Disability Insurance FAQs
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Disability Insurance – Frequently Asked Questions

What is disability income insurance?

Disability insurance refers to coverage against loss of income or ability to earn income resulting from accident or illness. It is designed to provide a substitute for earnings when, because of bodily injury or sickness the insured is deprived of the capacity to earn his living. Disability income policies typically provide that an insured is totally disabled if he or she is unable to perform the substantial and material duties of the insured’s own occupation in the usual and customary manner. Some policies provide for “specialty coverage” for various types of occupations that involve specialties (e.g., medical doctors and attorneys). Additionally, some policies, especially group insurance policies, have “any gainful occupation” provisions after one or two years after the insurer has paid disability benefits.

What is the difference between an individual and an employer-provided disability insurance policy?

How an insured obtained his or her disability insurance coverage plays a large role in determining which law governs the dispute, and in turn which remedies are available.

First, if an insured purchased the insurance policy directly from an insurance company – for example, through an insurance agent, insurance broker or trade association – the insured owns an “individual disability insurance policy,” and state law will govern the processing of the claim and any resulting litigation. In California, this means that an insurance company can be liable for breach of contract and breach of the implied convent of good faith and fair dealing (also known as “bad faith”). Through the bad faith cause of action, the insured can possibly collect emotional distress damages, foreseeable financial losses and certain attorneys’ fees incurred to force the insurance company to pay the policy benefits. Further, the insurer can be liable for punitive damages, if there is evidence the insurance company acted with malice, oppression or fraud. (For more information about “bad faith,” please visit our bad faith FAQ (https://mslawllp.com/faqs/insurance-bad-faith-faqs/.)

Second, if the disability insurance was provided as a benefit of employment, in most cases, the disability insurance claim will be governed by a federal law called the Employee Retirement Income Security Act of 1974 or ERISA. This means that almost all employee benefits plans that provide such benefits as health insurance, life insurance or disability insurance are regulated under ERISA. Unlike California state law, under ERISA, the claimant is not entitled to collect future benefits, bad faith or punitive damages. However, if the claimant prevails at trial, in addition to past-due benefits and interest, the ERISA administrator will likely be liable for all of the attorneys’ fees incurred in litigation. (For more information about ERISA, please visit our ERISA FAQ https://mslawllp.com/faqs/erisa-faqs/.)

Finally, in some cases where the disability insurance was provided by or through the employer, it will be governed by state law, and not ERISA. This is a rare occurrence, which typically occurs when employer is a government entity or religious organization.

What are the typical provisions contained in a disability income policy?

“Notice and Proof of Loss”: The burden of proving disability is on the insured. Disability policies require the insured to notify the insurer of a potential claim, to submit a sworn proof of loss and to cooperate with any investigation. The form and content of notice and proof of loss is determined by statute. See Cal. Ins. Code §§ 10350.5–10350.7. Proof of loss is usually required within 90 days after the date of loss. However, Courts have interpreted these provisions with varying degrees of flexibility. A delay in providing notice or proof of loss does not invalidate “any claim if it was not reasonably possible to give proof within such time.” See Cal. Ins. Code § 10350.7. Furthermore, under the “notice-prejudice rule,” an insured’s delay in giving notice of claim or proof of loss does not bar recovery unless the insurer is actually prejudiced by such delay; otherwise the delay is excused as immaterial. If an insurer denies liability prior to the time proof of loss is required, then proof of loss is waived. Finally, an insurer may be held to have waived the requirement of a timely proof of loss if the delay in the presentation is caused by the insurer or if the insurer failed to object promptly and specifically on that ground. Generally, courts have looked favorably on claims of waiver by insured on the time requirement for proof of loss in order to avoid forfeiture of benefits. See Beasely v. Pacific Indem. Co., 200 Cal. App. 2d 207, 209 (1962).

“Total disability” provisions: these provisions typically provide that an insured is totally disabled if he or she is unable to perform the substantial and material duties of the insured’s own or usual occupation in the usual and customary manner. “‘(T)otal disability’ does not signify an absolute state of helplessness but means such a disability as renders the insured unable to perform the substantial and material acts necessary to the prosecution of a business or occupation in the usual or customary way. Recovery is not precluded … because the insured is able to perform sporadic tasks, or give attention to simple or inconsequential details incident to the conduct of business …. ” Erreca v. Western States Life Ins. Co., 19 Cal. 2d 388, 396 (1942). Note that ERISA policies issued as part of an employee benefit plan governed by ERISA are interpreted under federal common law standards, rather than state law.

“Residual/Partial disability” provision: these provisions typically provide that if the insured is not totally disabled and can perform “one or more” of the substantial duties of his or her employment, they may be entitled to benefits. This coverage protects against loss of income rather than the inability to work. These provisions typically define “partial” or “residual” disability in terms of the percentage of duties the insured is able to perform and the percentage of lost earnings. For example: “‘Residual Disability’ means that due to Injury or Sickness: a. (1) You are unable to perform one or more of the important duties of Your Occupation; or (2) you are unable to perform the important duties of Your Occupation for more than 80% of the time normally required to perform them; and b. Your Loss of Earnings is equal to at least 20% of Your Prior Earnings while You are engaged in Your Occupation or another occupation ….” Partial or residual disability benefits are usually set at a percentage of total disability benefits (in proportion to the degree of disability) and are payable so long as the disability continues or until age 65.

“Own occupation” provision: “Own occupation” provisions require that disability benefits be paid if the insured is unable to perform the material and substantial duties of his/her customary occupation in the usual and customary manner and with reasonable continuity. However, the precise definition of “own occupation” differs from policy to policy based on the precise language contained in the policy. Some policies provide benefits if an insured is unable to perform the duties of the insured’s own occupation as that job was actually performed. Under these types of policies, insurers and administrators have a duty to carefully evaluate the insured’s material and substantial job duties when determining whether the insured is disabled from insured’s own occupation. In doing so, insurers and administrators generally must consider the employer’s description of the material duties of the insured’s occupation and the insured’s own description of insured’s occupational duties. To a lesser extent, the insurer may look at the description of the position as it is traditionally performed. However, the latter is typically not very relevant to the inquiry. With these types of policies, it does not necessarily matter that the insured is working in another occupation as this would not disqualify the insured from collecting benefits.

Other types of disability insurance policies define “own occupation” as “not engaged in any other occupation.” With this type of policy, if an insured is working in another occupation, then he/she will not likely qualify for disability insurance benefits.

Yet other policies define disability from an insured’s “own occupation” as the inability to perform the material duties of a vocation of the same or similar general characters is typically performed in the general economy. In this type of policy (typically found in group insurance policies), the insured’s actual occupational duties are relevant but carry less weight. Under these policies, the insurers and administrators are not limited to considering the insured’s own occupation duties, but may consider the way the occupation is generally performed in the national economy. This often involves using the Department of Labor’s Dictionary of Occupational Titles. Under these policies, the insurer or administrator will take the position that it can deny an insured’s claim if it determines that the insured is capable of performing his/her occupation generally, even if the insured’s actual occupation is more demanding or strenuous. These “own occupation” provisions give insurers and administrators more leeway in determining what job description to apply to a particular insured. However, the descriptions applied are often inaccurate and do not fit the insured’s occupation. As such, these denial decisions are often incorrect and a basis for appeal.

“Any occupation” provision: “Any occupation” means disability benefits must be paid if the insured is disabled from working “in his customary occupation or in any other occupation in which he might reasonably be expected to engage in view of his station and physical and mental capacity and given his education, training and experience. The occupation must be “gainful,” which usually means that it pays the insured at least 50%-60% of his pre-disability income. It is common for insurers to misapply this definition. For example, in determining whether the insured is “totally disabled” (under an “own occupation” or “any occupation” policy), the job market for his or her services must be considered. If employers are generally unwilling to hire persons with such a disability, the lack of employment prospects is evidence of disability. See Moore v. American United Life Ins. Co., 150 Cal. App. 3d 610, 630 (1984).

“Offset” provisions: Disability policies (especially group policies) often provide for offsets (usually dollar for dollar reductions in benefits) where income is received from other sources on account of the same disability (e.g., income from other disability income policies, Social Security disability income benefits, state disability income or workers’ compensation benefits, and settlements in lawsuits for the injury causing the disability). By far the most important of these offsets is for Social Security disability income. Often times, the policies provide that insureds must sign reimbursement agreements and apply for such benefits, otherwise, an estimate can be made.

“Elimination period” provision: Almost all policies establish an “elimination period” following onset of a disability (e.g., 30, 60, 90, 180 days) during which no benefits are payable. Under such a policy, the insured must establish that he or she is “totally disabled” continuously during the elimination period. If he or she returns to work during the elimination period, there is no coverage. See Moore v. American United Life Ins. Co., 150 Cal. App. 3d 610, 618 (1984).

“Illness vs. Accidental Injury” provisions: Disability insurance policies often distinguish between disabilities caused by illness and those resulting from accidental injury. Typically, a shorter period of benefits is provided for disability based on sickness (e.g., 2 or 3 years, or to age 65); while longer benefits are payable for disabilities resulting from accidental injury (e.g., lifetime payments). A disability results from “accidental injury” if the accident is a proximate cause of the disability. It is enough that the accident “triggered” or set in motion the chain of events that ultimately resulted in the insured’s total disability.

Limitation on Benefits for Mental Illness: Disability policies often provide more limited benefits for a disability based on “mental illness.” These provisions, which are generally enforceable, typically limit benefits to a period of 24 to 36 months. These provisions may or may not be enforceable depending on the language of the limitation provision and depending on the nature of the condition at issue. For example, conditions commonly thought to be primarily psychiatric in origin but that are organically based (e.g., autism, schizophrenia, bipolar disorders) may not be subject to the provision. See Bosetti v. United States Life Ins. Co. in City of N.Y., 175 Cal. App. 4th 1208 (2009). Most policies specifically define the term “Mental Illness” to include a specific list of mental illnesses that are subject to this provision. However, if a physical condition is also separately totally disabling, then a disability claim is not generally limited by this provision.

Preexisting Condition Exclusions: Disability policies often limit or exclude coverage for disabilities attributable to preexisting illness or disease. These provisions differ substantially and it is important to review the applicable language. Some policies require the illness “first manifest” during policy period. In order for this provision to apply, typically the insured must have been correctly diagnosed and treated for the condition causing disability before the policy was issued. If this language is used to contest the policy, it may not be enforceable, depending on the contestability period. Note that a preexisting condition exclusion applies only if the insured’s disability is substantially and directly caused by the preexisting condition. If a condition is not diagnosed before the policy issuance date, the exclusion may not apply.

“Receiving Physician’s Care” and “Appropriate Care” provisions:
Disability policies often require, as part of the disability provision, that the insured must be “receiving a physician’s care” or is receiving “appropriate care” for the condition causing disability.

What law governs disability insurance claims disputes?

When making a disability insurance policy claim, it is important to clarify whether the insured has an individually-purchased policy or an employment-based group policy. If the insured is a member of a non-governmental employment-based group disability insurance plan, the disability insurance will be governed by a federal law called the Employee Retirement Income Security Act of 1974 or ERISA, which establishes the standards for the parties responsible for administering an ERISA plan and claim and has stringent requirements for processing disability insurance claims. If the insured owns an individual disability insurance policy, any required deadlines and standards in processing a disability insurance claim will be administered according to state law. As discussed more in the Insurance Bad Faith FAQs and ERISA FAQs sections, it is critical to determine whether ERISA or state law applies as the available remedies and potential damages are very different.

What timelines govern a disability insurance claim?

In making a disability claim, an insured will first want to clarify whether he/she has an individually-purchased policy or an employment-based group plan. If the insured has a non-governmental employment-based group policy, the plan will be governed by a federal law called the Employee Retirement Income Security Act of 1974 or ERISA, which sets the standards for the party responsible for administering an ERISA plan. ERISA has stringent requirements for processing benefit claims. If the insured owns an individual disability insurance policy, any required deadlines and standards in processing a disability insurance claim will be administered according to state law. California law is particularly beneficial to disability insurance claimants.

General Timeline for ERISA governed disability insurance plans:

  • A claim should be approved or denied within 45 days of receipt of the claim. See 29 C.F.R. § 2560.503-1 (f)(3).
  • Should more time be necessary to review a claim, the plan can extend the time frame for up to 30 days, but the plan must inform the insured within the initial 45 days that additional time is needed, why the additional time is needed if there are any unresolved issues or additional information needed, and when a final decision will be rendered. See 29 C.F.R. § 2560.503-1 (f)(3).
    • Should additional information be needed, the insured will have 45 days to provide the additional information. See 29 C.F.R. § 2560.503-1 (f)(3).
    • Once the additional information has been provided the claim should be decided no later than 30 days or during the timeframe set out by the policy, whichever comes first. See 29 C.F.R. § 2560.503-1 (f)(3).
  • If a disability insurance claim is denied, the insured has 180 days to file an appeal. See 29 C.F.R. § 2560.503-1 (h)(3)(i).
  • A decision on an appeal must be made not later than 45 days after receipt of the insured’s request to review a denied claim. See 29 C.F.R. § 2560.503-1 (i)(3).
    • Should special circumstances require an extension, the plan may take up to 45 more days, but the plan must provide an explanation in writing of the special circumstances along with providing a date by which the plan expects to make a decision on the claim. See 29 C.F.R.§ 2560.503-1 (i)(3).
  • Traditionally, an ERISA matter in the state of California could be brought four years after all administrative remedies are exhausted. However, a recent United States Supreme Court ruled that an ERISA plan can impose a shorter contractual time limitation, as long as the period provided is not “unreasonably short.” In Heimeshoff v. Hartford Life & Accident Insurance Co., 134 S. Ct. 604 (2013), the Court explained that a plan’s contractual limitation periods should ordinarily be enforced, unless the time limitations is “unreasonably short” or a controlling statute prevents the limitations period from taking effect. Unfortunately, the Heimeshoff decision left open the issue of just how short a plan’s contractual limitation must be in order to be considered unreasonable. Thankfully, post-Heimeshoff, at least one district court has ruled that 100 days is not a reasonable amount of time to give a plan participant to file a lawsuit under ERISA. See Nelson v. Standard Insurance Company, 2014 U.S. Dist. LEXIS 119179 (S.D. Cal. Aug. 26, 2014). For disability claims, Heimeshoff probably means that California Insurance Code Section 10350.11 would apply to override any shorter limitations period found in the plan language, a result that aids plan participants. This section provides for a limitations period of three years after the time written proof of loss is required to be furnished to the insurer.

General Timeline for individual disability insurance policies governed by California law:

  • A claim should be approved or denied within 30 calendar days of receipt of all necessary information to determine liability for a claim. See Cal. Ins. Code §10111.2 (a).
    • The 30-day period does not begin to run until all relevant medical information has been received, all relevant information has been requested and received or if an investigation for fraud has been reported to the California Department of Insurance and is being conducted. See Cal. Ins. Code § 10111.2 (a) (1-3).
    • Should the insurer require additional information to conclude the claim investigation then it must notify the insured in writing within 30 days after the claim is filed, and provide a written list of all information reasonably need to investigate the claim. See Cal. Ins. Code § 10111.2 (b).
  • California law requires an insured wait 60 days after filing a claim to file suit. See Cal. Ins. Code § 10350.11
  • An insured typically has three years after the time written proof of loss is furnished to an insurer to file suit. See Cal.Ins. Code § 10350.11.

How does a claimant make a disability claim?

The most important document in filing a disability insurance claim is the disability insurance policy, or if the insured is a member of a group insurance program for which ERISA applies, the summary plan description and group insurance certificate. These documents typically provide a detailed overview of how the plan or policy works, what benefits it provides and how to file a claim for benefits. If the insured is a member of a union or a plan associated with a collective bargaining agreement, he/she should also check any applicable collective bargaining agreement’s procedures for filing, claims, grievances and appeals. If the insured does not have a copy of the disability insurance policy or summary plan description, the insured should immediately make a written request for a copy of his/her policy, summary plan description and/or group certificate that contains the claims procedures. The plan administrator in ERISA matters is required by law to provide the insured with a copy upon written request. The insured will also want to contact his/her insurance agent or plan administrator to obtain claim forms.

It is important to keep copies of all letters, so the insured has an easily accessible timeline in the unfortunate event he/she has to pursue a claim through litigation. Also, it is the best policy to send all letters by certified mail with return receipts, so there is a record of when documents were received and who is processing those documents.

When filing a disability insurance claim, the insured will want to include, among other things, a detailed discussion of his/her medical condition(s), why he/she cannot perform the material and substantial duties of his/her occupation in the usual and customary manner, a list of medical providers he/she has seen and a certification from a medical provider as to why the insured is totally disabled. The more information that the insured presents at the outset of the claim the less likely he/she will experience unnecessary delays.

Remember, a disability insurance claim is a very proof intensive process, and the insured should document all interactions with insurer, plan administrators, employers and representatives of the insurance company (such as insurance agents) every step of the way. Always memorialize all telephone or in-person conversations by letter summarizing what was discussed, and send it to all parties involved in the processing of the claim to confirm the communication occurred. Also, the insured should maintain a file of everything related to the claim and keep a chronology of claim related events. This way should the insured be forced into litigation, there is a clear and definitive record of how the claim was handled.

What is an incontestability clause and how does it work?

An incontestability clause is a policy provision that prevents an insurer from denying a claim or rescinding (i.e., voiding) a policy after it has been in force for a specified period. California Insurance Code section 10350.2 states that all disability insurance policies require an incontestability provision, and further provides that every disability policy must contain specific form language either limiting the contestability period to two years or having no limitation in time, but requiring that insurer prove fraudulent intent. During the contestability period an insurer can void the policy or deny a claim based on a material misrepresentation made on the application. A material misrepresentation is a statement made by a potential insured person in the application process that is factually incorrect. The misrepresentation is considered material if knowledge of the misstated fact would have caused the insurer to refuse to issue the policy or would have caused the insurer to issue the policy with limitations or a higher premium.

An insurer must take immediate action to cancel the policy or deny the claim should it discover a material misrepresentation during the contestability period. A mere declaration that it intends to void the policy will have no legal force unless the policy is rescinded within the contestability period. An insurer can potentially waive the right to rescind the policy in the contestability period if it continues to accept premium payments after it has asserted that it can rescind the policy. See Anaheim Builders Supply, Inc. v. Lincoln Nat’l Life Ins. Co., 233 Cal. App. 2d 400, 411(1965). Furthermore, an insurer cannot claim a material misrepresentation occurred if the applicant fails to appreciate the significance of the information. See Miller v. Republic Nat’l Life Ins. Co., 789 F.2d 1336, 1340 (9th Cir. 1986) (applying California Law).

If the contestability period expires, the insurer will be prohibited from rescinding the policy based upon a material misrepresentation in the application process. However, many incontestability provisions set forth an exception for fraudulent misrepresentations discovered after the two year contestability period. These exceptions allow insurers to rescind the policy if there is a factual showing by the insurer that the insured provided false information on the application with the intent to deceive. Whether fraud has occurred or a simple misstatement was made will be determined by the facts of each particular case. Therefore, the incontestability provision attempts to strike a balance between providing predictable insurance coverage and protecting the rights of the insurer against misrepresentations by applicants. If an insurer asserts that it is entitled to rescind the policy because of a material misrepresentation, it is imperative the insured contact experienced disability insurance attorneys to determine whether the insurer’s attempt to rescind the disability insurance policy was improper.

What information does the insurance company require as proof of claim?

When a claimant submits a claim for insurance benefits, the insurance company requires that certain information be provided in order to support that claim. The proof of claim requirements vary from policy to policy, but are usually contained either in the Policy’s “Definitions” section or in a section explaining how to submit a claim.

Here is an example of a proof of claim provision from a Long-Term disability insurance policy:

What Information Is Needed as Proof of Your Claim?

  • That you are under the regular care of a doctor
  • The appropriate documentation of your monthly earnings
  • The date your disability began
  • Appropriate documentation of the disabling disorder
  • The extent of your disability, including restrictions and limitations preventing you from performing your regular occupation or gainful occupation
  • The name and address of any hospital or institution where you received treatment including all attending doctors
  • The name and address of any doctor you have seen

Obviously, “proof of claim” provisions, sometimes called “proof of loss” provisions, also vary depending on the type of policy. Here, because this is from a Long-Term disability insurance policy, the insurance company is seeking information regarding the claimant’s disability, restrictions and limitations, occupation and earnings. However, a proof of claim provision for a health insurance policy would seek specific information regarding the date of the disputed treatment and the amounts paid by the claimant for that treatment. A proof of claim provision for a life insurance policy might require the claimant to provide a death certificate and other related documents.

A claimant should always strive to provide all of the information that the insurance company requests as part of the claim review process. A failure to comply with the proof of claim provision gives the insurance company an easy reason to deny an otherwise payable claim.

What will a claims administrator/insurer do to investigate a claim?

Insurers engage in numerous actions to investigate claims. All will initially require that an insured complete claim forms and certifications from doctors. Once they obtain these forms and authorizations to obtain medical and financial records, they commence the claim investigation by requesting the claimant’s medical information and records. They will also typically contact employers to obtain employment information such as occupational duties, time of employment, hours worked, supervisors, etc. Insurers may also engage in the following activities: background checks, medical examinations, medical and financial consultations, surveillance, telephonic or in-person interviews, workplace interviews, internet searches, among other things. Very often, careful scrutiny of these actions will reveal unreasonable actions.

Can social media impact a claim for disability insurance benefits?

There is a high likelihood that social media could impact the insured’s claim for disability income benefits. Insurers are increasingly utilizing social media to investigate the legitimacy of disability claims. Generally, information on social media sites can be obtained without the insured’s knowledge or permission. In fact, recent case law suggests that social networking sites are not considered private and may be subject to discovery by defendants. Increasingly, insurers are relying upon electronic surveillance to paint claimants in an unflattering light based upon social media entries and photographs. The best practice when filing a claim for disability income benefits is to remove cancel or suspend all social media accounts.

However, should the insured choose to keep social media accounts active, we recommend that the insured ensure that all of his/her social media accounts are set to the most restrictive privacy setting possible. The insured should take every possible step to ensure that none of his/her personal information and any questionable photographs are accessible to the public.

The insured should take the following precautions while in the process of filing a claim or litigating to recover disability benefits:

  1. Set all social media accounts to the most restrictive privacy settings.
  2. Refrain from connecting, linking up with or “friend-ing” anyone that the insured does not know personally and cannot identify.
  3. At no point should the insured make any comment about his/her case or matters surrounding the disability insurance claim or case.
  4. Avoid making any comments about physical or mental conditions. These status comments can potentially be used to show that the insured’s condition has improved or is inconsistent with what the insured has represented.
  5. Do not post anything about meeting with lawyers or a lawyer’s staff members. This can result in a challenge to the attorney-client privilege.
  6. Be very discrete about any photos posted, and avoid posing for any photos that can be misconstrued as the insured participating in a sporting event or physically challenging activities. Photographs showing physical activity inconsistent with the insured’s claims can be very damaging.
  7. Do not post any “party” photos that show the insured drinking alcohol or otherwise being engaged in activity that the insurer can potentially misconstrue as reckless or irresponsible behavior.
  8. Do not send any e-mails regarding the insured’s claim or case to anyone other than the insured’s attorneys. Emails often contain emotional content that may be inconsistent with the insured’s recollection if the insured is deposed later in litigation. Additionally, the insurer may attempt to subpoena these emails.
  9. At no time should the insured participate in any blogs, chat rooms or message boards concerning insurance companies.

There is no guarantee that an insurer will attempt to access the insured’s social media, but the increasing likelihood that an insurer will investigate a disability insurance claim through social media, strongly suggests that the insured should take every precaution to minimize any adverse effects that his/her social media could have on a claim. After all, the insured’s latest status post could be the determining factor between a generous settlement and failure to collect any benefits.

Are employment prospects considered when determining total disability?

In determining whether an insured is “totally disabled” (either under an “own occupation” or “any occupation policy”), the job market for the insured’s particular occupation must be considered by the administrator or insurer. For example, if employers in an insured’s particular occupational field are generally not willing to hire individuals with the insured’s disability, the lack of employment prospects would be evidence of “total disability.” Moore v. American United Life Ins. Co.,150 Cal. App. 3d610, 630 (1984). If an insured has returned to work or accepted other employment, evidence of this would be relevant to determination of a claim for total disability. However, simply performing certain duties does preclude a finding of total disability if the insured performed those duties against the advice of his/her physician. For example, the fact that an insured performed certain material duties of his/her occupation during the time for which he/she is claiming disability benefits is not conclusive evidence that the insured’s disability was not total if reasonable physicians would advise against doing so. See Fitzgerald v. Globe. Co. of N.Y., 84 Cal. App. 689, 698 (1927).

What are the typical reasons an insurer will deny a claim?

In the vast majority of cases, the reason that an insurer denies a claim for long-term disability or short-term disability benefits is because of a determination that the medical evidence does not support the claimant’s assertion that he or she is unable to return to the workforce to perform the substantial and material duties of his or her occupation. Even when a claimant has records from his or her personal physician stating that the claimant is unable to work, the insurance company can, and often will, still deny a claim for long-term disability or short-term disability benefits.

One common explanation given is that the claimant failed to provide “objective” evidence of the disability. For example, a claimant may assert that a mental condition, chronic fatigue, fibromyalgia or chronic pain is disabling. Because these and other complaints cannot be easily verified by “objective” evidence such as an X-Ray, MRI or blood test, the insurance company may allege that the claimant has presented insufficient evidence of the total disability or partial disability. However, is most cases, the insurance policies do not explicitly require that “objective” evidence is necessary to support a claim, and thus such a denial is likely improper and can be challenged on appeal or in litigation.

Another common insurance company tactic is to focus on one statement by a doctor or one test result, and argue that document alone supports a denial decision; even if all of the other available medical information supports the claim. This again is improper, as a company is not permitted to focus on one medical document to the exclusion of other evidence that supports a claim for disability. This is especially true when a treating physician repeatedly, and consistently, supports the claim for long-term disability or short-term disability benefits.

Another very common denial tactic used by disability insurers is to hire a nurse or a doctor to review the medical records, and offer an opinion regarding the claimant’s ability to work. This “paper review” is typically completed without examining or even contacting the claimant and without contacting any of the treating physicians. Not surprisingly, this nurse or physician, who is paid by the insurance company, will typically provide an opinion that the insurance company can use to deny the claim. While numerous courts have criticized this practice in certain circumstances, insurance companies continue to rely on this tactic to deny a claim.

In addition, many long-term disability or short-term disability policies have what are known as “any occupation” provisions and once the claimant reaches the time period when the “own occupation” provision is no longer applicable, the claim is denied because the claimant can allegedly work in a gainful occupation for which the claimant is qualified by his or her education, training and experience.

Other reasons given by disability insurers to support a claim denial are late notice of a claim, application of policy exclusions, a failure to cooperate, failure to provide access to medical documents or failure to attend a scheduled examination.

Properly and adequately responding to long-term disability or short-term disability claim denials often requires the involvement of highly experienced attorneys such as the McKennon Law Group PC to assist with the appeal of the denial decision or to initiate litigation to overturn the decision.

What does an insured do when his/her insurer denies a disability insurance claim?

If a policy is not governed by ERISA, then the next step following an insurer’s denial of a claim would generally be to bring a civil lawsuit against the insurer, since unlike under ERISA governed policies, there is no requirement that the insured submit an appeal. However, an insured should review the policy and denial letter to ensure that he/she has completed all the necessary steps for claiming disability benefits. After doing so, the insured should consult with an experienced disability insurance attorney regarding bringing a civil action. Most attorneys, including the McKennon Law Group PC, will take a meritorious case on a contingency fee basis (meaning the insured does not pay a fee unless there is some type of recovery from which a fee may be earned).

If a policy is governed by ERISA, then the insured cannot immediately file a civil action to recover disability insurance benefits until he/she appeals the initial claim denial. Instead, ERISA requires that the insured first appeal the initial determination in accordance with procedures contained in the plan documents/policy. Under the Department of Labor Regulations, an insured has no more than 180 days to appeal a denial decision relating to disability insurance benefits. If the insured does not timely appeal an adverse benefit decision, then he/she may lose the right to collect benefits under the Plan. When an insurer denies a disability insurance claim, it is required to advise the insured of the specific reasons for the denial and describe any additional material or information necessary to perfect the claim. Additionally, the insurer must inform the insured of the plan’s review procedures and inform the insured of his/her right to file a subsequent civil action. However, the insurer never tells the insured that he/she will not be allowed to use new evidence to support a subsequent civil action. Because the insured may be limited to the information contained in the Administrative Record in the lawsuit, it is crucial that the Administrative Record contains all information that supports the insured’s disability insurance claim.

As such, following denial of a disability insurance claim, the insured should immediately consult with an experienced disability insurance ERISA attorney and discuss appealing the insurer’s initial decision. As discussed above, time is of the essence and the insured does not want to risk losing disability insurance benefits by failing to file a timely appeal. But, the insured should not simply submit an appeal stating that he/she disagrees with the insurer’s denial decision. The insured should have an attorney prepare the appeal and ensure that the file contains all of the documents and information needed in a subsequent lawsuit. Specifically, a qualified attorney can help the insured review the insurer’s often voluminous records and identify any problems or irregularities in its initial denial. An experienced disability insurance ERISA attorney can also ensure that these problems or irregularities are noted in the Administrative Record and are backed up by applicable case law citations. Moreover, when confronted with the arguments of experienced disability insurance ERISA attorneys such as McKennon Law Group PC, the insurer or plan administrator will often reverse itself and approve the claim for benefits without the need to file a lawsuit.

What should an insured do if the insurer improperly lapses a disability insurance policy?

A lapse in coverage occurs from an insured’s failure to pay a scheduled premium or the insured otherwise manifesting intent not to renew the policy. Express provisions in the disability insurance policy provide for the legitimacy of the insurer to allow a disability insurance policy to lapse for failure to pay premiums. However, California law requires that disability insurance policies include a grace period during which coverage remains in effect even if the renewal premium is not paid before the expiration of the policy period. Payment of the renewal premium during the “grace period” will prevent any lapse in coverage. Insurers are required to provide the insured with a written statement outlining the specific reasons for cancellation and a summary of his/her rights under the California Insurance Code. The written notice must be provided at least 30 days prior to the expiration of the policy.

If the insurer improperly lapses the insured’s policy, it is important to take immediate action. The first step is to contact the insurer and insurance agent to confirm that the policy has indeed lapsed and is not currently in a grace period. If the policy has indeed lapsed, then the insured should inform the insurer and the agent of the impropriety of the policy lapse, and request that the insurer reinstate the policy. Where a policy has lapsed for nonpayment of premiums, the insurer may offer to reinstate the policy upon receipt of the unpaid premiums. Typically, an insurer may condition such an offer on receipt of a new application so it can underwrite the policy based upon new/updated medical information (which means that if the insured’s health has materially changed for the worse, the premiums could be much more expensive or the insured may not even be insurable!). Insurers often will exclude coverage for losses between the lapse date and reinstatement date. Insureds should be advised that an insurer that receives a new application in conjunction with policy premiums is required by California law to notify the insured of any decision to reject the application within 45 days or the policy will be reinstated.

Furthermore, should the insurer act as if the policy is still in force through misleading representations, by retaining premiums or through conflicting notices for past-due payments, then it may be deemed to have waived its right to cancel the policy. If the insurer attempts to exclude coverage for losses because of improper lapse it is important to remind them of the circumstances that caused the lapse and document the entire chain of events in a formal letter to the insurer. It is also important to assess the agent’s actions because it may be possible to render the insurer responsible for the negligent actions of the agent, who may also independently liable for the wrongful lapse. This area of potential liability is extremely complicated under the law so the insured should talk to an experienced disability insurance attorney about exploring his/her legal rights further.

What are the time limits (statute of limitations) for suing an insurer?

Every disability policy issued in California must contain a provision barring a action on the policy until 60 days after filing written proof of loss or more than three years after the time such proof of loss “is required to be furnished.” Ins. Code § 10350.11. The three-year period runs from the date the written proof of loss is required to be furnished, which is normally 90 days after the date of loss. California’s Fair Claims Regulations require the insurer to disclose applicable time limits to first-party insureds. If they are not represented by counsel, they must give them written notice of any statute of limitations or other time period requirement upon which the insurer may rely to deny a timely claim. See 10 Cal. Claim Regs. §§ 2695.4, 2695.7(f). Insurance bad faith claims are typically governed by a two-year statute of limitations in California.

Under ERISA, if the policy does not provide a contractual limit on time to sue, it is subject to the state’s applicable statute of limitations (in California, under Cal. Code Civ. Proc. § 337(1), it is 4 years). In that case, the statute of limitations for “an ERISA cause of action accrues either at the time benefits are actually denied” or “when the insured has reason to know that the claim has been denied.” Id. If the ERISA policy does contain a specific, shorter contractual time limitation, it will be enforced unless the court ruled that the contractual limitation period is “unreasonably short.” See Heimeshoff v. Hartford Life & Accident Insurance Co., 134 S. Ct. 604 (2013). For disability claims, Heimeshoff probably means that California Insurance Code Section 10350.1, which provides for a limitations period of three years after the time written proof of loss is required to be furnished to the insurer.

Can an insured sue for future policy benefits and attorneys’ fees incurred in bringing a lawsuit against an insurer for disability benefits?

Yes. Under California law, if an insured claimant can prove that the insurer acted in “bad faith” then an insured can recover future policy benefits and attorneys’ fees. If ERISA applies to an insurance claim, attorneys’ fees are often recoverable.

What is a lump-sum buyout of a long-term disability insurance claim?

A lump-sum buyout is when the insurance company pays the insured a one-time, lump-sum payment to “buyout” the disability insurance claim and policy. In exchange for that payment, the insured gives up his or her rights under the long-term disability insurance policy, forever. After the payment, the insured has no more rights under the policy and the insurance company has no obligation to make any additional payments. However, a lump sum buyout provides the insured with a sum of money to invest, and can also provide peace of mind. A lump-sum buyout is available even if the disability insurance coverage was provided by the insured’s employer and the claim is governed by ERISA.

When does an insured have the opportunity to consider a lump sum buyout of a long-term disability insurance claim?

While a lump-sum buyout is not advisable or available in every situation, there are certain instances in which a lump sum disability insurance policy buyout might be worth considering. However, the insured must be aware that an insurance company will only consider offering a lump-sum buyout if it feels it can save money in the long run. That being said, there are two primary times in which a lump sum buyout might be available. First, when the insured has been receiving benefits for an extended period of time, and the underlying medical condition is accepted by the insurer as being permanent and without the possibility of major improvement. In this situation, with its ongoing liability beyond any reasonable dispute, an insurer might consider the possibility of making a one-time payment, rather than making monthly evaluations of the claim until the end of the policy (typically age 65 or the Social Security Retirement Age).

The other situation when a lump sum buyout might be available is if the insurer concludes determines that the insured no longer qualifies for benefits under the policy and decides to deny the claim. In this situation, the insured will need to hire an attorney with experience litigating disability insurance claims to handle the claim and to potentially file a lawsuit to recover benefits owed under the policy. A buyout can occur either prior to litigation or once a lawsuit is filed. Once litigation has begun, the insurance company maybe be receptive to a lump sum buyout, after the filing of the Complaint in the state or federal court, during a mediation, during discovery (when large costs are about to incurred), right before trial or even during or after trial. Each of these events represents an opportunity to obtain a lump sum buyout from the insurance company.

If an insured is interested in negotiating a lump sum buyout, whether initiated by the insured or the insurance company, the insured is best served by consulting with an attorney experienced negotiating lump-sum buyouts. Attorneys who have experience negotiating lump sum buyouts with insurance companies can help ensure that the lump sum settlement is for the largest amount possible.

What factors are important for properly calculating the value of a lump-sum buyout of a long-term disability insurance claim?

When an insured is considering a lump sum buyout, the most important and frequent question is “what is my disability insurance policy worth?” The answer to this complicated question can only be answered by considering many different factors.

The most important factor when determining the value of the disability insurance policy is the net present value (“NPV”) of the policy, calculated using monthly benefits payable under the policy and the benefit period. For example, if an insured is receiving $10,000 per month, and has seven years left on the policy, it may appear as if the policy is worth $840,000 ($10,000 times 12 months times seven years). Unfortunately, the policy is not actually worth $840,000, but rather the NPV of $840,000, that is, how much money today is needed to have $840,000 in seven years.

Insurance companies realize that calculating the NPV of a claim can be difficult, and have staff actuaries whose job it is to calculate the NPV value of policies/claims. One of the most important factors in calculating the NPV is assessing which discount rate to utilize. The higher the discount rate, the lower the NPV and vice versa. Thus, when an insurance company is calculating the NPV of a claim, at first, it always uses an unreasonably high discount rate to lower the NPV. However, an insured will want to argue that a lower discount rate should be used. In addition, calculation of the proper discount rate can be further complicated if the policy has a cost of living adjustment provision that allows the benefits payable under the policy to increase by the rate of inflation. Accordingly, an insured should consult with a law firm with experience calculating the NPV value and negotiating lump-sum buyouts. Indeed, because insurers are susceptible to allegations of heavy-handed tactics in undervaluing a disability insurance claim, most insurers will suggest, or even require, that an insured consult an attorney before engaging in negotiations for a lump sum.

Other factors that influence how much the insurer will offer and pay in a lump sum buyout include, but are not limited to, the insured’s mortality/life expectancy and whether there is any chance the insured will be able to return to work. For example, if the insurance company believes that the insured will die soon, it will argue that the NPV is very lower. However, such an argument can be refuted with the right argument and evidence.

The application and interpretation of these factors can be critically important in determining the value of a disability insurance policy, and the insured should not expect that the disability insurance company will offer a lump sum equal of the full value of the disability insurance claim. In fact, the insured should expect that the insurance company is going to make every argument possible to reduce the amount of the negotiated lump sum buyout. Indeed, once the NPV is calculated, the typical lump-sum buyout falls between 65% and 85% of the NPV of the policy. Given this, in order to receive the largest amount possible in a lump sum buyout, it important that an insured hire attorney, such as the McKennon Law Group PC, who have significant experience negotiating lump-sum buyouts.