By A. Christopher Wieber, Esq. (Law Office of Mark Scherzer)
What do you do if you’ve been struggling at work with a disabling medical or psychiatric condition, and your employer targets you for layoff/termination and presents you with a severance package that you must accept or decline within a very short time frame? If you take the severance package, can you also make a claim under your employer’s long-term disability plan? Does it make a difference if you don’t take the package? If you have reduced work capacity — which your employer tolerated — what happens when you try to find work with a different employer who may be intolerant of such decreased performance in a new hire?
These are the sorts of questions we receive from clients on a regular basis. Unfortunately, there are no easy answers. A number of factors come into play. How long and how well-documented in the medical record is the disability/illness? Has the disability/illness directly affected work performance? Was the disability/illness disclosed to the employer (or is the employer otherwise aware)? Were any work accommodations sought or implemented in relation to the disability/illness? If so, is there an employment law attorney involved (and is there any intention to pursue an Americans with Disabilities, i.e., “ADA,” claim)? Will the client be able to find re-employment in his or her current debilitated medical condition (and, if so, is there likely to be a loss of income, as a result)? Is there a formal severance plan? Does the severance plan or package explicitly state that eligibility is based on termination due to layoff or reduction in force (or does it specifically exclude employees who terminate due to disability)? Has the client already executed a severance agreement and release (and do any of the terms of either preclude the possibility of a disability claim)? If not yet executed, is the employer open to negotiating a carve out for disability (and other benefit claims governed by the Employee Retirement Income Security Act, a/k/a “ERISA”)? Do the Short and Long Term Disability Plans identify severance pay as an offset (i.e., a deduction from the payable disability benefit)? How do the Short and Long Term Disability Plans define disability? What do the disability plans say about termination of coverage and leaves of absence?
Depending on these factors, it may be possible to both receive a severance package and pursue a disability claim. Or, it may be necessary to evaluate the pros, cons, and cost-effectiveness of each set of benefits and to choose between the severance package or the disability benefits. It may make sense to coordinate with your employment law attorney and to assess whether a potential ADA disability discrimination claim makes more sense than a claim for disability benefits (and/or whether it might be possible to pursue both). The bottom line is that if you are suffering from a disability/illness and are selected for termination, this is an extremely critical time to assess the merits of a potential disability claim. Before signing a severance agreement, it would be a good idea to consult a long-term disability attorney to determine what your options are, and which of those options is best-suited to your future employment objectives and abilities.
The following sections provide more detail about some of the issues outlined above.
Initial Caveat: Employer-Sponsored Group Long-Term Disability Coverage
vs. Individual Self-Purchased Disability Income Insurance
This post focuses on employer-sponsored group disability coverage. For most employers who provide such coverage, the first 3 to 6 months of disability is covered under a “short-term disability” or “salary continuation” plan, while a “long-term disability plan” covers disability after either the 90th or 180th day (i.e., at the conclusion of benefits under the salary continuation or short-term disability plan). Employer-sponsored group disability plans will generally be governed, with certain exceptions, by ERISA. When carriers and attorneys refer to “long-term disability” coverage, they generally mean employer-sponsored group disability coverage.
An individual may also purchase personal disability coverage — commonly referred to as “disability income” insurance. This coverage is typically provided through an individual policy that insures only the named individual. In contrast, employer-sponsored long-term disability coverage is usually provided through a policy issued to the employer that covers the entire group of employees. Individual disability income policies may be acquired in a number of ways. Self-employed persons and small businesses may purchase such policies, usually because there is no group coverage. Large employers may offer individual policies as “supplemental” coverage to highly-paid employees whose disability coverage is limited by benefit caps. While it is common for group long-term disability plans to cover 60% to 70% of salary, it is also common for such plans to have a maximum benefit cap (with the effect that highly-paid employees may only be covered for a lesser percentage of their earnings under the “basic” long-term disability plan). Supplemental coverage is thus offered to these high-wage employees to allow them to cover a percentage of their earnings that is closer to the 60% to 70% coverage provided to other employees. This supplemental coverage may be offered under a supplemental group policy, but may also be provided through individually-issued policies of disability income insurance. Finally, some persons who are covered under their employer’s long-term disability plan may nonetheless have their own individually-purchased disability income insurance on the side. This may be a sort of legacy coverage acquired at a point in time when no other coverage was available. The policy may have been purchased when the individual was a student or intern. Or, the coverage may have been “converted” or “ported” from group disability coverage provided by a prior employer when the employee left employment (and the group coverage terminated for that employee). Or, a high-wage earner with basic long-term disability coverage at the office that caps covered earnings (or excludes certain types of earnings, such as bonuses, commissions, and the like), may take out an individual disability income insurance policy to supplement the basic level of group coverage (if no supplemental coverage is offered by the employer).
For the purposes of this post, there are several significant differences between individual disability income insurance and long-term disability coverage. Principal among these is that an employee’s coverage under an employer-sponsored group long-term disability plan typically terminates when the employee ceases “active employment” — regardless of whether the employer or employee attempts to keep the coverage in force by continued payment of premiums. Consequently, when an employee terminates employment, coverage under the group long-term disability plan ceases and replacement coverage will not be available again unless/until (1) the employee takes up a new job and is provided coverage under the new employer’s group long-term disability plan, or (2) the employee obtains other disability coverage (such as an individual disability income insurance policy, a ported policy, or a conversion policy). Most individual disability income insurance policies, on the other hand, remain in force so long as the premiums are paid on a timely basis. This means that an individual policy may be carried from job to job, and through periods of unemployment, in a continuous and uninterrupted manner.
Because group long-term disability coverage is associated with a particular employer (whereas individual disability income coverage is carried from job to job with different employers), this gives rise to a second significant difference. Under a group long-term disability plan that defines disability in terms of the employee’s “own” or “regular” occupation, it is usually fairly clear what the employee’s occupation is. Most employees will have held the same job for the duration of their employment with a particular employer. If promoted, or moved to a new position, that will also generally be well-documented. In contrast, many individually-purchased disability income policies are marketed and sold to young professionals at the beginning of their career. By the time a disability arises, many years may have passed and the policyholder’s occupation may be quite different than it was at the time the disability income coverage was purchased. Because many individual disability policyholders are self-employed, their occupations may be extremely idiosyncratic. For example, a physician may purchase a disability income policy while pursuing a residency in dermatology. Twenty years later, the physician may have become a specialist in cosmetic dermatology, have his own office practice, and be a co-owner and manager in a chain of laser dermatology centers. If the disability income policy is “own occupation,” and depending on the precise wording, there may be questions about (1) whether the policyholder should be judged against the work demands of a general dermatologist, or a cosmetic dermatologist, (2) whether and to what degree the doctor’ s occupation also includes the demands of owning/managing his own office practice, and (3) whether and to what degree the doctor’s occupation should also include the demands of owning and managing the chain of laser dermatology centers.
The discussion that follows is focused on issues arising in the context of employer-sponsored group disability coverage, i.e., long-term disability coverage. It does not address disability coverage under individual disability income policies. Nonetheless, to the extent the handling of self-purchased individual disability income policies sheds interesting light on the issues that arise under employer-sponsored long-term disability plans, this will be noted.
Compatibility of Concurrent Severance Pay and Long-Term Disability Claims
The nature and purpose of severance pay has evolved over time. In its earliest form, prior to the 1930’s, severance pay developed primarily as a substitute for receiving advance notice of a termination of employment.1 The custom of providing advance notice — usually a short period, i.e., 2 weeks — was intended to minimize the period of unemployment by allowing the employee an opportunity to seek out new employment during the notice period, while still employed. Id. Substituting pay for the notice period, i.e., without requiring attendance at the workplace, achieved the same goal, providing the employee a payment bridge between the old and new jobs. Id. Removing the lame-duck employee from the workplace during the notice period arguably allowed the employer to preserve morale and performance levels. The use and formalization of severance plans intensified during the Great Depression, when the deteriorating economy compelled employers to substantially reduce their workforce — including higher-level and long-service employees. Id. During this period and after, severance plans have remained a stable component of employer-sponsored fringe benefit offerings.1,2,3 While most severance plans are formal, written plans, many companies have informal plans.3,4 Severance pay has increasingly become identified with longer-term plans where benefits are graduated based on years of service (rather than the uniform short-term plans that were the origin of such benefits).2
Although the primary purpose of severance pay was originally to serve as a form of job displacement insurance (i.e., unemployment pay), it has also served other purposes. When questioned, most employers have reported that severance plans are designed to boost company morale — particularly among the workers who remain employed.2,5 While most plans predicate entitlement based on involuntary termination due to layoff or down-sizing, some have allowed eligibility for benefits based on terminations due to disability, retirement, inadequate performance, voluntary resignation and even for-cause grounds.1,4,5 The graduated benefit amount provided in many severance plans seem designed to encourage (and reward) the loyalty of employees based on the length of employment. Increasingly, employers have made severance pay contingent upon execution of a general release — so that severance pay serves as consideration for broad waivers of potential claims by employees under state and local anti-discrimination laws, state labor and wage laws, OSHA, Title VII of the Civil Rights Act, the ADEA, the ADA, ERISA and other laws.3,4,6
Severance pay has thus evolved in ways that make it far more compatible with disability pay. Initially, short-term severance pay was designed primarily (if not exclusively) to provide the employee with unemployment compensation in lieu of advance notice. Arguably, in that form, such pay is antithetical to disability. Severance pay was offered in lieu of advance notice of employment termination (at a time when the employee was expected to fully serve out the remainder of the notice period as an employee). If disabled, the employee could not remain on the job and would not be entitled to the notice period pay. To the extent severance pay was intended to bridge a worker over to the next job, it could not serve that purpose where the worker was disabled and could not take up new employment. If the employer also provided disability benefits, then it made some sense to view severance pay and disability benefits as separate and mutually exclusive tracks. An employee who terminated with prospects of reemployment took the severance track, whereas an employee whose disability precluded reemployment took the disability track.
In its current form, however, severance pay and disability pay travel on concurrent and arguably non-exclusive tracks. Today, severance pay typically consists of larger payments gradually increasing by years of employment. Thus, this pay is designed to reward loyal, long-term service of the terminated employee and to simultaneously increase the morale of retained employees. The execution of broad releases by terminated employees in exchange for their severance pay further protects employer interests by reducing potential legal risks. Severance pay has become less about compensating an employee for unemployment and more about rewarding loyalty, encouraging morale and decreasing turnover of retained employees, and avoiding future liability. These employer interests are served by severance pay regardless of whether it is paid to an employee terminating due to layoff/reduction-in-force or to an employee terminating due to disability. Consequently, today’s severance pay is not inherently incompatible with making a disability claim or receiving disability pay. The employer enhances retained employee morale and reduces legal risk when it presents the disabled, terminating employee with a severance package and release. Indeed, since severance releases typically waive claims for disability discrimination, there is arguably greater incentive for an employer to obtain such a release from a terminating disabled employee.
Even if there is no inherent incompatibility, there may still be a formal, legal, or discretionary incompatibility. A written severance plan — particularly if carried over from an earlier era — may specifically state that it applies only to certain classes of termination (and may explicitly exclude terminations due to disability). Conversely, the employer’s long-term disability plan may explicitly exclude claims by persons seeking (or receiving) severance pay. If the employer has an informal/unwritten severance pay program, it may decide as a matter of discretion that the employee must choose either severance or disability. If the employee had been struggling to work without revealing the disability, the employer may be affronted if the employee executes a severance package — without disclosing the disability — and then unexpectedly files a disability claim.
If there is no formal, legal or discretionary bar, then an employee should be able to concurrently pursue disability and severance benefits, as there is no inherent incompatibility between the modern-day versions of these benefits. Whether and to what degree a particular employee will be successful in obtaining concurrent disability and severance benefits will then depend on a number of additional considerations. Several of these are discussed in the following sections.
Making a Long-Term Disability Claim in the Context of Termination or Layoff
⋅ Catastrophic Disability ⋅
The conventional disability claim involves an employee, suddenly stricken with a catastrophic illness or injury, who stops working unexpectedly and involuntarily. The employee is severely injured in a car accident and must undergo multiple surgical procedures, extended hospitalization and rehabilitation, and is left with ongoing pain and permanent limitations. Or, the employee suffers a massive heart attack, undergoes a quadruple bypass surgery, and enters into a cardiac rehabilitation program. From a disability claim perspective, these are typically “easy” claims, as there is little question about the existence of the disease/injury or about the severity of the resulting incapacity. Although some employers have no formal termination procedure for disabled employees, most will either terminate the employee at the end of short term disability and the transition to long-term disability (usually, 6 months after the onset of the disability), or at some specified later date. Some employers may keep the disabled employee in employment status for as long as the employee is approved for benefits under the long-term disability plan. The reasons for extended employment status for disabled employees include concerns about complying with the Family and Medical Leave Act (“FMLA”) and the ADA (which may require allowing leave as an “accommodation”). Such extended employment status may also make it easier for HR/Benefits staff to administer benefits (such as continuation COBRA health insurance coverage, life insurance coverage, and the like) in which the inactive employee may continue to be enrolled as a participant.
Severance packages may be offered to employees in the context of conventional disability claims. If so, such packages are typically presented to the employee at the time employment status is formally terminated (which may be months or years after the disability claim commenced). Unless there is an explicit contractual bar in the disability plan against receiving a severance package, accepting the package is unlikely to jeopardize the approval status of the disability claim. The catastrophic nature of the disability is unlikely to draw critical review of any sort and, indeed, the disability claim will likely already be approved and in payment mode before the severance package is offered. Payments under such a severance package may nonetheless result in an offset (reduction) of disability benefits (see below). General releases may need to be reviewed and revised (see below) to ensure that the employee does not unwittingly sign away rights to either the disability benefits (and other benefits, such as COBRA health insurance benefits), or to the remedial procedures necessary to enforce the approval and payment of those benefits.
⋅ Chronic-Progressive Disability ⋅
More common than the conventional catastrophic disability claim is a chronic-progressive disability claim. An employee struggles for years with multiple sclerosis (or chronic obstructive pulmonary disease, Parkinson’s disease, HIV disease, macular degeneration, rheumatoid arthritis, migraine headaches, degenerative disc disease, or any number of other chronic, degenerative diseases) and, over time, experiences increased burden from the disease (or treatment) and suffers decreased work performance. At some point, the employee realizes that continued work is precarious because the employee poses a risk to self or others, the struggle to keep up is accelerating the progression of the employee’s illness, or impaired performance increases the chances of being fired, etc.
In contrast to a catastrophically disabled employee, the employee with a chronic-progressive disability arguably has greater control over the timing of — and preparation around — the disability onset date. Because the debilitating effects of a chronic-progressive conditions are gradual (perhaps interspersed with remitting periods) and may not be uniform across all functional domains, the employee with such a condition may devise strategies to counteract decreased productivity and prolong employment. For example, the employee may off-load some job duties to colleagues; work longer hours (to make up for slowness and additional quality control during regular hours); take extra breaks (or naps) during the workday; work from home; use sick days, vacation time and FMLA leave to allow time for medical treatment and doctors’ visits; obtain specialized office furniture, computer software, or desktop appliances/equipment, adapted to the employee’s condition; etc. These coping strategies may be informally adopted by the employee (in an effort to maintain privacy and avoid disclosure), or may be formally approved as accommodations by the employer (after disclosure of the disabling condition). Disability is not an all-or-nothing proposition in the circumstances of a chronic-progressive condition. Like the proverbial “straw that breaks the camel’s back,” disability is caused by the slow accumulation of pain and dysfunction and cannot be attributed to a single, isolated cause. Consequently, the point on this disability gradient at which an employee stops working is, to some degree, individually and subjectively determined. The employee’s “selection” of a stop-work date, moreover, may be influenced by external considerations separate from the medical condition, itself. These external considerations may include the preservation of other employee benefits, i.e., qualifying for a bonus, vesting in a stock option or retirement program, etc., or the protection of the employer’s business operations, i.e., completing a transfer of work duties to others, finalizing a long-term work project, finishing out the “busy” season, etc.
The subjective timing and choice of a stop-work date make a chronic-progressive disability claim a complex proposition. As an initial matter, these claims attract greater insurance company scrutiny and suspicion, frequently expressed in questions such as “what changed in your condition to cause disability on the specific disability date?” or “which medical records reflect a sudden deterioration in your condition or quantitative increase in symptoms and functional incapacity around that date?” Courts have consistently rejected denials of disability claims based on insurer arguments that the claimant failed to demonstrate a “sudden deterioration” or “acute change.”7 Courts have also routinely held that “heroic efforts” to continue working, despite a chronic-progressive illness, should not be held against an employee’s disability claim, nor should the employee’s continued work be deemed inherently contradictory to a disability claim.8 Nonetheless, and despite this legal precedent, a disability claim administrator/insurer is likely to closely analyze (and may deny) a claim in which the claimant with a chronic-progressive condition worked full-time (and without any obvious accommodations or gross dereliction of duty) until the disability onset date — especially where there is purportedly no evidence of “sudden deterioration” or an “acute change” in the medical condition centered on that date.
The particular plan language defining disability is an additional factor that will influence the timing and choice of a stop-work date in the context of a chronic-progressive disability. For example, a short- or long-term disability plan that defines disability as the “inability to perform all the substantial and material duties of your occupation,” may create a higher hurdle to obtain claim approval (and lead to delaying the stop-work date) relative to a plan that defines disability as the “inability to perform one or more of the material duties of your occupation.” If continued employment at a reduced capacity is functionally possible (and satisfactory to the employer), the employee may want to consider taking such a reduced role and filing a “partial” or “residual” disability claim (if permitted under the terms of the relevant short- or long-term disability plan). Some disability plans may also require that the reduced role be accompanied by a cut in pay. While most employers will be eager to cut pay in proportion to the reduced role, it is not uncommon for an employer to offer full pay out of loyalty/generosity to a long-time employee. In such circumstances, it may be necessary to explain that such good intentions may have the unintended negative consequence of defeating the employee’s partial disability claim. If reduced employment is impossible with the current employer, it may be possible for the employee to take a new job with a new employer while simultaneously filing a partial or residual disability claim — at least where the new job is a lesser job at lesser pay to accommodate the restrictions and limitations imposed by the illness. If approved for total or residual long-term disability benefits, the employee must be wary that while his or her chronic-progressive illness is sufficiently severe to satisfy an “own occupation” definition of disability, it may be inadequate (without further progression) to satisfy an “any occupation” definition of disability (many plans transition from Own Occupation to Any Occupation benefits after 24 months).
For the employee with a chronic-progressive condition (and for the attorney advising such an employee), determining when and how to initiate a disability claim is thus a complex and challenging decision in which medical limitations (how much work can the employee do, and at what medical cost?), must be balanced against legal constraints (how do the applicable disability plans define total disability and partial disability, must the employee experience a specified level of reduced income, will the definition of disability change, and when?). Simultaneously, these medical and legal considerations must be balanced, in turn, against practical considerations: are further accommodations possible and will they be effective, how will the timing of a disability affect the employer/colleagues, does the employee have any realistic alternate employment options (with the current employer or another employer, with reduced responsibilities, with a reduction in title, with reduced compensation?), and what level of resistance can be expected from the long-term disability insurance carrier (based on the objective certainty of the diagnosis, the evidence establishing the severity of the symptoms, the documented effects of the illness on work performance, and the existence, or not, of acute changes in the illness near the proposed date of disability)?
Severance packages may be offered to an employee with a chronic-progressive disability in the same manner as an employee with a catastrophic disability, i.e., after the employee has initiated a total disability leave and at the time formal employment status is subsequently terminated. If so, and as with the catastrophic disability, acceptance of the severance package is unlikely to jeopardize the status of an already-approved disability claim.
Many employees with chronic-progressive disabilities, however, find themselves facing an employer-initiated termination. As a number of courts have observed, “it is far from unheard of for a company, in good faith or otherwise, to fire an employee when he becomes disabled.”9 An employer may note an employee’s reduced performance and (whether unaware, suspicious, or with full knowledge of the employee’s chronic-progressive illness) target that employee for termination. The employer may have an inkling (or actual knowledge) of the employee’s chronic-progressive illness and seek to cut its losses before the employee’s performance further deteriorates. Meanwhile, the employee may be seeking to extend employment for as long as possible — whether to qualify for a bonus, complete a project, or simply extend employment at full income for as long as possible. The employee may be unaware that disability benefits are available, or may be fearful that the long-term disability insurance carrier won’t approve the claim. The employee may be in denial about the severity of the chronic-progressive illness and how much it has negatively affected his or her work. The employee may be extremely resistant to taking on the mantle of “disability” and all its associated implications about the end of a career, future non-productivity, and an increasingly illness-centered lifestyle. It is thus not unusual for an employee’s desire to extend work (in the face of a chronic-progressive illness) to run up against an employer’s interest in weeding out under-performing workers by termination, layoff, or reduction in force.
Once an employee with a chronic-progressive disability has been notified of an employer-initiated termination and presented with a severance package, there are basically two options for the employee if he or she wishes to file for disability benefits: (i) initiate a disability claim before the termination date, or (ii) work until the termination date and file a disability claim at that time. In either case, and to the extent the disability insurance carrier becomes aware that the employee was slated for termination, the fact that notice of the termination preceded the disability claim will exponentially increase the suspicion and hostility directed towards the claim — especially if the termination is in the context of a broader layoff, reduction in force, or similar employer action. Superimposed on the usual “what changed” question that an insurer is likely to have in the case of a chronic-progressive disability, will likely be the new question: “Why didn’t the employee, if he or she were truly disabled by the chronic-progressive illness, file for disability benefits well before becoming aware of the impending termination?” For the reasons set forth above, the co-incidence of a job termination and disability claim should not be surprising — the employee’s desire to “hold on” runs up against the employer’s imperative to “cut its losses.” Courts have acknowledged this reality and concluded that it is improper to deny a disability claim solely because the employer initiated a termination.9,10 Nonetheless, disability insurers may seek to deny a disability claim based on a perceived categorical incompatibility between termination/severance and disability, i.e., one must choose one path or the other. In some cases, seeking to file a disability claim before the termination date (and without taking the severance package) may result in more friendly handling by the disability insurance carrier. But not necessarily, as the disability insurer may still find the the timing too close, and may view the disability claim as a “preemptive” attempt to substitute disability benefits for termination/severance benefits (or as an attempt to get both). Disability insurance carriers may also frame hostility to the claim in terms of choice: a truly disabled person has no choice and must stop working, whereas an employee who continues to work and files a claim only after being notified of a termination is clearly “choosing” to file a claim and “gaming the system.” But, as noted, there is always some choice in the timing of any disability claim arising out of a chronic-progressive disease, so hostility on this basis is misplaced.
Perhaps the most facially persuasive argument advanced by disability insurers — at least where the employee does not file a preemptive disability claim — is that the termination isn’t “caused by” the disability, but by the employer’s termination decision, layoff, or reduction in force. As articulated by one insurance carrier, “[Employee] does not satisfy the eligibility requirements of the insurance policy because her employment was terminated due to economic downsizing, not because she was totally disabled.”10 This argument, however, suffers from significant flaws. Fundamentally, the argument is at odds with the definition of disability. Most long-term disability plans speak of the inability to perform the duties of an occupation, but nowhere require that this inability must be a cause (or the sole cause) for the employee’s termination. Interpolating such a requirement constitutes an arbitrary and capricious barrier to the real question of whether or not the employee is disabled, as defined by the plan.11
Some insurance carriers have latched onto “loss of earnings” requirements to repackage the causation argument, asserting that where the disability plan requires a loss of earnings and states that the loss of earnings must be “due to the disabling injury or illness,” this element cannot be satisfied where the employee is involuntarily terminated. In other words, because the employer terminated employment — especially if the termination is effected through a layoff or reduction in force — it is the layoff, itself, not the disability which caused the loss of income. While this argument has superficial appeal, it becomes less convincing when one scratches below the surface.
As an initial matter, there is something fundamentally wrong with an approach that permits an employer to disqualify a disabled employee from disability benefits by firing the employee before he or she files a disability claim. When a disability insurance carrier denies benefits to a terminated disabled employee because the employer initiated the termination (instead of the employee “self-terminating” by way of a disability leave), it puts the employee in an extremely precarious position. The employee did nothing more than attempt to prolong remunerative employment for as long as possible. The employer, for its part (and whether out of fear of instigating a disability discrimination claim or out of beneficent intentions to reward the employee’s loyalty and service), may have tolerated poor performance until it was no longer economically feasible to do so. The employer, moreover, may wait to terminate the disabled employee until it is possible to do so in a broader lay-off or reduction in force so as to specifically avoid a potential disability discrimination claim. The claimant is then penalized when the employer beats the employee in choosing the nominal termination date. The laid-off employee may be just as incapable of holding down competitive employment as the employee who self-terminates by filing a disability claim. New employers are unlikely to tolerate the poor performance, accommodations, and restrictions and limitations that were afforded to a loyal, long-serving employee by the old employer. If the disability insurance carrier refuses to pay short- or long-term disability benefits, the terminated employee is not only without income (unless a severance package is offered), but also without access to new employment or to any means of acquiring replacement disability coverage. If barred by the termination, layoff or reduction in force, from pursuing a disability claim, the employee with a chronic-progressive illness thus may find him- or herself unemployed, unable to seek and hold down competitive employment, and without any avenue for obtaining replacement disability coverage or benefits (other than the basic “safety net” disability benefits provided by Social Security).
More fundamentally, a rigorous causation analysis underscores that whether a disabled employee is laid off or self-terminates, the ensuing loss of earnings is due to the disability — not the termination of employment. When an employer selects an employee for layoff because of comparatively lower work quality or productivity, and that lower work performance, in turn, is directly attributable to a chronic-progressive disability, it is the disability that is the true underlying cause of the earnings loss. “But for” the disability and decreased performance, the employee would have survived the layoff/reduction-in-force. As observed in one case:
It is apparent to this Court that Sun Life became fixated from this early date on the “facts” that Mr. Bray’s termination was due to the poor performance of his division and that he continued to do work thereafter; and that Sun Life stubbornly and continuously thereafter refused to credit what the doctors were saying…. It does not appear that Sun Life considered, then or later, whether the poor performance of the division might have been related to Mr. Bray’s behavioral issues….
Bray v. Sun Life & Health Ins. Co., 838 F. Supp. 2d 1183, 1196 (D. Colo. 2012). Where disability contributes to the employee’s poor performance or that of the employee’s team/division (and the employee or his team/division is subsequently targeted for elimination), the employee’s chronic-progressive disability is the proximate cause of the termination (and the attendant loss of earnings). At the very least, the disability is a substantial factor leading to the termination and loss of earnings. From this perspective, the employer’s selection of the employee for termination is merely a natural and foreseeable consequence of the disability. The termination decision is thus a confirmation of the disability — a recognition that the employee is under-performing.
That disability is the real underlying cause of lost earnings is further demonstrated by the fact that the termination of employment need not result in a loss of earnings at all. In other words, the termination of employment is insufficient, standing alone, to cause a loss of earnings. A non-disabled employee can find a new job with a new employer and thereby maintain continuous earnings. The disabled employee’s earnings loss is thus not caused by the termination, itself, but by the inability (due to illness and injury) to seek out, obtain, and maintain competitive employment with a new employer in a comparable job. This fact also underscores why the employer’s motivation in firing the employee should be irrelevant to the question of the employee’s disability. Should it matter whether a disabled employee is terminated because of poor performance, or is instead terminated for reasons wholly unrelated to poor performance (or any other factor that might be attributed to the chronic-progressive disability)? For example, an employer may simply be getting rid of a redundant (or obsolete) position in its organizational structure (and the disabled employee is merely the unfortunate holder of that position). Or, an economic slump may result in across-the-board reductions of whole departments or classes of employee (and the disabled employee may simply be in the wrong department or class of employee, or lack the necessary seniority to survive the reduction-in-force). But why should this make a difference as to the employee’s entitlement to disability benefits? Regardless of the employer’s reason for the termination, the disabled employee’s loss of earnings still arises from the same fundamental cause: his or her inability (due to illness and injury) to maintain competitive employment with a new employer in a comparable job.12
Another superficially persuasive argument for denying disability benefits to a terminated employee is that the termination of employment instantaneously causes a termination of coverage, such that there is no coverage for the employee who is paid full wages until the termination date, on the theory that any disability-related loss of earnings occurs only after the termination date (and thus after coverage has terminated). Most courts have rejected this defense as an artful, but insupportable, dodge. The argument, as it is typically framed, relies on eligibility provisions that link coverage to “active employment.” Most short- and long-term disability plans state that eligibility for coverage ceases as soon as “active employment” ends. Consequently, some disability insurance carrier’s have argued that because termination of employment results in the end of “active employment,” coverage ceases and is unavailable to cover the employee’s disability.13 Although this argument is equally true in cases of self-termination due to initiation of a disability claim — i.e., by stopping work and filing a disability claim, the employee ceases “active employment,” thereby triggering a cessation of coverage — disability insurance carriers never invoke this defense in that circumstance because of its manifest absurdity. As the Second Circuit Court of Appeals has noted, “[T]he argument pressed by UNUM would essentially put disability claimants in a ‘Catch 22’ because those claimants who were working could not be considered disabled and yet claimants who had stopped working would not be covered under the Plan.” Locher v. UNUM Life Ins. Co. of Am., 389 F.3d 288, 297 (2d Cir. 2004) (rejecting non-coverage argument asserted by Unum because the employee voluntarily “resigned” on April 3, 1993 — citing a decision to “move on” rather than a disabling illness — and only filed a disability claim in July, 1993, after receiving a clarifying diagnosis from a treating specialist). The non-coverage argument, if accepted, would have perverse results:
It is not uncommon for a disability to lead to the cessation of active employment, and unfortunately, it is far from unheard of for a company, in good faith or otherwise, to fire an employee when he becomes disabled…. Moreover, given that employment termination is more likely to occur swiftly after the onset of a major disability than after the onset of a minor one, First UNUM’s interpretation would make the most severely disabled the least likely to receive coverage. These are precisely the people whom the Policy was most designed to protect, and often their impairments are the easiest to verify.
Radford Trust v. First UNUM Life Ins. Co. of Am., 321 F. Supp. 2d 226, 245 (D. Mass. 2004). These cases underscore that the determination of disability in the case of a terminated employee should not rest on simplistic reasoning. Termination of employment does not, ipso facto, constitute a superseding cause (over the disability) for the loss of earnings, nor should it automatically trigger a loss of coverage for the disability. A proper determination must assess whether a disabling medical condition existed before the termination date, and whether the symptoms of that medical condition were sufficiently severe as to interfere with the employee’s ability to work.14
Focusing on the existence and severity of the disabling medical condition at or before the termination date — rather than engaging in semantic and philosophical legerdemain regarding such issues as causation, active work, and the termination of coverage — better conforms to the purpose of long-term disability coverage. Employer-sponsored long-term disability insurance coverage was initially provided to high- and middle-wage earners, but over time (and in conjunction with Social Security disability benefits, which were first introduced in 1956), this coverage has been expanded to include lower income and hourly wage workers.15 This expansion was fueled by fact that loss of income through sickness or injury persisted as one of the major economic hazards among American families.16 Long-term disability insurance is not concerned with disability, per se; rather, such coverage is more specifically concerned with the risk of income loss resulting from disability.16,15 The coverage is intended to cover wage-earners. Employer sponsorship of a long-term disability plan thus reflects the employer’s commitment to its employees to insure them against disability-related loss of income that arises during their period of employment. Consequently, it is not surprising that there should be no coverage for a disabling medical condition that arises after the term of employment has ended. In that instance, the healthy employee can either seek re-employment in his occupation (and obtain employer-sponsored long-term disability insurance coverage with the new employer) or purchase an individual disability income insurance policy (if there is going to be a substantial gap of time before re-employment or if the new employer provides no employer-sponsored disability coverage).
On the other hand, when — at the time of termination — an employee suffers from a medical disability that impairs wage-earning capacity, it is natural that the employer’s long-term disability plan should cover that impairment (regardless of whether the employer initiated the termination, or its reasons for doing so). While the employee can file for Social Security disability (“SSDI”) benefits, SSDI benefits, alone, are unlikely to adequately replace lost earnings.17 And, no other coverage will generally be available to supplement SSDI benefits. Unlike a healthy employee, the terminated employee with a disabling medical condition will be largely uninsurable for individually-underwritten disability income insurance coverage (due to the presence of the pre-existing medical condition). And, if the condition prevents competitive re-employment, the employee will not be able to obtain replacement coverage under a new employer’s plan. Even if the medical condition permits some degree of re-employment, the employee may face a pre-existing condition limitation in the new employer’s plan. Moreover, to the extent re-employment is at a significantly reduced level, at a significantly reduced wage, only the new, reduced earnings will be covered. If the purpose of providing employer-sponsored long-term disability coverage is to insure against disability-related loss of earnings capacity during the employer’s “watch,” then the lack of alternate coverage options for a terminated employee — specifically because of a disabling medical condition demonstrated to exist at the time of termination — underscores that coverage for the employee’s loss of earnings capacity should be provided under the terminating employer’s long-term disability plan.
An employee suffering with a chronic-progressive illness who is confronted with a termination/severance may face stiff resistance to a disability claim. The disability insurance carrier may default to the unsound causation, loss of earnings, and/or eligibility defenses outlined above. On the other hand, the employee may have nothing to lose in pursuing a disability claim if (i) he or she has continued to work despite significant illness-related decrements in productivity and performance, and (ii) prospects for re-employment are grim (given the restrictions and limitations imposed by the illness). The employee will have to choose whether to file a preemptive disability claim (or simply file a claim at or about the time of the termination). If a severance package has been offered, it may make sense for the employee to disclose the disability to the employer (if the employer is not already aware) and to float the idea that a short- and long-term disability claim is being considered in addition to the severance package. It may become clear in those discussions that the employer (and/or the disability insurance carrier) will force an exclusive choice between severance vs. disability. The employer may change or reduce the package. Or the employer may see no incongruity at all, and may negotiate the severance to permit the concurrent filing of a disability claim (see “The Danger of General Releases“). It will be important to have the employer’s consent to move forward with a disability claim, or, if not, to be aware that pursuit of a disability claim may jeopardize the severance package, the disability claim, or both. But, the employer’s consent does not mean the insurer will approve the claim. For the reasons set forth above, the insurer may have a policy against approving disability claims filed by employer-terminated employees. Or, it may view the claim as a spurious effort to obtain disability benefits on top of severance benefits — even though the employer, itself, has no problem with the employee receiving concurrent severance and disability benefits.
The complexity of a claim filed in the context of a chronic-progressive illness is thus exacerbated when it occurs in the context of an employer-initiated termination, layoff or reduction in force. The likelihood that the claim will face stiff resistance from the disability carrier (and potentially from the employer, if it administers and funds the short-term disability portion of the disability program) means it is extremely important to seek legal assistance in such circumstances, if at all possible. A disability lawyer can help identify whether severance and disability must be evaluated as separate and exclusive courses of action, or as potentially complementary. If there are trade-offs, the attorney can help outline the pros and cons of each course of action. If a disability claim will be filed, the disability lawyer can also determine whether it makes sense to file that claim preemptively (before the formal termination date), or whether it may be better to wait until the termination takes place. A disability lawyer can also help present a claim under the short- and long-term disability plans so as to properly frame the relevant considerations, to develop supporting evidence, and, thereby, to allay the disability insurance carrier’s skepticism and to underscore that the employee’s disability is legitimate and covered under the terms of the plans.
Severance Pay as a Long-Term Disability Benefit Offset
The cost-effectiveness of pursuing a severance package while simultaneously filing for short- and long-term disability benefits will depend, in part, on whether the disability plans treat severance pay as “other income” or a “deductible source of income,” i.e., an offset to the disability benefit. Most short- and long-term disability plans contain a list of income/benefits that will reduce the amount of the disability benefit payment amount. Commonly included in this list are Social Security disability benefits, worker’s compensation benefits, and employer-funded early retirement benefits. Severance pay may be explicitly listed as an offset or an as an exception to the list of offsets, in which case it will be clear whether, and to what degree, the severance pay will result in additional overall benefits. If it is treated as an offset, and the disability benefit is reduced by the amount of the severance pay, there may still be a net additional value even if the severance pay is significantly more than the disability benefits. This is because most disability benefits have a minimum payment amount (sometimes stated as a specified dollar amount, e.g., $100, or as a specified percentage of the disability benefit, e.g., 10%), and never reduce to $0. If the disability plan specifically mentions severance pay, this should also serve to underscore that such pay is not incompatible with receiving disability benefits, i.e., if the plan treats severance pay as an offset (or an exception to offset), then the employer and insurer clearly contemplated that disability benefits and severance pay might be payable at the same time. In many plans, severance pay is not mentioned at all, and it may be necessary to closely analyze whether such pay might arguably fall under one of the other categories of offset (or exception to offset). In such cases, the employer or insurer may argue that severance pay and disability benefits are incompatible or seek to impose a reduction in disability benefits (even in the absence of a specific contractual provision authorizing an offset).
If the disability plan treats severance pay as an offset (and depending on how such pay is defined), it may be possible to negotiate with the employer to designate a payment associated with termination of employment as a “payment for release of claims,” rather than a severance payment. Indeed, where that is the primary purpose of the payment (and particularly if the employer is paying a reduced amount to the disabled employee relative to terminated employees who are not disabled), “payment for release of claims” is a more accurate description. Disability plans rarely list release payments as a deductible source of income, so denominating the payment as such may dissuade the insurance carrier from seeking an offset in relation to such a payment.
It may be a good idea to report severance pay to the disability carrier on any claim forms requesting information regarding other benefits being received — even if there is not an explicit question or category asking about “severance pay.” If there is going to be a fight about whether or not severance pay is compatible with disability benefits (and/or whether it constitutes an offset), it is generally better to have that fight at the start. Otherwise, the insurance carrier — upon later discovery — might seek to penalize the employee and seek recovery of any “overpayment” resulting from the employee’s failure to disclose the severance pay earlier. This could be a substantial amount and may be recovered by suspending benefits, or terminating the claim altogether. The insurance carrier is likely to become aware of such payments anyway, as most carriers monitor contributions to Social Security and will note any contributions that occur after the disability onset date. Such post-disability contributions can occur if the employee returns to work (and receives regular earnings), but can also result from other sorts of compensation, including late-paid bonuses and commissions, salary continuation pay, and severance pay. If severance pay is not reported, the disability insurance carrier may suspect that new post-disability Social Security contributions are the result of an unreported return to work, and disrupt the routine handling of the claim.
The Danger of General Releases
If an employee intends to simultaneously accept a severance package and pursue disability benefits, it will be extremely important to review the general release that is invariably required in exchange for the severance package. This is because most general releases include ERISA among the many laws (also including the Civil Rights Act/Title VII, ADA, ADEA, FMLA, PDA, OWBPA, GINA, and state employment discrimination laws) under which claims are released. By including ERISA in their general releases, employment lawyers are generally thinking of ERISA discrimination claims (i.e., claims by an employee that job actions — such as termination, transfer, or demotion — were undertaken by the employer to interfere with employee benefits).
However, ERISA also governs benefit claims and the right to file lawsuits to enforce such claims. If health insurance is continued under COBRA, those benefits are most likely governed by ERISA. Life insurance is frequently continued after employment terminates (whether on a paid basis or free, pursuant to a disability waiver-of-premium provision), and would also generally be governed by ERISA. Most short- and long-term disability benefits are also governed by ERISA. Consequently, any release that broadly waives all claims under ERISA, and particularly any release that attempts to do so for all time, could potentially be invoked by the employer or insurance carrier as a basis for denying a life, health, short-term disability or long-term disability benefit claim. Most employers have no intention (or interest) in precluding such claims, and it may be possible to negotiate language carving out an exception preserving the employee’s rights to pursue such benefit claims. If such language is negotiated, this may also serve as evidence to the insurance carrier that the employer sees no incompatibility between receiving a severance package and filing a disability claim.
General releases are often discovered by insurance carriers and enforced at the litigation stage. General releases typically include broad language that covers not just the employer, but its agents, claim and plan administrators, benefit plans, and insurance carriers. However, because the release is exchanged between employer and employee, an insurance carrier may be unaware that a general release exists and may process a life, health or disability claim in the normal fashion. If, at some point, the claim is denied, the employee’s appeal is also denied, and the employee files a lawsuit to seek enforcement of his/her entitlement to benefits, the insurer may contact the employer to obtain relevant information and discover the existence of the release. If so, the release may be invoked to bar the lawsuit — regardless of the merits of the claim or the insurance carrier’s prior normal administrative handling of the claim.
A recent case from the Southern District of New York is illustrative, Schuyler v. Sun Life Assur. Co. of Canada, 2023 U.S. Dist. LEXIS 38162 (S.D.N.Y. Mar. 7, 2023). In Schuyler, the claimant accepted a severance agreement that contained a broad release of ERISA claims against her employer, Benco Dental Company: “Employee of her/his own free will, voluntarily releases . . . any and all known and unknown actions . . . arising out of or in any way connected with Employee’s employment with Benco . . . including, but not limited to, any alleged violation of . . . the Employee Retirement Income Security Act of 1974 (‘ERISA’).” The release covered not only Benco, but “its officers, directors, trustees, shareholders, partners, parents, subsidiaries, and any related or affiliated entities . . . and parties-in-interest.” The court found that claimant was barred from bringing a lawsuit seeking long term disability benefits against Sun Life Assurance Company of Canada — the insurer of the Benco LTD Plan — because Sun Life could be considered a “related or affiliated entity” and/or a “party-in-interest.” Other cases generally underscore the dangers of a broad release of ERISA claims.18
If an employee intends to maintain post-termination coverage (and potentially file claims) under employer-sponsored group health, life or disability benefit plans, he or she must carefully review any general release executed in connection with the termination of employment and offer of a severance package. If the general release contains language waiving ERISA claims, it is imperative that the employee negotiate language to exclude such claims (and the right to commence legal action to enforce those claims) from the waiver.
If you’re suffering from a disabling illness and are presented with a layoff notice and severance package, there are likely to be some complex decisions you’ll need to make. You may need to address whether you have a disability discrimination claim under the ADA. You will need to determine whether your disability negatively affected your work performance with your employer and whether the disability impairs your prospects for re-employment. If so, then it would be a good idea to explore whether it might be possible to file claims under your employer-sponsored group short- and long-term disability plans. Long-term disability insurers are sometimes hostile to claims filed in the context of a layoff, termination, or reduction in force — particularly if the termination is accompanied by a severance package. In the absence of provisions creating explicit incompatibility between severance and disability benefits, however, it may be possible (if challenging) to simultaneously pursue both. Whether it makes sense to do so (or to instead pursue disability benefits only, or severance package benefits only), will depend on a careful evaluation of the strength of a potential disability claim, the net added value (after consideration of potential treatment of the severance benefits as an offset), and whether a general release can be negotiated to preserve the right to pursue disability (and other ERISA plan benefits). Our attorneys can assist with this evaluation and work hand-in-hand with an employment attorney (if one is involved) to ensure that you consider all your options and fully protect your rights. See “Get Your Disability Claim Off to the Right Start.”
Chris Wieber is a New York Long Term Disability Lawyer with nearly 30 years’ experience in ERISA short- and long-term disability claims.
1D.O. Parsons, “The Emergence of Private Job Displacement Insurance in the United States: Severance Pay Plans 1930-1954,” (As Revised, Oct. 2017), IZA Discussion Papers, No. 11068,
Institute of Labor Economics (IZA), Bonn.
2J. Bishow and D.O. Parsons, “Trends in Severance Pay Coverage in the United States, 1980-2001,” (May, 2004), SSRN Electronic Journal.
3“Severance & Separation Practices: Benchmark study 2008-2009,” (2008), Lee Hecht Harrison.
4“Severance and Separation Benefits, 7th Edition,” (2018), Lee Hecht Harrison and Compensation Resources, Inc.
5R. Holzmann and M. Vodopivec, Eds., “Reforming Severance Pay: An International Perspective,” (2012), The World Bank.
6W.F. Cascio, “Employment Downsizing and its Alternatives: Strategies for Long-Term Success,” (2009) SHRM Foundation’s Effective Practice Guidelines Series, sponsored by Right Management.
7E.g., Delisle v. Sun Life Assur. Co., 636 F. Supp. 2d 561, 573 (E.D. Mich., 2007) (claim administrator’s denial of benefits based on “the lack of any ‘significant change’ leading up to the … disability date that would render Plaintiff totally disabled” deemed unreasonable where “Plaintiff’s disability … progressed slowly over a period of years” and “[g]iven the progressive nature of Plaintiff’s disability, no significant change would be apparent”), aff’d, 558 F.3d 440 (6th Cir., 2009); Purifoy v. United of Omaha Life Ins. Co., 2013 U.S. Dist. LEXIS 106272, *19-20, 2013 WL 3936737 (E.D. Mich. July 30, 2013) (United of Omaha’s argument that “there is no explanation in the record as to why Plaintiff’s back and wrist pain suddenly became acute in August of 2011 … misconstrues the relevant inquiry, which is not why Plaintiff’s medical condition suddenly worsened”; “Rather, the pertinent question is whether Plaintiff’s condition prevented her from performing at least one of the material duties of her occupation….”; “To the extent Defendant suggests the Plan requires Plaintiff to have a sudden, disabling event before August 14, 2011, such an interpretation is beyond the scope of the Plan’s definition of disability,” which “states: ‘Disability and Disabled means that because of an Injury or Sickness, a significant change in Your … physical functional capacity has occurred….’”); Picton v. Prudential Ins. Co. of Am., 2012 U.S. Dist. LEXIS 130184, *16-18, 2012 WL 4021799 (W.D. Wash. Sept. 11, 2012) (where “Plaintiff attempted to remain at work rather than applying for disability benefits” but nonetheless “presented substantial evidence to the administrator that his legal blindness rendered him unable to perform his occupation,” Prudential’s effort to frame “a different question: whether ‘there is documentation of a change in Mr. Picton’s medical condition/status at the time his employment was severed on June 14, 2010 that would support a change in his functional status,’ … sheds no light on whether Plaintiff’s legal blindness rendered him unable to perform his duties before that date”).
8E.g., O’Hara v. Nat’l Union Fire Ins. Co., 642 F.3d 110, 118-119 (2d Cir. 2011) (“One may be at one’s place of employment but not able to work”; “An employee’s continued presence at her place of employment does not preclude a finding of disability when there is evidence that the employee is incapable of performing her job”); Hawkins v. First Union Corp. Long-Term Disability Plan, 326 F.3d 914, 918 (7th Cir. 2003) (arbitrary and capricious for claim administrator to rely on the “bad argument … that because Hawkins worked between 1993 and 2000 despite his fibromyalgia and there is no indication that his condition worsened over this period, he cannot be disabled,” since there is no “logical incompatibility between working full time and being disabled from working full time,” i.e., “[a] desperate person might force himself to work despite an illness that everyone agreed was totally disabling”); Joseph K. v. Foley Indus. Emp. Ben. Plan, 2024 U.S. Dist. LEXIS 25752, at *11 (D. Kan. Feb. 14, 2024)(“Similar arguments by insurance administrators, advocating that employees cannot be eligible for benefits or considered disabled while working, have been soundly rejected by the circuits to have considered them”); Miceli v. Equitable Life Assur. Soc., 138 Neb 367, 293 N.W. 112, 115 (1940) (“[I]f, while attempting to do [the substantial and material duties of his occupation], he is jeopardizing his health and safety, or ought not actually to be so engaged, he will be held to be totally disabled within the meaning of a disability provision in an insurance policy”; “The courts will not in such a situation penalize one who heroically attempts to carry on, if he is not actually able to do so, or if he ought not soundly to be making the attempt”).
9Radford Trust v. First UNUM Life Ins. Co. of Am., 321 F. Supp. 2d 226, 245 (D. Mass. 2004) (“The availability of benefits under the Policy cannot turn on the accident of whether the insured was fortunate enough to get to see a doctor before employment terminated”). See also, Mirocha v. Metro. Life Ins. Co., 56 F. Supp. 3d 925, 934 (N.D. Ill. 2014) (Court rejected the relevance of Mirocha’s involuntary termination, noting that “it is entirely possible that poor job performance,” the employer’s reason for terminating Mirocha, “could have resulted from limitations imposed by Mirocha’s medical condition”).
10McEwen v. Tecstar, L.P., 2008 U.S. Dist. LEXIS 10950, *15-16, 2008 WL 441065 (E.D. Mich. Feb. 13, 2008) (claim denial arbitrary where “Sun Life refused to consider the possibility that Plaintiff was totally disabled but nonetheless attempting to work” and where it concluded that it “could not consider whether Plaintiff was totally disabled because she was laid off before filing her claim for disability benefits”); Joseph K. v. Foley Indus. Emp. Ben. Plan, 2024 U.S. Dist. LEXIS 25752, at *9 (D. Kan. Feb. 14, 2024) (where, “[b]ecause that definition requires loss of earnings, Prudential concluded that Plaintiff was not disabled before losing his job,” and “after losing his job, Prudential asserts that Plaintiff was no longer covered by the Plan … Defendants’ argument borders on frivolous” because “[i]t misconstrues the Plan’s unambiguous terms to give its ‘loss of earnings’ requirement a meaning no reasonable or ordinary person could foresee. Specifically, Defendants wholly ignore the loss of earnings an employee suffers when he stops working, either voluntarily or through termination“).
11McEwen, 2008 U.S. Dist. LEXIS 10950, *15-16 (where “Sun Life took the position that it could not possibly make a determination as to whether Plaintiff was totally disabled because she had been laid off prior to filing a claim…., [t]his refusal constitutes an arbitrary-and-capricious denial of disability benefits”).
12Significantly, I have never seen an insurance company argue — either in my practice or in a reported case — that the claimant under a self-purchased individual disability income policy was barred from benefits because the qualifying loss of earnings was due to a termination of employment, rather than the disability, itself. Presumably, this is because the coverage does not terminate with the end of employment (but remains in force so long as premiums are paid). Consequently, when coverage remains in force, but the claimant continues to suffer a loss of earnings, it underscores that the true cause of any sustained post-termination loss of earnings is due to the incapacity to resume gainful employment (and not due to the termination). As noted, the disability of an employee with a chronic-progressive illness may be shrouded during employment with an existing employer because of compensatory strategies undertaken by the employee and a lenient attitude adopted by the employer (whether out of loyalty, generosity, inertia, fear of legal action, or some combination of these or other factors). The termination of employment merely lifts that shroud, exposing the employee’s disability for what it is. When measured against other similarly-experienced applicants for jobs with employers expecting 100% performance, the applicant with decreased performance due to a chronic-progressive disease is revealed as no longer competitively employable. In the context of individual disability income policies, this is generally understood. And, while the presence of a termination (or the sale of a business) may trigger a more intense investigation, the underlying question remains whether the disability is real and renders the claimant unable to return to his or her occupation. If so, it is a payable claim — regardless of the involuntary termination. This handling of disability income claims underscores that the termination/causation defense is something of a false flag in long-term disability claims. The real question is whether the coverage was in force when the qualifying loss of earnings occurred. The termination of employment can never be the true cause for a loss of earnings, since re-employment always remains available to the non-disabled employee. Consequently, for a disabled employee, it is wrong to view the termination of employment as the “cause” of lost earnings; rather, the termination of employment is more accurately viewed as merely a starting pistol signifying the commencement of a period of lost earnings due to disability that precludes re-employment.
13As discussed in the preceding footnote, whether or not the disability/loss of earnings occurs while coverage is in force is ultimately the true underlying question. Since it is absolutely clear in disability income policies that coverage continues (so long as premiums continue to be paid), the issue of whether the disability occurred while coverage was in force rarely arises. It is perhaps not surprising that insurers devise creative defenses in other directions. Thus, in some instances, insurers have argued that if a disability occurs while the claimant is between jobs, coverage is unavailable or limited because the policyholder has no “occupation” from which to be disabled. For example, in Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1162-64 (9th Cir. 2002), the disability insurer argued that “if Amadeo became disabled during a period of unemployment, then the word ‘occupation’ meant ‘unemployment’ … [r]ather than considering Amadeo’s ‘regular occupation’ to have been her 20-year career in the securities industry.” Characterizing this interpretation as “sufficiently arbitrary and unreasonable that a jury could find it was adopted by Principal in bad faith,” the court held that “in the layperson’s terminology that Principal was required to apply in the context of a disability policy, the terminology ‘unable to perform the substantial and material duties of your regular occupation in which you were engaged just prior to the disability’ would seem to refer to Amadeo’s last employment in her regular occupation as an executive in the securities industry, not her condition of being unemployed.”
14In this regard, a disability claim that arises in the context of an employer-initiated termination should be treated similarly to a disability claim that arises the context of a legal disability. Legal disability generally refers to the inability to engage in one’s profession due to the loss of a professional license, incarceration, or some other “legal” bar. It is black-letter law that disability insurance benefits are not generally available for a purely legal disability. Mass. Mut. Life Ins. Co. v. Jefferson, 104 S.W.3d 13, 27, 2002 Tenn. App. LEXIS 636 (Tenn. Ct. App. 2002); Jacobs v Northwestern Mut. Life Ins. Co., 103 A.D.3d 78, 83, 957 N.Y.S.2d 347 (N.Y. App. Div. 2d Dept. 2012). However, entitlement to benefits becomes far more complicated where the legal disability is entangled with a prior factual disability. A pilot loses his vision and, as a consequence, loses his license to fly. The general legal consensus is that a subsequent legal disability should not necessarily supersede the underlying factual disability. Id. Rather, “when a person seeking disability benefits asserts that a factual disability preceded a legal disability…, the courts address whether the claimed factual disability is medically bona fide …, whether its onset actually occurred before the legal disability…, [and] whether the factual disability actually prevented or hindered the person seeking disability benefits from engaging in his or her profession or occupation.” Jefferson, 104 S.W.3d at 27-28. See also, Jacobs, 103 A.D.3d at 84. For example, in Jacobs, the insurer denied disability benefits to a physician (suffering from bipolar II disorder and substance abuse) because he “had a roomful of waiting patients on the day he was suspended.” 103 A.D.3d at 85-86. The Jacobs court firmly rejected this reasoning:
Northwestern’s approach rejects inquiry into insureds’ competence at the principal tasks of their profession. It would cease the inquiry after determining whether the insured was performing those principal tasks at all. Otherwise, Northwestern argues, inquiry would be necessary as to an insured’s mental or physical status on “any given day.” While this approach has the benefit of clarity, it is substantially outweighed by common sense and the reasonable expectations of an insured. Disability insurance is concerned with insureds’ ability—not just their attempt—to do their jobs. No one would knowingly use a doctor or lawyer, or any other professional or tradesperson, who shows up for work but performs incompetently. Thus, the fact that the plaintiff’s waiting room was filled with unwitting patients on the day the plaintiff’s license was suspended is not the end of the inquiry. We must also examine the ability of the insured to perform the principal tasks of the profession competently.
Id. at 86-87 (internal citations omitted) (holding that “plaintiff’s bipolar II disorder and drug addiction were the primary causes of the plaintiff’s inability to practice his profession and that the plaintiff’s loss of his medical license was secondary”). Jacobs thus reiterates the general principle that a disability insurer cannot summarily dismiss a claim because of a potentially secondary legal “cause” for the inability to work, but must investigate whether there is an actual, underlying, medical condition that precludes the ability to work. This principle has similar application here. The fact that an employee was selected for termination by the employer (whether for performance issues or purely business reasons) should not preempt a disability insurer’s “inquiry into insureds’ competence at the principal tasks of their profession,” nor should it constitute a peremptory disqualification for disability benefits.
15D.B. Hill, “Employer-Sponsored Long-Term Disability Insurance,” Monthly Labor Review (U.S. Bureau of Labor Statistics, Jul. 1987), 16-22.
16I.S. Falk, “Long-Term Disability Insurance,” 12 J. Amer. Assoc. Univ. Teachers of Insurance 11-21 (Mar. 1945).
17“Social Security Disability Insurance: A Lifeline for American Workers and Families,” White House Report (July 2015), at pp. 6-7 (Noting, inter alia, that ” the average benefit for a disabled worker was $1,165 per month, just enough to lift a single person out of poverty,” and that “SSDI benefits average $13,980 per year, about one-third of the average beneficiary’s pre-disability wages”).
18E.g., Perez-Jones v. Liberty Life Assur. Co., 2013 U.S. Dist. LEXIS 190108 (C.D. Cal. Apr. 30, 2013), and Perez-Jones v. Liberty Life Assur. Co., 2014 U.S. Dist. LEXIS 185419 (C.D. Cal. Feb. 20, 2014), aff’d, 647 Fed. Appx. 758 (9th Cir. 2016). See also, Jones v. AT&T Umbrella Ben. Plan No. 1, 2018 U.S. Dist. LEXIS 20946 (M.D. Fla. Jan. 10, 2018); Parisi v. Kaiser Found. Health Plan Long Term Disability Plan, 2008 U.S. Dist. LEXIS 5770 (N.D. Cal. Jan. 25, 2008).