'Sorry, We Don't Cover That' – Exclusion Clauses In Long Term Disability Policies

"Sorry, you're not covered". "Wait. How come?" "If you look at your policy, there is a list of exclusion clauses and unfortunately, you fell into one of the categories". "Exclusion what?"

The above hypothetical conversation between an insured person and an insurance representative is an unfortunate reality for many disabled claimants. Often colloquially referred to as the "fine print of the contract", exclusion clauses are provisions that are intended to preclude coverage for certain sets of circumstances and types of losses. They are almost always included in disability policies and other types of insurance policies.

By deconstructing the purpose of an insurance contract, the rationale underlying exclusions becomes abundantly clear. An insurance contract effectively outlines and explains the allocation of risks between parties. By expressly exempting liability in certain circumstances, exclusion clauses are an extension of the principle of risk allocation. Essentially, the insurer attempts to eliminate any potential burden that may arise from a set series of circumstances by contracting out of what are deemed to be unreasonable or unfair risks. For example, the following scenarios, which if led to disabilities, would arguably not warrant coverage under a typical long-term disability (LTD) policy:

The commission or attempted commission of a criminal offence; Active participation in a riot; Disability caused during incarceration; When an insured person fails to remain under continuing medical care, e.g. refusing to participate in a rehabilitation program or psychological assessment; Disability due to war, declared or undeclared, or any act of war; Workplace injuries that can be made under a WSIB claim; Illnesses that arise within the first 90/365 days of the effective date of the policy; Intentionally self-inflicted injuries; and Pre-existing conditions. As long-term disability insurance litigation is based on the specific contract that the parties agreed to, the resolution of a claim is dependent on the contract's interpretations and the principles that form the lens under which the contract is viewed. As such, the most fruitful starting point for understanding the nuances of exclusion clauses is an examination of the fundamental substantive and interpretive principles of insurance law. By appreciating this theoretical foundation, an understanding of the pragmatic approach to interpreting exclusion clauses can be facilitated. Subsequently, the most commonly invoked exclusion clause, "pre-existing conditions", and developments in the relevant jurisprudence will be examined.

1. Substantive and Interpretive Principles of Insurance Law

   The language of a contract is always the first and most important matter to be examined in interpreting its terms.1 The words that have been used in the insurance policy must first be interpreted in a manner that gives effect to the true and reasonable intentions of the parties at the time of entering into the contract.2 A Court will read an insurance policy as a whole and give effect to the clear language of a policy where it is unambiguous.3 Where words may appropriately be interpreted in more than one way, the more reasonable one, which bears a fair result, shall be deemed as the interpretation that would promote the parties' intentions.4

   If the words in a policy are clear and unambiguous, then they will be given their "ordinary meaning".5 The question of whether the words are clear will be determined on the basis of what an ordinary reader would likely intend considering the type of risk that the insurer is agreeing to accept. Consequently, the language in a policy will be construed in a manner that is consistent with ordinary policyholders' expectations and intentions.

   On the flip side of the coin, where there is ambiguity in the interpretation of a LTD policy, litigation often diverts from the predictable black-and-white determination of claims to a grey realm where adjudication may be required to resolve the ambiguity. When the meaning of an exclusion provision in an insurance contract is unclear and allows for more than one reasonable interpretation, the Court will rely on the applicable interpretive and substantive principles of insurance law to guide their analysis and determination of whether or not coverage shall be rightfully precluded.

   The Supreme Court of Canada has expressed on a number of occasions that coverage provisions should be construed broadly and exclusion clauses should be construed narrowly.6 As exclusion clauses restrict the scope of coverage provided by the policy and create exceptions to it, they are narrowly interpreted and construed against the insurer. In addition to this strict construction principle, the Courts have invoked the doctrine of contra proferentem when confronted with cases of ambiguity.

   The Courts have repeatedly expressed their willingness to apply the maxim, verba fortius accipiuntur contra proferentem ("words must be construed against those who use them" or in other words, a contract must be interpreted against the party that drafted it). The judiciary's inclination to use this doctrine can be attributed to the Courts' recognition of the stark dichotomy in bargaining power, sophistication and comprehension between an insured person and an insurer. Essentially, the Courts will construe ambiguity in favour of the insured, and against the party that drafted the agreement and is looking to avoid liability.7 However, the doctrine of contra proferentem cannot be raised with respect to the statutory terms of a contract.8

   When presented with ambiguity, the Courts also consider the reasonable expectations and intentions of the parties at time they entered into the policy.9 The Ontario Court of Appeal has gone further and stated that a policy should be construed consistently with the reasonable expectations of the insured person regarding coverage when there is ambiguity in a policy.10 This begs the question: what are the reasonable expectations of an insured person? The Supreme Court of Canada has provided some guidance by suggesting that: at a minimum, an insured person can reasonably expect that their insurance plan will provide coverage for legitimate claims on a continuing basis.11

   The onus is on the insurer to show that an exclusion clause applies.12 Where there is ambiguity after a plain reading of the words and reference to the policy as a whole, the insurer is entitled to call evidence to show that it intended one of the alternate meanings to prevail.13 Plaintiff's counsel can ensure that his or her client obtains disability coverage and the appropriate benefits under a policy by properly utilizing the abovementioned doctrines and marshaling the appropriate evidence when confronted with a denial due to an exclusion clause.

2. Pre-Existing Conditions

   1. Typical Pre-Existing Conditions Exclusion Clauses

      As mentioned above...