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Special Rules Governing Privately Purchased Individual Disability Income Policies

Special Rules Governing Privately Purchased Individual Disability Income Policies

The rules governing employer-sponsored group long term disability plans can be quite different than those that apply to individually purchased disability income insurance policies.  This is largely because group long term disability plans are governed principally by ERISA (see ERISA Long Term Disability Benefits), whereas individual disability income insurance policies are largely governed by state contract and insurance law.  Our lawyers have experience with both ERISA long term disability claims and claims under privately purchased disability income insurance policies.  Important differences pertaining to private disability income policies include:

  • No Mandatory Appeal Procedures:  ERISA-governed long term disability plans
    have mandatory internal appeal procedures that must be exhausted before a
    lawsuit can be commenced.  However, a
    non-ERISA disability income insurance policy will usually have no such
    procedures, and the policyholder may be free to file a lawsuit almost
    immediately after an improper denial or termination of disability benefits has
    occurred.  It may still make sense for
    the policyholder to submit additional evidence or engage in pre-litigation
    discussions with the insurance company, but the policyholder retains the option
    to sue.
  • Favorable State Insurance Law Rules:  Although some features of ERISA can be favorable to the claimant, state insurance law is frequently more favorable.  Most states apply the legal principle that ambiguities in a disability income insurance policy will be construed against the insurance company and in favor of coverage.  This principle may not apply in ERISA governed long term disability plans.  Disability income insurance policyholders may present a standard legal case in court, including the testimony of witnesses, treating physicians, and medical experts, as well as all the most current treatment records.  In ERISA-governed long term disability cases, the court generally does not hear any “live” testimony, and the claimant is restricted to only those written medical records and reports already contained in the insurance company’s claim file (known as the “administrative record”) at the time of the insurance company’s final decision.  A disability income insurance policyholder must generally prove disability in court by a “preponderance of the evidence.”  The policyholder’s evidence must outweigh the insurance company’s, such that the policyholder’s evidence and arguments are more reasonable than those of the insurer.  By contrast, in many ERISA cases it is generally insufficient for the claimant to show that the insurance company’s position is less reasonable.  Rather, the claimant must prove that the insurance company’s decision was plainly unreasonable.  In such cases, although the court itself might have found the claimant disabled, it must affirm the insurance company’s denial of benefits so long as it is within the universe of reasonable decisions, even if it is the least reasonable decision within that universe.
  • Policy Applications, Medical Underwriting, & Rescission:  Most employer-sponsored long term disability plans are provided without medical underwriting.  No questions are asked.  Every employee is generally eligible for coverage, after a certain amount of time on the job, and subject to a period – typically the first year of employment – during which a disability claim may be denied or reduced if it results from a pre-existing condition.  In contrast, most disability income insurance policies will require the policyholder to complete an application, including a health and medical history questionnaire, and, in some cases, to undergo a medical or paramedical examination.  After reviewing this information, the disability insurance company may refuse coverage, attach specific medical condition exclusions, or charge a higher premium rate.  If the policyholder’s application contains any significant factual misstatements, the disability income policy may be subject to rescission by the insurer at a later date.  Rescission of disability income insurance policies is discussed here.

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