Can a Severance Release Wipe Out Your LTD Claim? Ontario Courts Say Not Always

What does a full and final release actually cover?

When an Ontario employer terminates you, the severance offer almost always comes with a release. It is usually drafted as broadly as possible: you give up every claim of any kind against the employer, known or unknown, in exchange for the severance package. Many releases go further and specifically name benefit and insurance claims, including short-term and long-term disability, and some ask you to release the insurer too, even though the insurer is not paying you anything.

That breadth is deliberate. Employer-side firms tell their clients to paper releases carefully precisely because courts have refused to enforce sloppy or unfair ones. The flip side, which those alerts do not dwell on, is what matters to you: a release signed in the wrong circumstances is not bulletproof, especially when it purports to wipe out a disability claim.

Can a release really wipe out an LTD claim?

Sometimes yes, sometimes no. The leading Ontario example of no is Swampillai v Royal & Sun Alliance, 2018 ONSC 4023. Mr. Swampillai was off work with a disability. His insurer cut off his LTD benefits at the change from the own occupation test to the any occupation test, and he was appealing that denial. His employer then terminated him and offered a severance package conditional on a broad release that covered his LTD claim. He signed. When he later sued for his LTD benefits, the employer and insurer asked the court to throw the case out based on the release.

The court refused. The motion judge found the release unconscionable as it related to the LTD claim: the benefits at stake were potentially worth over $300,000 to age 65, Mr. Swampillai was in a vulnerable position, and the severance package included nothing identifiable for giving up that claim. The Court of Appeal for Ontario let his LTD lawsuit continue (2019 ONCA 201). The message for employees is simple: a court will look past the paper at the fairness of what actually happened.

Ontario courts continue to apply this reasoning. Employer lawyers read those decisions as drafting lessons. You should read them as confirmation that signing is not always the end of the story.

How do courts decide a release is unconscionable?

Unconscionability is an equitable doctrine that lets a court set aside a bargain that never should have been enforced. The Supreme Court of Canada restated the modern test in Uber Technologies v Heller, 2020 SCC 16: the court asks whether there was an inequality of bargaining power, and whether the resulting bargain was improvident, meaning it unduly advantaged the stronger party or unduly disadvantaged the weaker one.

In the employment release cases, Ontario courts have long worked through the factors set out in Titus v William F. Cooke Enterprises, 2007 ONCA 573. The hurdle is high; a deal that merely turned out to be a bad one is not enough. But the factors the courts weigh map closely onto what actually happens when a sick employee is handed a release:

• A grossly unfair and improvident transaction. Was the LTD claim you released worth far more than anything you received for it? In Swampillai, a claim potentially worth $300,000 was released with no specific consideration at all.
• No independent legal advice. Did you sign without a lawyer, or without a real chance to get one before the deadline?
• Overwhelming imbalance in bargaining power. Illness and disability are expressly recognized as sources of vulnerability; so are financial desperation and not understanding what the document covers.
• The other side knowingly taking advantage. Did the employer or insurer know you had a live LTD dispute and sweep it into the release anyway?

No single factor decides the case, and after Uber v Heller the focus is on the two core elements of unequal bargaining power and an improvident bargain. But the more of these boxes your situation ticks, the stronger the argument that the release should not stand between you and your LTD benefits.

What are the red flags that a release should not have covered your LTD claim?

• You were on disability leave, or in the middle of an LTD claim or appeal, when you were terminated and handed the release.
• You had no lawyer, and the deadline to sign was short (48 hours, one week) with pressure not to seek advice.
• The severance package was at or near your Employment Standards Act minimums, so you received little or nothing beyond what the law already guaranteed you.
• Nothing in the package was allocated to the LTD claim, even though the release purported to extinguish it.
• The insurer was released even though it contributed nothing to the settlement, or kept processing your appeal as if the claim were still alive.
• You did not understand that the document covered your disability benefits at all; the LTD language was buried in boilerplate.
• Your medical condition itself (pain, medication, depression, cognitive symptoms) impaired your ability to weigh what you were signing.

What compensation are you actually being asked to release?

A termination package can bundle together very different kinds of money, and the law treats them very differently. Before signing, you should know exactly which of these the release touches:

That table is why timing matters so much. An employer that terminates you while you are on disability leave is asking you to sign away not just severance but potentially years of income replacement. Those are separate entitlements and each deserves its own price. For more on how disability and termination interact, see our guide on being fired while on medical leave.

What should you do before signing anything while you are sick?

1. 1.Do not sign on the spot. No legitimate severance offer evaporates because you took a week to get advice, and short fuses are themselves a red flag courts notice.
2. 2.Read the release for the words 'disability', 'benefits', 'insurance', and the name of your insurer. If your LTD claim is being released, that claim needs to be separately valued and separately paid for, or carved out of the release entirely.
3. 3.Ask in writing for the release to exclude your LTD claim. Many employers will agree, because the LTD policy is the insurer's problem, not theirs.
4. 4.Get independent legal advice before signing, not after. A severance package review will price both the severance and the disability claim, and the advice usually pays for itself many times over.
5. 5.If your LTD claim has been denied, keep pursuing it. Read our guide on what to do when your LTD claim is denied in Ontario and do not let a termination meeting derail the appeal.
6. 6.Keep every document: the offer letter, the release, emails about deadlines, and your medical records from the period you signed. If the release is ever challenged, the circumstances of signing are the whole case.

I already signed. Is it too late?

Not necessarily, but move quickly. Challenging a release does not pause any limitation period. In Ontario, a lawsuit for LTD benefits generally must be started within two years of a clear and unequivocal denial of benefits, and human rights applications have their own one-year window. If you wait too long, you can lose the claim on timing grounds even if the release itself would never have held up.

A lawyer will look at exactly what the courts look at: what your LTD claim was worth, what you actually received for it, what state you were in when you signed, whether you had advice, and what the employer and insurer knew. If those factors line up the way they did in Swampillai, the release may not protect them at all.

Releases are the last step of a termination, not the first. Start with what a fair package looks like in our guide to severance pay in Ontario, read our plain-language walkthrough of whether you should sign a severance release, and if an insurer is part of the picture, see how courts treat disability insurers acting in bad faith. If you are being asked to sign anything while you are sick or on claim, talk to us first. The signature takes seconds; unwinding it takes a lawsuit.

About the Author

Daniel Carter

Legal Writer, Mirza Law

Daniel Carter is a legal writer at Mirza Law in Toronto. He writes about layoffs, employment contracts, and the steps to take before you sign anything from your employer.

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