Nuts and Bolts of Deductible Income: How to Know Whether The Insurer Is Overstepping

by Associate Attorney Noah Breazeale

If you are receiving benefits under a disability policy you got through work, chances are the insurance company funding that policy has the right to reduce your benefits when you receive income from other sources.  In this article, we go over the basics of deductible income, how to know whether the insurer has the right to reduce your benefits, what is typically considered “deductible income” under the policy, and what you can do if the insurance company abuses that right.

Does the insurance company have the right to reduce benefits?

The insurance company’s right to reduce benefits and the rules it must follow when exercising that right are established and governed by the terms of the insurance policy governing the LTD claim.  Under the Employee Retirement Income Security Act of 1974 (“ERISA”), insurance companies have a duty to act “in accordance with the documents and instruments governing the plan insofar as such documents or instruments are consistent with the provisions of ERISA.  See 29 U.S.C. Section 1104(a)(1)(D).  In other words, insurance companies must strictly follow the terms of the governing insurance policy when administering ERISA benefit claims.  In the context of deductible income, this means insurers only have the right to reduce benefits if the policy expressly grants them the power to do so.  Furthermore, the right to reduce only applies to those specific sources or types of income written into the policy’s definition of deductible income.  Unfortunately, most insurers are aware of these legal nuances and almost every group LTD policy will give the insurer the right to reduce benefits and will define “deductible income” broadly.

The policy provisions governing the insurance company’s right to reduce and identifying applicable sources of income are usually included in the policy’s table of contents and will be titled something akin to “Deductible Income Provisions” or “Other Income Provisions.”  As noted above, these provisions will set forth the definition of “deductible income” and list all the sources that are included and excluded from that definition.  Common sources of income included under the definition are:

• Amounts and/or Benefits received under Workers’ Compensation Law;

• Amounts and/or Benefits a person, spouse, and/or children receive as disability payments under the United States Social Security Act;

• Amounts received as disability payments under a retirement plan or pension plan.

Less common sources of income include Veterans Affairs Benefits, Severance/Salary Continuation Benefits, and lump sum settlements.  Beyond defining the contours of deductible income, these provisions will also set forth procedures for notifying the insurer when receiving deductible income, the rules or formulas required for calculating deductible income, and whether  (and to what extent) the insurance company can require people apply for sources of deductible income.

Because the insurance company’s right to reduce benefits depends entirely on the terms of the policy, it is important to obtain a copy of it as soon as possible.  This is especially true if you are worried that your insurance company is wrongfully reducing your benefits for deductible income.  

What happens when an insurance company incorrectly reduces benefits?

Unfortunately, insurance companies sometimes reduce benefits in ways that are inconsistent with, and violate, the policy’s deductible income provisions.  For example, an insurance company might reduce benefits by a source not included in the definition of “deductible income.”  Other times, the insurer might correctly treat another source of income as deductible but ultimately use the wrong formula when calculating how much to reduce benefits.  In situations where the insurer pays the wrong amount and refuses to correct it, it creates what is called an “underpayment” to occur.  In the context of ERISA claims, an underpayment is considered a type of adverse benefit determination.  Under the Department of Labor’s ERISA Claims Procedures Regulations (“DOL Regulations”), the term “Adverse Benefit Determination” means “[a]ny of the following; [a] denial, reduction, or termination of, or failure to provide or make payment (in whole or in part) for, a benefit[…].”  See 29 C.F.R. Section 2560.503-1(m)(4)(i).”  Under this definition, an adverse benefit determination occurs regardless of whether the insurance company sends a written denial letter to defend the underpayment.  This is important because it means affected claimants have the right to appeal and, if necessary, the right to sue in federal court when an insurance company underpays benefits without explanation.  

While filing a lawsuit should generally be avoided, it is sometimes necessary to force the insurance company to address an underpayment of benefits and begin paying benefits correctly under the policy.  In situations where the insurer refuses or ignores a written appeal and administrative remedies are exhausted, 29 U.S.C. Section 1132(a)(1)(B) allows claimants to file a civil action to “recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his right to future benefits under the terms of the plan”  See 29 U.S.C. Section 1132(a)(1)(B).  

We recently helped a client succeed on an underpayment claim by suing an insurance company under Section 1132(a)(1)(B).  In that case, the insurance company was wrongfully reducing our client’s monthly benefits by the client’s award of Veterans’ Affairs Benefits, which was not listed under the policy’s definition of deductible income.  After first appealing to the insurer and submitting evidence, including a copy of the policy, showing the insurer had no authority to reduce for VA benefits, we filed suit under 29 U.S.C. Section 1132(a)(1)(B).  Shortly after filing the complaint and attaching to it the evidence supporting the underpayment claim, the insurance company quickly discontinued the VA benefit reduction and repaid to our client the amounts it had previously been withholding.

What if I believe the insurer is wrongfully reducing my benefits? 

It is an unfortunate fact that most group disability policies will allow the insurance company to reduce your benefits if you receive income from certain sources.  But the right to reduce is not unlimited and is instead expressly limited to the grant of authority stated in the policy.  When there is concern or uncertainty about whether the insurer is calculating benefits correctly, it is important to get a copy of the policy and review the deductible income provisions.  If the insurance company is acting inconsistent with the policy provisions and underpays a claim, ERISA allows a person to appeal that decision to the insurer and, following administrative exhaustion, also allows the person to file a lawsuit under 29 U.S.C. Section 1132(a)(1)(B).  

Ultimately, if you are concerned the insurance company may be wrongfully reducing your benefits or if you have questions about your policy’s deductible income provisions, please contact me or my firm, Eric Buchanan & Associates, PLLC, and we will be happy to speak with you.