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Insuring Against Disability and Loss of Life After Terminations Without Just Cause


by Hugh McPhail, Q.C.

A few recent cases have brought into focus a significant risk for employers facing termination of employees without just cause, especially senior employees who are owed lengthy periods of reasonable notice. Some of those employees have been successful in suing the former employer to gain damages for loss of life insurance and long term disability (“LTD”) coverage. The damage amounts in these cases can be considerable. Life insurance is typically hundreds of thousands of dollars and long term disability coverage could be coverage until age 65 if disability were to continue that long.

The legal theory behind the successful claims is that damages are to put the employee in the position that he/she would have been in if he/she stayed employed through the reasonable notice period. If the employee would have been actively at work, then he/she would have had both LTD and life insurance coverage. A recent Ontario case rejected the notion that the refusal of the insurer to insure past the date the employee was actively at work, which is very common in policies, got the employer off the hook for damages. It also rejected the argument on the facts of the case that the employee failed to mitigate because he did not attempt to find replacement insurance coverage.

How do you deal with long reasonable notice periods if you can’t settle these claims? Employers have the option of trying to find coverage for life and LTD for the reasonable notice period but that is very expensive if it is even available. Ontario employers must now do that for the statutory notice period, but eight weeks is nothing compared to 24 months. It is probably excessive to do it in all cases considering the relatively small number of employees who you would have to worry about.

One thing employers should certainly stress in the termination correspondence is what life insurance conversion and replacement disability insurance options might be available for the employee to pursue.

There is another long term solution. Employment contracts should deal with this. Employment contracts can fully displace any entitlement to reasonable notice of termination and all that goes with that, if they are carefully drafted. This is one more reason to have them.


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