Judgment Call by Disability Insurer Gives Room for Debate

In this series on long term disability income insurance, we will define disability income insurance, explain the important differences between individual and group disability income insurance, outline likely coverage issues you need to understand, take you through the claims filing process, the appeal process and your litigation options. Because of the subjective element in determining whether an insured is totally disabled and eligible for disability benefits, there is ample opportunity for an insurance company to use its “judgment” to deny or terminate benefits on a claim that a neutral third party might determine to be payable. Therefore, if your claim is denied, you may need an attorney to protect your rights.

Long term disability income insurance provides a monthly income should you be unable to work because of illness or injury. This insurance benefit is either purchased by you on your own behalf or it is provided as a benefit for you by your employer. Assuming you had this insurance and you were earning $3,000 per month before you became disabled, if you established to the insurance company’s satisfaction that you had become disabled from a covered injury/illness, the insurance company would pay out a set dollar amount (for example, $2,000 per month) to help replace your lost income.

The primary difference between individual disability income insurance policies and group disability income insurance policies (often referred to as “long term disability”, or LTD, policies) is that individual policies are underwritten with respect to the individual being covered, while group polices are not individually underwritten. Rather, group polices are issued on the basis of underwriting assumptions pertaining to the general health of a group of people. Typically, private, individual policies are applied for and the premiums are paid for by you, separate and apart from an employer. Group coverage, on the other hand, is usually made available by your employer, and the premiums are paid, at least in part, by your employer. There are circumstances where your boss will purchase and pay the premiums on your behalf, or conversely, you will personally obtain group LTD coverage unrelated to your employment by joining a group (for example, a professional association) which has made available group coverage for its members.

As a potential recipient of benefits from your long term disability income insurance policy, you definitely need to know whether you have individual or group insurance. This is critically important in the event you have a dispute with the insurance company over whether disability income benefits are payable to you under your policy.

The difference in litigation is huge! If your long term disability policy is an individual policy and your claim is denied, the remedies that are available to you are vastly different than an ERISA-governed group policy. If your policy is a group policy provided by your employer, chances are the policy is governed by a federal law called ERISA. If the policy is governed by ERISA, then certain state laws that would otherwise provide relief are subject to ERISA preemption. In other words, the beneficial state laws don’t apply to you. And, unfortunately, ERISA does not provide for equivalent federal protections.

ERISA is an acronym for the Employee Income Retirement Security Act of 1974. This long-standing law is designed to protect employees’ rights under pension plans. In 1986, the U.S. Supreme Court decided that the law also governed employer provided group insurance benefits. The Court also decided that all state laws affording remedies for the improper denial of employer provided insurance benefits, beyond the very limited remedies afforded under ERISA, were preempted by ERISA. For example, the right under California law to recover compensatory and punitive damages is not available to you if the insurance company intentionally denies your group disability income insurance claim which is clearly payable. Thus the insurance company has no true incentive to pay claims fairly when the policy is governed by ERISA. The law prevents the award of damages for bad behavior. In essence, the odds are heavily stacked in favor of the insurance company in ERISA-governed claims.