Karen Mazurkewich – July 08, 2009
Nortel Networks Corp. has claimed another victim: Employees on long-term disability are just learning that their benefits, which they thought were insured, may be cut off if the company does not emerge intact from Companies' Creditors Arrangement Act protection.
Months after Nortel filed for bankruptcy protection, Susan Kennedy learned her benefits were not insured by Sun Life Assurance Co. of Canada, the company issuing her cheques.
Instead, her long-term disability (LTD) payments have been made from a Nortel Health and Welfare Trust, and Sun Life was simply administering benefits on Nortel's behalf.
The news comes as a shock to Ms. Kennedy and the 400-plus other employees receiving LTD. If Nortel is liquidated, Ms. Kennedy will join the ranks of unsecured creditors, forced to stand in line with bondholders to receive any compensation.
The prospect of losing her benefits is frightening. "My income will be reduced drastically to a CPP disability pension," she said.
Nortel's imploding benefits package has put the spotlight on the problem of "administrative services only" arrangements, known in the insurance industry as ASOs. The practice surfaced in the Canadian market in the 1970s, and has grown rapidly as a way for employers to reduce the cost of providing benefits.
Rather than buying insurance to cover employee benefits, companies can create their own trusts to provide benefits directly to employees, and use insurance companies to simply administer those benefits.
But while ASO arrangements offer some tax and premium savings to employers, they put employees at risk when the company hits rough waters. "It's not insurance; there's no insurance guarantee," says Frank Zinatelli, vice-president of legal services for the Canadian Life and Health Insurance Association (CLHIA).
There are more than a million Canadians whose LTD are covered by ASO arrangements, and whose coverage may be in jeopardy if their companies go under.
If an insurance company goes bankrupt, its policyholders would continue to receive their LTD payments from Assuris, a non-profit company set up to deliver payments. But employees of Nortel are not covered because Nortel is not an insurance company.
Nortel employees' best hope now is that the Nortel Health and Welfare Trust Fund, which cannot be grabbed by creditors, still has some cash in its coffers.
"There is some money in that trust that's earmarked for LTD employees but we don't know how much or how long it will last," said Susan Philpott of Koskie Minsky, the law firm seeking to represent the LTD employees in the bankruptcy hearings.
Ms. Kennedy has formed a committee to seek representation at the bankruptcy hearings and to lobby politicians. "We've been let down by Nortel, the insurance company and by the government," she said.
Although Nortel has always had a self-insurance policy, Ms. Kennedy argues that it was never made clear to her that the company had no insurance to cover its liabilities. The company first reported its self-insurance status in its 2005 handbook, but that was years after she qualified for benefits.
Ms. Kennedy also is upset that nowhere in her correspondence with Sun Life was it clear that Sun Life was the administer, not the insurer.
"Nortel was not mentioned anywhere -- not the T4A slips, medical request correspondence or letters of correspondence -- about continuing disabilities," she said.
Steve Kee, assistant vice-president, communications, of Sun Life, argued that when it comes to ASO arrangements, "in general, it's the employer's responsibility to tell their employees."
The CLHIA has argued that self-insured plans should be regulated to ensure that disability benefits continue to be paid to existing beneficiaries in the event the plan was terminated. Provincial governments, however, have done little to make changes even through this problem has come up in the past.
Ms. Kennedy is now meeting with politicians, including Paul Dewar, MP for Ottawa Centre, and Jim Watson, MPP for Ottawa-West Nepean, to push for restitution. They would like the courts to grant higher priority ranking to pensioners and disabled employees during the CCAA proceedings, or see the provincial and federal governments bail them out.