Disability Insurance—Peace Of Mind

Or Future Litigation?

 

Mark D. DeBofsky

Daley, DeBofsky & Bryant

One North LaSalle

Suite 3800

Chicago, IL 60602

(312) 372-5200

FAX (312) 372-2778

mdebofsky@ddbchicago.com

 

A recent advertisement in a professional journal warned, “You’re more likely to use a disability plan than life insurance before retirement.” Similar sales pitches have encouraged many attorneys to seek the protection of disability insurance either by purchasing individual disability insurance policies or by enrolling in group insurance coverage available through work or through professional associations. However, the promise of such insurance often proves illusory as the author of this article has learned from litigating and consulting on behalf of attorneys, doctors, and other professionals and workers who have suffered disabling sicknesses or accidents.  Disability insurance policies differ dramatically between insurance carriers; and even the same insurer will often provide markedly different policies.  To add further complication, the whole concept of “disability” is subject to varying interpretation by the courts.   Statistics bear out that insurers are taking a harder look at disability claims submitted by lawyers—therefore, an understanding of the issues that may be faced should an attorney experience an illness or suffer from an accident that affects the ability to practice is essential in avoiding claim denials. 

 

Individual Disability Insurance

Disability insurance comes in two forms—“general” and “occupational”.  “General” disability coverage resembles Social Security disability insurance—it insures only against sickness or injury that precludes all work.  “Occupational” disability insurance, on the other hand, protects against the inability to perform the material or significant duties of one’s own occupation.  Obviously, occupational disability coverage is far more desirable in order to protect an attorney’s huge financial investment in the education and career building necessary to establish a profession.  That entire investment can quickly become worthless, though, in the event of disability; and what is of the greatest concern is not the devastating sickness or accident causing such total disability, but circumstances that interfere with the performance of an occupation or occupational specialty. 

In such cases, many policies provide total disability benefits if the insured cannot perform all of the duties of their usual occupation, even if the insured may be capable of working in another occupation.  Other policies pay a proportionate benefit in the event that sickness or accident causes the insured suffers at least a twenty percent drop in income or if the insured can engage in some, but not all, of their regular occupational duties.  Because there are dramatic differences between disability insurance policies, the contractual language must be examined carefully to ascertain exactly what coverage is afforded.

It is also important to keep in mind that while some rare policies will adjust benefits for cost of living increases, most individual insurance policies pay only a fixed monthly amount that never increases.  Thus, it is also important to plan for the effects of inflation. 

Likewise, just as inflation adjusted coverage has disappeared, “own occupation” coverage is also difficult to obtain.  Even insurance plans sold by associations will only insure for “own occupation” for limited benefit periods; if disability continues beyond the initial own occupation period, for benefits to continue, the insured must demonstrate the inability to engage in any occupation.  Therefore, if more beneficial coverage is already in place, it is important to maintain that coverage and take advantage of additional purchase options.  Other offered disability coverage may be cheaper, but in the long run, no bargain is gained if the insurance fails to protect a lawyer’s investment in education, training, building, and maintaining a professional practice.

 

Group Coverage

            There are substantial differences between individual disability insurance policies and group coverage.  While an individual policy of insurance can be thought of as insuring the ability to earn a living, group coverage, on the other hand, insures income; and benefits are generally paid out as a percentage of earnings, usually between 50-70% of the insured’s base annual salary which may significantly penalize workers who receive bonus compensation as a substantial component of overall earnings.  Also, such policies usually limit benefits to a maximum amound such as $10,000.00/month, regardless of earnings prior to disability.

 

Taxation

The tax consequences of disability insurance benefits must also be considered.  So long as the insured pays premiums with after-tax dollars, the benefits are tax-free.  However, many businesses, partnerships, and other organizations pay their employees’ disability insurance premiums.  When that occurs, the benefits are taxable. Thus, for those who participate in group disability plans, the benefits paid may be worth substantially less due to the effect of taxation.

 

Definition of Disability

Because there is no such thing as a “typical” or “standard” disability insurance policy, the definition of “disability” can vary substantially.  This is especially the case in group disability plans.  Many older policies sold to groups of professionals or through professional associations have extended “own occupation” disability coverage; however, the promise of lower premiums without adequate warning of benefit cutbacks has lured many organizations to switch to inferior coverage insuring “own occupation” for only a limited period of time.  Such short-sightedness many have significant consequences in later years.

 

Psychiatric Claims

Another significant distinction between individual and group disability insurance plans is related to duration of benefit payments for what insurers refer to as “subjective” disability claims such as psychiatric claims. While some individual insurance contracts differentiate between mental and physical disabilities, such distinctions are almost universal in group long term disability insurance policies.  Typically, benefits for psychiatric disabilities are usually cut off after two years.  This can often be very confusing to the insured since the distinction between mental and physical conditions are often blurred.  As pointed out in the introduction to the American Psychiatric Association’s Diagnostic and Statistical Manual of Mental Disorders IV, there are many mental aspects to physical illness and many physical aspects of mental illness.  Breakthroughs in research are also pointing to biological causation of most mental illnesses, yet insurers often provide in their policies that any condition classified in the DSM-IV will be subject to benefit limitations.  Even so, claimants who can establish an organic cause for a mental impairment (such as stroke) will usually be able to overcome policy limitations for mental disorders because most individuals (and courts) would naturally understand such claims to be physical in origin.

 

Other subjective disability claims

Other subjective disability claims may also prove problematic.  Claims arising from conditions such as chronic fatigue syndrome, fibromyalgia, and myofascial pain syndrome are frequently rejected.  From the insurers’ viewpoint, because these conditions cannot be objectively tested and measured, the insurers have difficulty in establishing the validity of a claim.  From the perspective of the claimants, though, insurers appear to be taking advantage of medical science’s inability to objectify their impairments.  However, the progress of medical research will undoubtedly rectify this problem in future years, just as the advent of the MRI made it easier to diagnose multiple sclerosis.  In addition, even though medical science has yet to be able to identify objective tests for conditions such as chronic fatigue syndrome, the recognition of that condition by the Centers for Disease Control, and the American College of Rheumatology’s acceptance of fibromyalgia as a distinct disease entity has created judicial hostility toward insurers’ efforts to exclude claims that qualified physicians have diagnosed and certified as disabling. 

Insurers have countered by issuing new disability insurance policies containing specific limitations for “self-reported illnesses” such as chronic fatigue syndrome. Faced with its first court test of that policy limitation, though, UNUMProvident, the leading disability insurer in the United States, lost resoundingly.  The court ruled that such provisions were ambiguous and could not be enforced.

 

Offsets from Benefits

In evaluating disability coverage, it is also important to know whether the insurer can coordinate benefits with benefits from other sources.  Although very few individual disability insurance policies contain such provisions, it is common for group policies to contain provisions reducing benefits when the insured receives “other income benefits.”  Those provisions refer to Social Security disability benefits, workers’ compensation, state disability, other government disability benefits, or other group disability insurance; and the policies provide that an award of such benefits acts as an offset reducing the benefits owed by the group disability insurer.  Often, the offset extends beyond benefits received directly by the insured and also includes dependents’ benefits awarded by Social Security in relation to an award of Social Security disability insurance benefits.  To illustrate: If an attorney qualifies for $5,000.00 per month in group disability benefits, but also is found entitled to receive $1,400.00 per month from Social Security disability, and an additional $700.00 per month in Social Security dependents’ benefits, the disability insurer deducts $2,100.00 from its payment obligation, and pays only the balance of $2,900.00. 

It is therefore important to financially plan for such a shortfall which could markedly reduce the anticipated amount of disability insurance benefits that would be expected to be paid in the event of catastrophic accident or sickness.            One way of doing so is to purchase supplemental individual coverage because, while other group or government disability insurance benefits are offset as “other income benefits,” there is no reduction for individual disability insurance benefits. 

 

ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that has unintentionally dramatically impacted the landscape of disability insurance coverage.  Congress intended that the law protect employee benefits, but in actuality, the effect of ERISA has been to convert the employee’s sword to a shield for employers and insurers.   ERISA has profoundly affected both the administration and litigation of disability insurance claims since that law broadly applies to almost all employer-sponsored employee benefit plans, including disability insurance coverage. The courts have also expansively broadened the definition of the term “employee benefit plan” to include even single employee plans if the insurance premiums are paid by the business.  Thus, although the federal courts have not been entirely consistent, there are rulings holding that disability claims brought by law firm partners or even sole shareholder organizations purchasing individual insurance coverage for the owner of the business are covered by ERISA.   In such cases, ERISA preempts all state law claims.

The effect of ERISA is that the insured is deprived of significant rights in the event a claim is later litigated--including the right to a jury trial and the right to seek damages in cases where the insurer’s behavior is vexatious or malicious. However, the most profound disruption of traditional insurance law principles caused by ERISA is insurers are usually granted the same broad discretionary authority as would be given to trustees of retirement plans.  Such deference allows insurance companies broad leeway to interpret policy terms and determine benefit eligibility—which often is done in a way that favors insurers’ profits rather than the claimants’ interests. 

The practical effect of having such rules apply is that so long as the insurer’s claim file contains some evidence supporting its decision, even if the greater weight of the evidence favors the insured, the claim may be confidently denied without fear of reversal; or even if the court overturns the insurer’s determination, there is never any possibility of the imposition of penalties or damages.  Thus, decisions have been sustained where the only evidence supporting a denial or termination of benefits is the opinion of a reviewing, non-examining doctor whose qualifications are suspect, or videotape surveillance that may only misleadingly show a few minutes of a person’s daily activities, conveniently omitting much longer periods of pain and disability. 

While some courts have lately come to the understanding that too much deference has been granted to insurance companies, at least for now, ERISA claims often impose such a difficult burden on claimants that it is nearly impossible to overcome the insurers’ adverse decisions.

 

Some Other Troubling Issues

            As if the challenge of ERISA were not difficult enough, other issues are frequently raised in an effort to defeat disability claims.  Some of the more common issues are discussed below:

            Risk of Disability         This issue often arises in cardiac cases where the insured may have an essentially normal stress test following angioplasty or cardiac bypass graft surgery, but is advised that returning to a stressful occupation could cause further risk or death.  The courts have yet to definitively resolve the question of whether a “risk of disability” is an actual disability, although claims are enhanced if the insured is able to document all of the material duties of their job and whether present restrictions and limitations would preclude a return to that occupation.

            Legal Disability           Loss of licensure or practice privileges, even if caused by disorders such as drug addiction or other mental impairment, may also present a difficult burden. Courts and juries are generally unsympathetic to cases where professional licensure is caused by criminal behavior, regardless of whether that behavior was due to a disability.  However, if a physical or mental disability precedes a legal restriction, courts will generally find benefits payable.  The lesson to be learned from the cases is that impaired attorneys should self-report their problems rather than wait for legal or regulatory authorities to step in. 

Job versus Occupation.  Another issue that seems to be arising with greater frequency is characterized by the disability insurance industry as “job versus occupation.”  One of the significant recent cases involved an emergency room cardiologist who suffered a leg injury.  After an initial period of disability, the insurer argued that the claimant could return to work as a “cardiologist;” however, the doctor claimed that his disability prevented him from being able to run from one part of the hospital to the emergency room in the event of a cardiac arrest.  Because that ability was an essential duty of the claimant’s occupation prior to the onset of his disability, the court ruled the insurer had to continue benefits.  As a result of that decision, more recent rulings have also determined that in assessing disability, insurance companies must take into consideration specific characteristics of the job that the insured is performing; and if those characteristics make the job more exertionally or mentally demanding (such as the job of “trial lawyer”), if the insured cannot perform those essential material occupational duties, disability benefits must be paid.

 

Conclusion

            Few people truly really understand the importance of disability insurance coverage.  When one is enjoying good health, vitality, and professional growth, it is hard to imagine the possibility of a disabling illness or injury.  But even a mild degree of visual impairment, a moderate loss of cognitive ability, or even a minimal loss of manual dexterity could have profound consequences for an attorney.  That is why professionals purchase disability insurance—the current maximum Social Security disability benefit of approximately $1,400.00 per month is insufficient to replace a professional’s earning power; and even those benefits are unattainable unless the disability is so severe that any and all work is precluded. 

            Therefore, the importance of having the protection of disability insurance cannot be overstated.  It is also necessary to comprehend the issues that may be faced in the event a claim may have to be submitted.  The time to do so is now before it becomes too late to prevent the double disaster of experiencing a disability and not being able to recover benefits thought to be there in the event of such need.