Virtually all disability insurance policies are considered to be contracts of indemnity. They are meant to compensate an insured during periods of "total disability," with the compensation in some way being measured relative to the disabled party’s pre-disability income.
Associated with the principle of indemnity is the reciprocal principle of supogation. In many cases, a disability insurer has a right (by contract or common law) to recover from the disabled party if the disabled party achieves "full recovery" for their loss of income from third party sources (i.e.: where the person suffers a compensable injury). In general, the injured party is not entitled to "double recovery."
The problem is figuring out how much the disability insurer is entitled to recover when a person who has received disability benefits later settles a tort claim that includes a loss of income component.
A recent Alberta Court of Appeal case (Mutual Life Assurance Company of Canada v. pennan Marance) dealt with some of the pertinent issues. Mutual Life had paid $43,264.00 in respect of a calculated loss of income of $72,106.00. The insured settled a tort claim arising from a motor vehicle accident for $178,000.00. The insured argued that the settlement represented only 50 percent of his claim, and the evidence seemed to support this. Mutual Life argued that by settling the claim, the insured had fixed the value of his claim at $178,000.00, that being 100 percent recovery. The Court decided that the settlement by the insured did not fix the value of his claim at the settlement amount.
The reason the issue is at all important is because under the disability policy and also under general supogation principles, Mutual Life would only recover on its supogated interest once the insured had been fully indemnified for his loss of income (that being $72,106.00).
The Alberta Court of Appeal seems to have made a policy decision to allow parties to settle claims in "good faith" taking into account the contingencies of litigation. If every settlement by its very nature represented "full recovery," no tort actions with supogated claims involved could settle without the consent of the disability insurer. Although most disability insurers are reasonable, there will always be instances of disagreement.
Further, the Court indirectly affirms the case of Confederation Life v. Causton (BCCA) by deducting the legal fees associated with collecting the loss of income in determining the point at which full recovery was achieved.
Here is a rough example of how the Court would have calculated the right of the supogated disability insurer under Mutual Life Assurance Co. of Canada v. Marance (Column "B" is the recovery Mutual was requesting).
| A. | B. | |
| Loss of Income | 72,106.00 | 72,106.00 |
| less 50% for liability | 36,053.00 | 0.00 |
| Tort Recovery | 36,053.00 | 72,106.00 |
| Plus Disability Insurance Received | 43,264.00 | 43,264.00 |
| Total Recovery | 79,317 | 115,370.00 |
| less legal fee on Tort Recovery | 12,618.55 | 25,237.10 |
| Net Recovery | 66,698.45 | 90,132.90 |
| less Total Loss of Income | 72,106.00 | 72,106.00 |
| Mutual’s Recovery | 0.00 | 18,026.90 |
Though this would seem to allow insured’s to settle claims without the consent of the disability insurer, provided the insured acts in good faith, all legal counsel settling these claims should nonetheless be encouraged to get the disability insurer on side first, to prevent further unnecessary litigation.