Types of Long Term Disability Insurance
By: Eric Buchanan, Chattanooga, Tennessee. eric@buchanandisability.com
As social security representatives, many of us have had disabled clients who tell us they are also being paid long term disability (LTD) benefits, and sometimes that they have been denied LTD benefits. Unless you regularly handle LTD cases, or learn how the complex rules work, there are many traps and pitfalls that can ruin your client’s LTD case if you, as a social security disability practitioner, are not aware of them.
If you are a social security practitioner who does not handle LTD claims, there are still many things you need to be careful about, because sometimes the way you handle your clients’ social security cases may have a significant effect on your clients’ LTD cases. This paper will address what some of those issues are, and how to avoid them or handle them. This paper will also help social security practitioners understand how the issues LTD attorneys regularly deal with so that social security disability and LTD attorneys can work together better.
If you are a social security practitioner who occasionally helps your client with LTD issues, or are thinking about doing so, this paper will also address common mistakes made by less experienced LTD attorneys so that you can do the best job you can for your clients.
This paper is not a comprehensive overview of all the law applicable to LTD claims; a comprehensive paper covering all the legal issues related to disability insurance and its controlling law would be a large book. Similarly, a seminar covering all the issues in depth would be a multi-day seminar similar to the NOSSCR conference. This paper does provide an introduction into some of the most common issues that arise in LTD claims. Additional papers on more in-depth topics of LTD law are available on our firm’s website at www.buchanandisability.com under resources and articles, and some of the specific ones are mentioned throughout this paper.
Private Individual Disability Insurance
When an individual person purchases a disability insurance policy directly from an insurance company or insurance company’s agent, those policies typically offer strong protection against a loss of income due to disability. Many such policies insure the person’s own occupation, provide increasing benefits over time under cost-of-living adjustments (“COLA”), have more generous definitions of disability, provide for partial disability, and generally provide strong coverage when a person suffers a medical disability.
Typically, these private policies do not cover a percentage of a person’s pay. Rather, most policies provide for a specific monthly benefit amount if a person becomes disabled, or a portion of that benefit if the person is partially disabled. Additionally, not only do many policies provide for a COLA, but many policies also have built-in increases in the base coverage (with built-in increases in premiums as well) that apply over the first few years of the policy, to account for the increase in income most professionals typically have. Thus, for example, someone might have a policy with a face value of $6000 per month, with an automatic increase of $500 per month for the first five years, so that, if the insured person accepts the increases, the policy is worth a base of $8500 a month after five years.
Another good feature of these policies is that they do not typically allow for an offset of other benefits, such as social security or workers’ compensation benefits.
Further, because these policies are purchased by an individual directly, and not through an employer, any dispute over coverage or a claim fall under state law. That typically allows for a jury trial, the full scope of remedies allowed for breach of contract, and, in many states, punitive or extra-contractual damages for bad faith.
Of course, these policies are expensive to purchase, and typically are purchased by doctors, other professionals, business owners and executives. However, because they are usually paid for by the individual in post-tax dollars, the benefits paid are paid tax free.
In the industry, the private policies are usually referred to as “individual disability insurance” policies, or “IDI” policies. Often this is shortened to “individual disability,” or “ID,” or just “disability insurance, or “DI” policies.
IDI policies are great policies for the people who can afford them and who purchase them. And when a dispute arises, their rights and remedies can be strong. Our firm would vastly prefer to help someone with an IDI policy over group policies, which are discussed next. However, IDI policies are only a small percentage of the types of disability insurance policies in the marketplace.
Group Long Term Disability Policies
When a policy is offered through work as a group policy, these policies are typically referred to as long term disability, or “LTD” policies. While some of these policies have generous provisions, few are as good as typical IDI policies. And some are so badly written (or written in favor of the insurance company) so as to be worthless.
Almost all LTD policies pay a percentage of the employee’s income before becoming disabled. Most often, this is 60% of the income, but sometimes it is as little as 50% or as much as 70%. Sometimes policies offer a “base” of, say, 50%, and allow the person to pay for a buy-up of another 15%.
However, almost all LTD policies reduce, or offset, the benefits for other income. Other income almost always includes social security disability benefits, and almost always that includes benefits for auxiliaries/dependents. LTD policies are almost always also offset by workers’ compensation benefits and similar benefits. Sometimes the policies are offset by veteran’s benefits, but not always.
Some policies that are more recently issued are now including offset for money recovered from third parties who caused the disabling injuries, allowing the LTD policies to offset for recoveries from the tort case a person who is injured may have.
About the only thing that group policies don’t typically offset for is for income from individual disability policies a person may have purchased outside of work.
Further, most LTD policies purport to allow the insurance company or plan to recover back from the disabled person when full LTD benefits are paid for a while, and later the person wins a social security case, tort case, or whatever. The good news is that most policies aren’t offset by the attorneys’ fees paid to recover social security benefits or other recoveries, although a few even try to recover that amount.
Many policies also only cover a person’s base salary or hourly pay, so that the 60% calculation (or whatever percentage the person is eligible for) is limited to the forty hours of base pay, and overtime is excluded. Also, in too many policies, when someone gets a substantial amount of income from commissions or bonuses, the policies are written to only calculate the benefit based on the much lower base pay.
Another limitation in some policies is that the policies cap the maximum pay that is covered. Sometimes that is a high limit, such as $10,000. However, one really bad policy we have seen (offered by a large carpet company in north Georgia) caps benefits for hourly employees at $1000 per month yet still offsets for social security benefits, resulting in virtually no benefits for the employees with that policy.
Group LTD policies also typically have more restrictive definitions of disability than individual policies. The most common policies provide only two years of disability coverage if a person is disabled from his or her “own occupation;” after that, the disabled person must prove disability from “any occupation.”
Another common provision in group LTD policies is that coverage is limited to 24 months for people who are disabled due to “mental and nervous,” or psychiatric, conditions. Many policies have begun to also limit benefits to 24 months for disabilities that are manifested by “self-reported symptoms.” Thus, many insurance companies will try to cut off benefits after 24 months if the person is disabled due to headaches, for example. Some hotly contested issues occur when an insurance company tries to extend this provision to disabilities such as fibromyalgia, chronic fatigue syndrome, or Lyme disease.
In addition to policy provisions that provide for less coverage than private IDI policies, group policies also typically fall under the federal ERISA law as employee benefits. As is discussed in more detail throughout much of the rest of this paper, ERISA limits the remedies for disabled people who have been wrongfully denied to only the benefits due, plus maybe attorneys’ fees. ERISA also often allows for a more restrictive standard of review, so that the insurance companies and plans often have a large advantage in court.
Also, as explained in more detail below, ERISA case law provides that the review of a denial of benefits is limited to the record before the insurance company. The question for the court is typically not, is this person disabled, or even was the insurance company wrong, but more accurately, “based on the information provided to the insurance company and obtained by the insurance company, was the insurance company’s decision to deny benefits arbitrary and capricious.”
Another limitation in ERISA cases is that the case is “tried” (if we can even use that word) based on written arguments, and maybe oral arguments, in front of a federal judge. There is no jury trial, almost never live witnesses, and sometimes not even oral arguments.
ERISA v. Non-ERISA Cases and Case Selection
Because most disability policies are offered as group policies through work, much of this paper discusses the rules that apply to ERISA LTD policies. Again, a separate discussion about litigating non-ERISA IDI policies would be a multi-day seminar.
While IDI policies are usually more advantageous for the people who buy them than group LTD policies, there are still plenty of LTD cases that are worth helping people with. However, I submit that, when taking on an ERISA LTD case, attorneys need to be more vigilant and pay attention to the facts at the beginning of the case.
If you are going to help a client with an ERISA LTD claim, it is hugely important that the person has a well-documented factual disability case. However, there are other factors to consider early on.
It is crucial to look at the financial picture and to attempt to calculate the net benefits after offsets. As discussed more below, in a typical case where a client has a chance of winning an LTD case, the same client has almost always got to have a good chance of winning the social security case. So, in calculating the benefits in dispute, we recommend that in almost every case, you assume the client is going to win both cases.
Thus, a client who made $36,000 per year, or $3000 per month, who has an LTD benefit at 60%, is fighting for over $1800 a month in LTD benefits. If that same person is 40 and has a 3-year-old, and has a $1000 PIA, and Aux benefits of another $500, that means for the next 15 years or so, the person’s LTD is likely to be offset down to just $300.
On the other hand, a person making $100,000 per year, would often have an LTD benefit of $5000 per month (at 60%). Let’s say the social security benefit for that person is $2600 a month; that leaves another $2400 a month in LTD benefits to fight for.