LLQP Accident and Sickness Insurance 3 — Questions and Answers

Question 1: What is 'residual disability' coverage in a Canadian disability insurance policy?

Coverage for disabilities that are permanent
Partial benefits when the insured can work but with reduced capacity (Correct answer)
Coverage for mental health disabilities only
Benefits paid after the main benefit period ends

Correct answer: Partial benefits when the insured can work but with reduced capacity

Residual disability coverage provides partial benefits when the insured can work in a reduced capacity and experiences a proportional loss of income.

Residual disability (also called partial disability) coverage pays a proportional benefit when the insured can still perform some but not all duties of their occupation, or can work but with reduced hours, resulting in an income loss. The benefit is typically calculated as: (pre-disability income minus current income) divided by pre-disability income, multiplied by the full monthly benefit. For example, if someone earning $10,000/month can only earn $6,000 after disability, they would receive 40% of their full monthly benefit. This provision encourages return to work while maintaining financial support.

Question 2: In group accident and sickness insurance in Canada, what happens to an employee's coverage when they leave the employer?

Coverage continues indefinitely at the same premium
Coverage terminates immediately with no options
The employee may have the right to convert to an individual policy (Correct answer)
The provincial government assumes coverage automatically

Correct answer: The employee may have the right to convert to an individual policy

Most group policies include a conversion privilege that allows departing employees to convert their group coverage to an individual policy without evidence of insurability.

When an employee leaves a group plan, their coverage typically terminates. However, most provincial insurance legislation requires group policies to include a conversion privilege. This allows the departing employee to convert their group coverage to an individual policy within a specified period (usually 31 days) without providing evidence of insurability. The individual policy will typically be at higher premiums reflecting individual rates and may have different terms than the group plan. If a claim is in progress at termination, the extension of benefits provision may continue payments for that specific claim.

Question 3: What is the 'relation back' doctrine as it applies to accident and sickness insurance claims in Canada?

Claims must be filed within 30 days of the accident
The cause of loss is traced back to determine if it was accidental or from sickness (Correct answer)
Benefits are calculated based on the insured's income from the previous year
Policy terms revert to the original application date

Correct answer: The cause of loss is traced back to determine if it was accidental or from sickness

The relation back doctrine traces the chain of events to the original cause to determine whether a loss resulted from accident or sickness, which affects coverage and benefits.

The relation back doctrine is used to determine the proximate cause of a disability claim. When a chain of events leads to a disability, insurers trace back to the original or initiating cause. For example, if someone has an accident that leads to surgery, and then develops an infection from the surgery causing disability, the original cause is the accident, not the sickness. This distinction matters because accident benefits may differ from sickness benefits in terms of elimination periods, benefit amounts, and duration. Courts in Canada have applied this doctrine to ensure fair determination of claims.

Question 4: Which provincial body typically regulates accident and sickness insurance products in Canada?

The Office of the Superintendent of Financial Institutions (OSFI)
The provincial insurance regulator or superintendent of insurance (Correct answer)
The Canadian Life and Health Insurance Association (CLHIA)
The Financial Consumer Agency of Canada (FCAC)

Correct answer: The provincial insurance regulator or superintendent of insurance

Insurance products in Canada are regulated at the provincial level by each province's insurance regulator or superintendent of insurance.

In Canada, the regulation of insurance products and the licensing of insurance agents falls under provincial jurisdiction. Each province has its own insurance regulator (such as FSRA in Ontario, AMF in Quebec, or BCFSA in British Columbia). These regulators oversee product approval, agent licensing, market conduct, and consumer protection. OSFI regulates federally incorporated insurance companies for solvency purposes but does not regulate products or agents. CLHIA is an industry association, not a regulator. FCAC handles consumer complaints about federally regulated financial entities but does not regulate insurance products.

Question 5: What is a 'cost of living adjustment' (COLA) rider in a disability insurance policy?

It adjusts the premium based on inflation
It increases disability benefits annually to keep pace with inflation (Correct answer)
It reduces the elimination period during economic downturns
It adjusts the benefit period based on retirement age changes

Correct answer: It increases disability benefits annually to keep pace with inflation

A COLA rider increases disability benefit payments annually, typically tied to the Consumer Price Index, to protect the purchasing power of benefits during a long-term claim.

A Cost of Living Adjustment (COLA) rider is an optional add-on to a disability insurance policy that increases benefit payments during a claim to account for inflation. Once a claim is in progress, benefits are typically adjusted annually based on the Consumer Price Index (CPI), usually capped at a maximum increase of 2% to 4% per year. This rider is particularly valuable for long-term disability claims where a fixed benefit amount would lose significant purchasing power over years of inflation. The rider increases premiums but provides important protection for claimants with extended disability periods.

Question 6: In Canadian accident and sickness insurance, what does 'subrogation' refer to?

The insured's right to appeal a denied claim
The insurer's right to recover benefits paid from a third party responsible for the loss (Correct answer)
The transfer of policy ownership to a new policyholder
The process of reducing benefits due to other coverage

Correct answer: The insurer's right to recover benefits paid from a third party responsible for the loss

Subrogation is the insurer's right to recover claim payments from a negligent third party who caused the insured's injury or illness.

Subrogation allows the insurer, after paying a claim, to step into the shoes of the insured and pursue recovery from a third party whose negligence caused the loss. For example, if an insured becomes disabled due to a car accident caused by another driver, the disability insurer pays the claim but then has the right to seek reimbursement from the at-fault driver or their insurer. In Canada, subrogation rights in accident and sickness insurance are typically established through policy provisions and supported by common law principles. This prevents double recovery by the insured and helps keep insurance costs down.

LLQP Accident and Sickness Insurance 3

What is 'residual disability' coverage in a Canadian disability insurance policy?