court noted that insurance policies are generally interpreted against the drafter and also that the trustees failed to discharge its burden of proving its definition should prevail.  As a result, Tyson was entitled to full coverage for what was essentially a pre-existing condition.  Of course, an insurer or employer may elect to provide such coverage, but when that is not the intention then the governing plan language must be clear.