Long term disability benefits not deductible from IRB payments

March 03, 2013, Kitchener, Ontario

Posted by: Robert Deutschmann, Personal Injury Lawyer



Heard Before: Alec Fadel

Date of Decision: December 5, 2012



Jacqueline Bennett was a pedestrian when she was struck by a motor vehicle on January 10, 2008. She did not have automobile insurance at the time and the vehicle that struck her was driven by an uninsured driver. Ms. Bennett applied for accident benefits from the Motor Vehicle Accident Claims Fund (the MVAC Fund). The MVAC Fund refused to pay a number of benefits including income replacement and medical benefits resulting in an application for arbitration. At the pre- hearing a dispute arose concerning the potential deductibility of a settlement achieved between Ms. Bennett and a collateral carrier.


Ms. Bennett had a policy of insurance through Great West Life (GWL) and received a long term disability benefit payment until May 29, 2008 when the benefits were terminated.


Ms. Bennett issued a statement of claim against GWL for damages and unpaid benefits. The GWL action was settled on December 23, 2011 and by letter dated January 9, 2012, the MVAC Fund was informed that the action settled for $150,000.00 of which Ms. Bennett was to receive $100,000.00 after legal fees.  The MVAC Fund brought this motion and takes the position that it is entitled to deduct the proceeds from the GWL settlement from any accident benefits owing to Ms. Bennett on two bases:


  • Section 267.8 of the Insurance Act allows for collateral weekly payments for loss of income to be deducted from the income replacement benefit owing by an accident benefit insurer; and,


  • Section 22 of the Motor Vehicle Accident Claims Act (MVACA) requires that any amounts paid because of the existence of an insurance policy are deductible by the MVAC Fund from any accident benefits owing.


Ms. Bennett takes the position that given the caselaw the settlement is not deductible. The preliminary issue is:


1.   Is the GWL settlement deductible pursuant to s. 267.8 of the Insurance Act?


2.   Is the GWL settlement deductible pursuant to s. 22 of the MVACA?




1.   The GWL settlement is not deductible pursuant to s. 267.8 of the Insurance Act or s. 22 of the MVACA.




Ms. Bennett submits that the law regarding deductibility of settlements of this kind has been well established in recent years.  She relies on Vanderkop v. Personal Insurance Company of Canada1, Cromwell v. Liberty Mutual Insurance Company2, and Anand v. Belanger3, all from the Ontario Superior Court of Justice, to support this position.


In Vanderkop the plaintiff commenced an action against her LTD carrier that was subsequently settled with a lump sum payment of $57,500.00.  The accident benefit insurer claimed that it was entitled to a credit for this payment under the Schedule. The Court found that the $57,500.00 was a payment for all past, present and future claims which included a claim for aggravated and punitive damages and damages for mental distress.  It was concluded by the Court that the monies paid pursuant to the settlement could not be characterized as “net weekly payments for loss of income that are not being received by the person as a result of the accident” and were instead found to be funds that represented “a lump sum payment arrived at after a law suit was commenced and negotiated as a compromise.”


In Cromwell, the Court examined the deductibility of LTD benefits from a Sun Life Policy and found that the benefits payable under that policy were deducible under the Schedule.  However, when examining the lump sum settlement made by Sun Life as a result of the commencement of litigation, there was evidence presented that only $15,000.00 represented payment for arrears due under the Sun Life policy. The other component of the settlement, being $160,000.00, represented a lump sum with respect to future benefits. The Court found that there was no evidence that the lump sum paid by the LTD insurer was calculated taking into account the future value of the LTD payments and found that instead it was “arrived at on the basis of the amount of money available under the authority of the person authorizing settlement.”


The Court found it relevant in Cromwell that the release involving the LTD benefits also involved mental stress, aggravated and punitive damages and it was found that the settlement did not qualify as “net weekly payments for loss of income . . .  under any income continuation benefit plan.” The Court found that the accident benefit insurer was not entitled to a deduction in respect of the $160,000.00 lump sum payment paid by the LTD insurer.


It was highlighted by Ms. Bennett that the Court in Cromwell followed the reasoning of the Supreme Court of Canada in Tsiaprailis v. R., which is a tax law decision.  In Tsiaprailis the Supreme Court, when addressing the issue of the correct tax treatment for disability insurance plan payments, held that:


It is clear that monies paid in settlement of any future liability under the disability insurance plan were not paid “pursuant to” the plan because there is no obligation to make such a lump sum payment under the terms of the plan.


In the recent decision in Anand, Cromwell was followed. It was noted in Anand that at the time of the settlement of the LTD action, the LTD insurer’s obligation did not include future payments that were contingent on Ms. Bennett’s entitlement to them based on an ongoing disability.  Justice Stinson concluded that consistent with the reasoning in Cromwell, “the payment made by Manulife to settle Mrs. Anand’s claim against them was not a payment ‘under an income continuation benefit plan’; rather, it was a payment to settle a legal obligation that one party sought to enforce by litigation.  Therefore it follows that this payment falls outside the scope of s. 267.8(1)2.”


The MVAC Fund submits that the GWL settlement is deductible from any IRB payable by the MVAC Fund because a disability benefit is an award for loss of income or earning capacity as established in s. 267.8 of the Insurance Act. This position is counter to the caselaw that has been highlighted above.  Accordingly, the Arbitrator did not find that the GWL settlement represents damages for loss of income as established by the Insurance Act and instead was a payment to settle a legal obligation arising from the commencement of litigation.


In Vanderkop there was no allocation of the lump sum payment under the various heads of damages and it was found by the Court that the accident benefit insurer was not entitled to any deduction for payments in respect of the lump sum settlement.  The case before the Arbitrator is similar and no reliable evidence was provided to suggest that all or some of the GWL settlement represented an amount of past LTD payments owed by GWL.


In Ms. Bennett’s statement of claim against GWL, she claimed a number of things including


  • a declaration that she was entitled to monthly indemnity payments from May 2008 by reason of her disability
  • a declaration that she was entitled to rehabilitation, other supplementary medical benefits available to her under the LTD policy
  • damages by way of resulting economic losses sustained by Ms. Bennett as a result of her disability
  • exemplary, aggravated and punitive damages
  • damages for bad faith in the amount of $1,000,000.00
  • pre- and post-judgment interest
  • costs of the action


The full and final release indicates that for the sum of $150,000.00, Ms. Bennett released GWL “of and from any and all manor of action and actions, cause and causes of action, suits, debts, dues, sums of money, general damages, special damages, costs, claims and demands of every nature and kind, at law or in equity or under any Statute . . . arising out of or relating to the policy or the pleadings issued in respect of the Action.”


Given the abovementioned caselaw, the Arbitrator did not find that the GWL settlement related solely to LTD benefits, past or future, and with no evidence presented regarding a breakdown of the settlement funds, they are not deductible under s. 267.8 of the Insurance Act. In addition, even if part of the settlement funds represented exposure for future entitlement to LTD payments, as held in Cromwell and supported by Tsiaprailis this would not be deductible.


The MVAC Fund further submits that the deduction of the GWL settlement is guaranteed by s. 22(1) of the Motor Vehicle Accident Claims Act (“MVACA”) which states:


No payment shall be made out of the Fund in respect of a claim or judgment for damages or in respect of a judgment against the Superintendent of an amount paid or payable by an insurer by reason of the existence of a policy of insurance within the meaning of the Insurance Act, other than a policy of life insurance, and no amount sought to be paid out of the Fund shall be sought in lieu of making a claim or receiving a payment that is payable by reason of the existence of a policy of insurance within the meaning of the Insurance Act, other than a policy of life insurance.


The MVAC Fund argues that despite case law, s. 22(1) guarantees the deduction of the GWL settlement received by Ms. Bennett from any benefits which may be payable by the MVAC Fund.



The MVAC Fund asks that the Arbitrator interpret s. 22 of the MVACA to mean that the settlement funds are payable because of the existence of a policy of insurance; however, the Arbitrator interpret s. 22 to mean that actual benefit payments made because of the existence of a policy of insurance are deductible. Payment of settlement funds as a result of litigation which included many elements other than the payment of benefits pursuant to a policy of insurance is not the same as payment of a benefit pursuant to the existence of a policy of insurance.


Arbitrator Fadel found that s. 22 does not apply in this instance since we are dealing with proceeds of settlement and not an award made by a Court where a finding of entitlement to a certain disability benefit is made, or a benefit payable by a collateral insurer “by reason of the existence of a policy of insurance.”


In addition, the Arbitrator that the cases relied upon by the MVAC Fund are not on point as none of them deal with monies received in a settlement of a court action.  For example, the Ontario Superior

Court in Meloche v. McKenzie found that collateral benefits provided by the employer were properly deductible. In Strickland v. Mistry the Ontario Superior Court found that the CPP disability pension and a long-term disability benefit being received by the plaintiff were properly deductible pursuant to s. 267.8(a) of the Insurance Act. In Miller et al. v. Gibbons et al.,the plaintiff received an award that included $520.00 of disability benefits that the Court of Appeal found was deductible from the total amount payable by the MVAC Fund.


Also, as stated above, there is no evidence before the Arbitrator suggesting a breakdown of the GWL settlement and therefore no way to determine what, if any, of the settlement represents a payment for past LTD benefits owed pursuant to the policy.




Given the reasoning in Anand and Cromwell, the Arbitrator found that the settlement funds resulting from the GWL action are not deductible under the Insurance Act. The Arbitrator also found that s. 22(1) of the MVACA does not apply in this instance.  Unlike Cromwell, there is no evidence before Arbitrator Fadel of what portion of the settlement involved past benefits owing and the Arbitrator is unable to make a finding relating to same. Also, the Arbitrator did not find that the settlement funds were paid pursuant to a policy of insurance but were paid in order to settle a court action.

Posted under Accident Benefit News, Automobile Accident Benefits, Car Accidents, Disability Insurance, Pedestrian Accidents, Treatment

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Deutschmann Law serves South-Western Ontario with offices in Kitchener-Waterloo, Cambridge, Woodstock, Brantford, Stratford and Ayr. The law practice of Robert Deutschmann focuses almost exclusively in personal injury and disability insurance matters. For more information, please visit www.deutschmannlaw.com or call us toll-free at 1-866-414-4878.

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