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When the employer inadvertently assumes the insured risk

In benefits, we are all familiar with self-insured benefits and the assumption of risk by the employer. This will typically apply to the day-to-day claims for health, vision, dental care, sometimes pharmacy, up to a prescribed limit of liability. This kind of coverage uses a benefit vehicle defined as a “Private Health Services Plan” PHSP. The other common identifiers include Health Spending Account (HSA), Administrative Services Only (ASO), Cost Plus, etc.

But what happens when good intentions go awry and the employer is suddenly the insurer when a life insurance or disability claim needs to be paid?

Let’s consider the “not actively at work” contract definition found in group life insurance policies. This quickly translates into if an employee is not actively at work, then they are ineligible for any life or disability claims resulting after they were no longer “active” within the workplace which owns the insurance policy.

Makes sense from both the employer and the insurer perspective.

The insurance carrier hasn’t required medical evidence for employees enrolled within the expected waiting period because the assumption is if they are actively at work, then they are healthy and pose no medical risk of claim at that time. From the employer perspective, why would they want to continue to pay for benefits for an employee who is not participating in the financial success of the corporation? That is the agreement in terms of the contract between the two parties involved in the insurance.

Note that the “not actively at work” clause does not include scheduled vacations, sick days, maternity/paternity leaves. However, extended leaves of absences, compassionate leave, sick leave (outside disability claims) or unpaid vacations should be checked with the insurer.

This brings up a “good intention” for consideration:

An employee, aged 66 leaves work due to sickness. Due to age, the employee is ineligible for long term disability and there is no short term coverage in place.

The employer files a Record of Employment, citing sickness so the employee can justifiably make an Employment Insurance sickness claim. The expectation is the employee will return to work. The employer does not notify the insurance carrier and all benefits remain as though the employee is “actively at work” for the duration of the leave.

The employee remains off work for ten months and then dies.

The family, through the employer, files a claim for the life insurance in which the premium has been paid all along and the survivor benefits applicable for the health and dental portion of the plan.

All claims are declined by the underwriter.

The reasoning …

  • the employee was not eligible for coverage
  • a record of employment was issued
  • the insurance carrier was not notified that the employee was not “actively at work”

Any premium paid after the date of the record of employment was submitted was returned.

To avoid the good intention resulting in unintended punishment, full disclosure is key.

In this case, had the employer notified the broker/consultant, or the insurance carrier at once, and in writing that this employee was no longer “actively at work”, they would have received the advice necessary to protect both themselves and the employee against this risk.

In many cases, when a not “actively at work” situation arises, a written request to extend benefits—the health and dental portion of the plan can be arranged and typically approved. Then the employee must receive communication in writing, from the employer, regarding any and all benefits not extended. The result would have included a suggestion that the employee purchase, on their own, any life or travel insurance for the period they were not “actively at work”.


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