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Insurer gets off the hook as a result of a deal struck between the employer and the employee

01 Jun 2014

The doctrine of “privity of contract” stands for the proposition that only parties to a contract can enforce it. What happens, however, when parties contract to release a third party from liability? Can the third party, who has never even seen the contract, rely on its terms? The Supreme Court of Canada answered this question in the affirmative in the London Drugs and Fraser Rivers decisions. In certain circumstances, the Court ruled, exceptions are allowed. This rule was revisited in an employment context where as a result of a release entered into by the employer and the employee the third party insurance company was excluded from liability.

Zelsman v. Meridian Credit Union Ltd. 2012 ONCA 358 involved a plaintiff (the “plaintiff”) who was employed by the College of Family Physicians (the “College”). The plaintiff was terminated in 2008 and was denied long-term disability benefits (“LTD”) twice under the available group coverage. Having been terminated, the plaintiff also launched a complaint for discrimination pursuant to the Ontario Human Rights Code. The human rights complaint was settled and in 2010 the plaintiff applied for LTD for the third time, this time successfully. The insurer then discovered that the plaintiff and the College had signed minutes of settlement releasing the College and the insurer from further liability. Not surprisingly, the insurer decided to discontinue the benefits, which caused the plaintiff to bring a motion for a declaration that the release involving the insurer was unenforceable. The Ontario Court of Appeal upheld the motion judge’s decision and benefits under the policy were denied.

The Zelsman decision is a potent reminder that counsel should be attentive to the details of releases signed in the furtherance of settlements. Employment releases that involve terms specific enough as to exclude a third party from liability may be enforceable by the third party even if the third party does not partake in the execution or formulation thereof.

The above article is for general information purposes only and does not constitute legal advice. If you are an employer or an employee and have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.