Self-funded disability insurance plans need government attention

By Tony Poland, LegalMatters Staff • The government must step in to end the pervasive conflict of interest that is inherent in self-funded disability insurance plans, says Ontario disability insurance lawyer Courtney Mulqueen.

“Insurers serving as both claim adjudicator and benefit payer creates an inherent conflict of interest,” says Mulqueen, principal lawyer of Mulqueen Disability Law Professional Corporation. “This dual role incentivizes claim denials and terminations to protect corporate profits, rather than prioritizing long-term disability (LTD) claimants’ health interests.

“Recent history has provided stark warnings about the dangers of these arrangements and underscore the urgent need for legislative protections.”

In a self-funded model, the plan sponsor – typically the employer or the plan trustee – assumes all financial risk and is responsible for both adjudicating claims and paying benefits, she says. 

“Every dollar paid out in benefits is a dollar directly impacting the sponsor’s own financial reserves,” Mulqueen says. “There are examples where employees have lost access to promised benefits when self-funded plans were under-resourced or mismanaged. 

‘Claimants may have fewer protections

“The lack of regulatory oversight for self-funded plans, compared to insured products, compounds these risks,” she adds, “Claimants may have fewer protections and there can be less transparency. As well, the appeals process is often managed internally, reducing independent scrutiny.”

Mulqueen tells LegalMattersCanada.ca her clients – often battling invisible disabilities such as chronic pain or mental health conditions ­­– “face heightened vulnerability” when self-funded insurers:

• Prioritize financial gains over medical evidence, leading to wrongful denials.
• Impose burdensome requirements that exacerbate clients’ conditions during appeals.
• Exploit subjective policy language to limit benefit periods despite clear evidence of disability.

Mulqueen pointed to a recent news report dealing with the uncertainty surrounding the future of workers receiving long-term disability benefits after the Hudson Bay Company (HBC) shut down for good.

Company used its own cash

The Globe and Mail reported that the Bay’s benefits plan “provided long-term disability payments through an ‘administrative services only’ arrangement, which meant the company used its own cash to make those payments.”

According to the Globe, the benefits of “roughly 190 current and former staffers” were at risk as the retailer wound down its operations.

“When HBC encountered financial difficulties, it simply could not meet its obligations to its disabled workers,” explains Mulqueen, who is not involved in those benefit claims but comments generally. “This real-world example demonstrates how self-funded LTD plans can fail the very people they are supposed to protect, with catastrophic consequences for vulnerable employees.”

She says self-funded employer LTD plans come with additional risks to insured workers due to inadequate financing and regulatory gaps.

“Employers facing financial strain may deny valid claims to preserve cash flow,” says Mulqueen. “Benefits may also evaporate during employer insolvency. And there is limited oversight by the provincial government.

Protection does not extended to provincial employees

“Federally regulated employers must now insure LTD plans under Canada Labour Code amendments, but this protection does not extend to provincial employees or those in non-regulated sectors,” she adds. “Self-funded plans’ structural instability leaves disabled workers financially stranded when they need security most.”

Mulqueen says many of her clients are educators covered by the Ontario Teachers Insurance (OTIP) Long Term Disability Plan, which is self-funded.

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“I have seen first-hand how plan administration has changed since OTIP took over funding the policy from Manulife in January 2020,” she says. “In my experience, it has become exponentially more difficult to prove legitimate claims. While it is not known for certain that this is the reason, the change in the funding coincided directly with the additional challenges faced by those making LTD claims under the new OTIP plan.”

LTD benefits are now paid for and managed directly by OTIP, rather than an external insurance company, Mulqueen says. 

The problem with a self-funded structure is that the financial stability of the LTD plan depends on the funds managed by the administrator and the plan’s ongoing claims experience, rather than the backing of a large insurance company where risk can be more easily managed, she says.

Can create ‘systematic barriers’

A structure where an LTD plan is both benefit payer and claims adjudicator can create “systemic barriers for those seeking their rightful disability benefits,” Mulqueen maintains, “raising serious concerns about conflicts of interest and claimant welfare.”

She says she has witnessed “heightened claim adjudication barriers” in self-funded plans including:

• Evidence thresholds becoming escalated beyond plan requirements, particularly for subjective conditions such chronic pain and mental health disorders. Claims normally approved under an insurance carrier face disproportionate scrutiny despite unchanged policy language.
• Appeal committees that become internally controlled, comprised of self-funded plan staff and a company paid medical consultants with less time and money spent on independent unbiased assessments. This creates inherent bias when reviewing denials.
• Increased reliance on surveillance and “paper reviews”, with self-funded insurance administrators frequently overriding treating physicians’ assessments and without examining the claimant. “Our clients report invasive monitoring that often exacerbates mental health conditions,” Mulqueen says.

She says conflict of interest is an obvious byproduct of a self-funded structure.

Incentive to deny or terminate claims

“Every approved claim directly impacts the provider’s reserves, inherently creating institutional pressure to reject valid claims,” Mulqueen says. “There is a clear financial incentive to deny or terminate claims, particularly in times of economic uncertainty or when claim volumes rise, as was the case during the pandemic. This structure disproportionately harms claimants with complex or less visible disabilities, who may face skepticism or dismissal of their medical evidence.

“The correlation between self-funding and deteriorating claimant outcomes cannot be ignored.”

She says since OTIP assumed full financial responsibility for the LTD plan in 2020, she has seen “a marked increase in the difficulty of proving legitimate claims for our educator clients.”

“While OTIP publicly stated that plan features and service levels would remain unchanged, the practical experience of claimants tells me something different,” Mulqueen argues. “In my experience, claims, especially those for conditions such as chronic pain or mental illness, face more rigorous and sometimes unreasonable requirements for proof of disability.

“In a self-funded model, we have seen plan administrators who override the treating physicians’ opinions without direct examination of the claimant, which can further traumatize individuals already struggling with their health,” she adds. “My clients with mental health claims have experienced systemic skepticism.  Their workplace stress has been dismissed ­– even pandemic-related burnout – as insufficient for disability.”  

She says regulatory gaps leave claimants further exposed.

‘Enables procedural unfairness’

“Unlike provincially regulated insurers, it may be possible for some self-funded plans such as employer-funded STD plans, to operate outside Ontario’s insurance oversight framework,” says Mulqueen. “An absence of external accountability opens up the chance of procedural unfairness, even when a third party might be assessing claims. In these cases, the employer has the last say as to whether a claim is paid.”

She says she expects others will face challenges that “mirror those experienced by employees in other self-funded LTD plans, such as Hudson Bay Company,” she says.

“The lack of pre-funding, limited regulatory oversight, and the potential for financial instability, all contribute to a system where claimants can be left without the support they need at their most vulnerable,” says Mulqueen.

She says Ontario government’s Bill 14, the Building Opportunity and Securing Our Future Act, was designed to address risks inherent with self-funded plans. 

Bill would have amended Insurance Act

“The bill would have amended the Insurance Act to prohibit the provision of long-term disability benefits in Ontario unless the benefits are payable under a contract of insurance issued by an insurer licensed under the Act,” Mulqueen explains. “In other words, it sought to eliminate self-funded LTD plans and require that all such benefits be insured, ensuring that employees are protected even if their employer faces financial difficulties.”

The legislation received royal assent 11 years ago but the government hasn’t taken the final step to make it law.

“There is an urgent need for Ontario to revisit and enforce Bill 14’s protections,” Mulqueen says. “I join other advocates for LTD claimants who call on policymakers to prioritize the security and dignity of disabled workers by closing the loopholes that allow self-funded plans to exist in Ontario. 

“The shift to self-funding in LTD plans has resulted in increased barriers, conflicts of interest, and significant risks for disabled employees. We urge plan sponsors and regulators to recognize these dangers and implement stronger safeguards to protect the rights and well-being of all LTD claimants,” she adds. “The time to act is now ­– before more employees are left unprotected in their time of greatest need.”