Disability insurance

Disability Insurance: A Primer on what it is, how it works, and why it’s important to consult an attorney

By: Bradley M. Peri, Goodman Acker, P.C.

Disability insurance, similar to life insurance, is intended to protect future earnings and will replace your income in the event that you become physically unable to work.  Although it gets less attention than life insurance, many will agree that disability insurance is just as important.  According to the Council for Disability Awareness, about one in four of today’s twenty-year-olds have a chance of becoming disabled sometime before they retire.  In addition, the average long-term disability absence from work lasts 2.5 years.

While the majority of people are prepared for the medical costs (through their applicable health insurance) if they become disabled, many are not prepared for the loss of income.  So how does disability insurance solve this?
There are two types of disability insurance: Long Term and Short Term.  Either may be purchased individually, or by or for a group, such as part of an employee benefit package.
Short-Term Disability Insurance

Short-term disability insurance replaces a portion of lost salary in the event the claimant misses six months or less of work as a result of a temporary disability.  In most policies, the coverage will typically begin after all sick leave is exhausted, and will replace almost 100% of the claimant’s wages for the first monthly payment.  Thereafter, if the claimant remains unable to work, the majority of policies permit the monthly payment to drop to 60-66% of the claimant’s wages.  The length of coverage and payment percentage varies from plan to plan but most are consistent with the above.
Long-Term Disability Insurance

Many contend that long-term disability insurance is the most important insurance an individual can purchase.  After a claimant has exhausted all of their short-term disability insurance, long-term disability insurance will kick in.

Long-term disability insurance protects a claimant from loss of income in the event that he or she is unable to work due to illness, injury, or accident for a long period of time (i.e. in excess of six months.  Most policies will cover 50%-70% of the claimant’s monthly salary.  The duration of plan benefits can also extend for different lengths of time.  Some policies will only pay out for 5-10 years, while the majority will pay till the claimant reaches the age of 65 pending they continue to meet the definition of “total disability” defined by the policy.

Generally, there are several ways long-term disability insurance is paid for, with each option having different costs, as well as tax implications.  First, the plan can be paid for directly by the potential claimant themselves.  Next, and most common, the plan is paid entirely (or a portion) by the potential claimant’s employer.  In this situation, the plan is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).  Therefore, if a claimant is denied long-term disability insurance it is very important to get an attorney involved at the application level to determine whether ERISA is applicable or not.

When ERISA is involved, a claimant may internally appeal the claims administrator’s first denial of long term disability benefits within 180 days from the notice of benefit denial.  Most group policies allow for at least two internal appeals with the third appeal sometimes being optional to the claimant.  Many attorneys, including myself, use this initial 180-day period to gather and organize medical records, arrange for a medical examinations and functional capacity assessments of the claimant and retain an expert to perform a vocational analysis regarding the claimant’s background, training, and education as it relates to his or her performance of occupations.

After an appeal has been submitted to the carrier, ERISA provides that a long term disability plan administrator shall notify a claimant of the plan’s benefit determination on review within a reasonable period of time, but not later than 45 days after receipt of the claimant’s request for review.  If the plan administrator determines that an extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 45-day period.  However, in no event shall the total period of review exceed 90 days.  As a pre-requisite to filing a lawsuit under ERISA the claimant is required to exhaust all of his or her internal administrative remedies.

The deadline for filing suit under ERISA for denial of long term disability benefits is established by the State’s statute of limitations for contract claims (usually a period of two years to six years).  However, in some cases the court will allow the long term disability plan administrator to establish a shorter limitation period for filing suit. Again, this demonstrates the importance of having an attorney review the policy to determine the actual limitation period for filing suit within your particular jurisdiction.

Most policies also require the claimant to apply for “other income” after they are disabled for a set period of time.  Typically, the policy will require the claimant to file for Social Security Disability, and will even assist in the application process, and then take a set off from any amount received.  More often than not, the insurance carrier will terminate the claimant’s long-term disability benefits even though he or she is also collecting Social Security Disability.  Essentially, the insurance carrier will avail themselves of the claimant’s Social Security Disability award by reducing the claimant’s long-term disability payments and then ignore or repudiate that award when considering the claimant’s continued plan benefits.  Although the Social Security Administration’s disability determination is not binding on an ERISA plan administrator, Calvert v Firstar Finance, Inc, 409 F3d 286; 2005 US App LEXIS 8484 (CA 6, 2005), the courts will often consider it as a factor in determining whether the insurance carries made the appropriate decision regarding the denial and/or termination of a Claimant’s benefits.  Napier v Hartford Life Insurance Co, 282 F Supp 2d 531; 2003 US Dist LEXIS 16950 (ED Ky 2003).

Therefore, if you or someone you know plans on filing for short or long-term disability it is very important to have an attorney assist in the application process and review the applicable policy to determine what benefits the claimant is entitled to, whether ERISA is involved and what limitation period is in effect for filing suit.