Disability News

Settling your Disability Claim: Where did my Benefits go?

Settling a Disability Claim

Sometimes during the disability litigation process, disability claims could come to a resolution by settlement. Remember, when you sue a disability carrier for the wrongful denial of benefits, you are suing in terms of breach of contract. You are seeking a “declaration” in your lawsuit, which is a formal statement (within legal documents) that outlines your request for relief or remedy from the court.

This includes specifying the nature of the claim, such as challenging the denial, termination, or miscalculation of your LTD benefits by your disability insurance company. In the end, the only thing a Court can do when you win your case is order the arrears owed to you paid up to date, and declare you disabled in terms of your policy definition – meaning you will be put back on claim.

Often, however, our disability lawyers and your insurance company lawyers may come to a resolution in terms of a lump sum payment reflecting a settlement of your future stream of disability payments. This would effectively end the litigation in exchange for a lump sum payment.

How do you Settle a Disability Case?

Normally with lump sum settlements, the insurer will pay some or all of the arrears (or past benefits owed from the date of cut-off to the date of settlement), prejudgment interest, and an agreed amount of your future benefits based on the risk of you meeting the policy definitions and remaining disabled into the indefinite future.

In terms of arrears, the amount of your recovery in your pocket will, of course, depend on whether some disability payments were paid, should have been paid, or not paid, or if they were taxable or non-taxable. This is always confusing to many claimants. The simple way to think about this is this way – if the premiums were paid by your employer, your disability benefits will taxable. However, if you paid the premiums, your disability benefits are non-taxable. Claimants are almost always unaware of the fact that tax will be payable if their employer pays the disability premium.

Also, it is important to note that if arrears are paid, you will be provided with a T4 by your disability insurer for the arrears of disability payments that are subject to tax. It is our practice that our settlement instructions or directions indicate the amount that you will ultimately net after paying taxes on your arrears. With that being said, our disability lawyers and your insurer do often try and work together to spread the taxable benefits over the years they would have been received so that the full amount is not all taxable in the year in which it is received, to minimize your tax consequences.

Settling your Disability Claim: You Might be Shocked.

It is also very important that you understand the term “offsets” or collateral benefits – terms often used interchangeably within disability settlement negotiations. In a disability lawsuit in Canada, “offsets” or “collateral benefits” refer to any additional income or benefits you receive due to your disability, such as ODSP, severance, CPP Disability, workers’ compensation, or other government disability benefits, etc. These are considered when determining your compensation from the lawsuit or insurance claim, potentially reducing the amount you’re awarded to avoid “double recovery,” where you would receive more than your actual financial loss or need. Understanding these offsets is important as they directly impact the final amount you may receive.

Do I need to give CPP as an Offset when Settling my Case?

 Do I need to apply for CPP if I am receiving long-term disability benefits? The answer is yes. Most, if not all long-term disability insurance polices contain provisions which make is mandatory for a claimant to apply for CPP disability benefits if they are receiving LTD benefits.

The reason is that your Disability Insurance Company gets a direct offset of your CPP monthly payment from the monthly disability benefit they pay you.

Disability insurers will always be looking to maximize offset amounts to reduce the lump sum that will be payable. Disability policies will contain provisions permitting the insurer to notionally deduct CPP if the insured has recourse to apply. Presently, in 2024, CPP disability benefits could pay up to $1,616.52 per month.

The question often becomes whether or not a claimant has to deduct CPP if it’s not being received. There are certainly some scenarios where a person is gravely ill and has not had the time to apply for CPP, or is waiting for a decision from Service Canada. Some lawyers approach the situation differently – however in most cases, as a gesture of good faith during the settlement proceedings, we will offer a discount on future CPP payments. Our disability lawyers will obtain documentation from Service Canada which will show an estimated amount of CPP Disability monthly payment which a person would be entitled to, based on their contributions to date.

The shock? When evaluated until the age of 65, the CPP offset, in most cases, will reduce the amount payable considerably. However, before this, we believe it to be very important that settlement instructions or directions from our client show the full offset calculation so that the plaintiff fully understands the erosion of his or her benefits — and more importantly, what he or she will net in his or her pocket.

And there’s more: What is a Present Value Discount?

In the context of disability litigation, when you are settling your future stream of disability benefits, “present value discount” is a crucial concept to understand. Essentially, it means calculating the current value of the money you’re expected to receive in the future. 

When you settle for a lump sum payment for future benefits, the total amount is adjusted to reflect its present value. This adjustment involves estimating how much the future stream of payments is worth right now, considering factors like inflation and the interest you could earn if you had the money today. The process uses a discount rate to convert future amounts into their equivalent current value.

Let’s simplify it further.

Imagine you’re supposed to get $100 every year for the next 10 years from your disability benefits. Instead of waiting every year, you decide to settle and get the money now in one lump sum. However, getting all the money now won’t simply be $100 times 10 years, which is $1,000. It will be less than that. Why? Because of something called “present value discount.”

Think of it this way: having $100 today is more valuable than getting $100 five years from now. If you had $100 today, you could put it in a bank or invest it and end up with more than $100 after five years, thanks to interest. So, when calculating a lump sum for future benefits, we use the present value discount to figure out how much those future payments are worth today, not in the future.

The “discount” part means reducing the future amounts because of the time value of money. The total lump sum you get now will be the sum of all your future payments, but each is made smaller (discounted) because you’re getting them now, not later. This is a standard financial principle used to ensure fairness and reflect the true value of money over time.

After all these Deductions – what’s the Settlement Value of your Claim?

Then after all offsets, deductions, and calculating the present value of the remaining funds (until you turn 65) what is the “settlement value” of the claim?

In the end, the objective in every disability case is to settle reasonably without going to trial. Litigation is costly and trials are unpredictable in predictable ways. From our perspective as disability lawyers, avoiding trial and settling reasonably means making a fair evaluation of both the litigation risk and the settlement value of the case, all while keeping the client fully informed.

It means approximating reasonable outcomes and quantifying the net expected value of the settlement payable to the client. It means ascribing best/worst case scenarios and probabilities if the litigation were to continue. It means coming to a net expected value that the plaintiff can appreciate and accept, and that the disability insurer is willing to pay to close the file.

While representing the plaintiff disability claimant through to settlement, we will want to capitalize on the fear of the unknown that every disability claims examiner must face – no disability claims adjuster, no matter how experienced, can concisely unravel a plaintiff’s medical issue to determine risk on a 100% basis.

A good disability lawyer must harness the fear of the unknown by creating a compelling perception of exposure through his or her case theme, storytelling, and medical evidence. It is not uncommon for the disability insurer to approach mediation optimistically while seemingly being a supporter of the plaintiff’s recovery and successes to date. The disability carrier may come across as a fan of the claimant’s skills, character, and abilities, and promote the fact that the claimant’s mitigation efforts in terms of rehabilitation will pay off shortly and that he or she will be successful in returning to work. All of this is often very appealing to the claimant at first blush but devised in a guise to convince the plaintiff that he or she will be employable someday and that their claim has little to no value.

In terms of settlement, we will want to stand firm on the payment of arrears unless the claimant has returned to some type of work or menial job. Then, a negotiation should be made in terms of the payment of arrears plus a percentage of the future present value.

In our experience, this can be presented in terms of a percentage of the value of the future stream of benefits or the number of “years” of future payments. For example, if a person has 10 years of benefit remaining, one would look at the various offsets, calculate the present value discount, then after these numbers are calculated – and depending on the facts of the case and the risk involved, come to an agreement with the other side on the potential settlement value of the case.

The Takeaway

In the end, clients almost always suffer the “shock of offsets” – meaning that that disability clients often find themselves shocked and disheartened upon discovering the significant offsets applied to their long-term disability benefits when they settle, often feeling unprepared for the financial impact of these deductions on their anticipated compensation.

But what is the alternative?

Have you been Denied Long-Term Disability Benefits?

For nearly four decades, our experienced team of long-term disability lawyers has been dedicated to defending the rights of claimants across the disability claim journey. We profoundly understand the physical, emotional, and financial toll that the cessation of disability benefits can inflict. Our team is acutely aware of the challenges and hurdles you may encounter when interacting with insurance adjusters and the overwhelming pressure to return to work prematurely.

Our goal is to ensure you receive the long-term disability benefits you deserve, helping you concentrate on your health and recovery, free from financial worries. If you or someone you know is battling colon cancer and has faced denial or unjust termination of long-term disability insurance benefits, we are here to support you. Our services are designed to secure the benefits you need, offering financial support as you heal.

Based in Hamilton, Ontario, our firm assists disability claimants across the nation.

We offer free consultations to those in Ontario or anywhere in Canada. Reach out to us at 1-844-4-DISABILITY or confidentially via our website for a no-cost discussion about your long-term disability rights and legal options.

[1] Tsiaprailis v. R., (sub nom. Tsiaprailis v. Canada) [2005] 1 S.C.R. 113, 2005 SCC 8, 2005 CarswellNat 431, 2005 CarswellNat 432 (S.C.C.).