Many of our clients have both a private (Individual) policy of disability and group (ERISA) long term disability insurance coverage. The insurer knows what rules govern the claim and acts accordingly to protect the company’s bottom line. You should know them too. For you, the dispute is personal and immediate. You may be unable to work, unable to earn income, and required to produce extensive medical and occupational documentation during an extremely difficult time.
What is long term disability insurance? It’s insurance intended to replace a portion of your income when an illness or injury prevents you from working. And can be obtained in different ways.
The distinction between group disability insurance and private disability insurance is critically important when an insurer denies, terminates, or questions a claim.
Group disability insurance is commonly offered through an employer as part of an employee benefits package. Individual disability insurance, also called private disability insurance, is purchased directly by the individual, usually through an insurance broker, agent, or insurer.
Those differences impact the claims process. They include deadlines, appeal rights, evidence, judicial review, available remedies, portability, and ultimately the strategy required to protect your benefits.
The short version is this: group and private disability insurance may serve the same economic purpose, but legally they are worlds apart.
What Is Group Long-Term Disability Insurance?
Group long-term disability insurance is generally provided through an employer-sponsored benefit plan. It may be offered alongside health insurance, life insurance, retirement benefits, and other employee benefits. Employees may pay some or all of the premium through payroll deductions, or the employer may pay the premium. In most workplaces, employees enroll in the coverage without giving the policy much thought.
That changes when a disability occurs.
Most group disability policies are governed by the Employee Retirement Income Security Act of 1974 (ERISA) if it is part of a covered private-sector employee benefit plan. ERISA establishes federal requirements governing certain employee benefit plans, including procedures for disability claims and appeals.
Not every group disability arrangement is governed by ERISA. Government plans and many church plans, for example, generally fall outside ERISA. The structure of the plan must therefore be examined and not assumed.
What Is Private or Individual Disability Insurance?
Private disability insurance is generally purchased directly by an individual rather than provided as an employee benefit. Professionals, physicians, attorneys, executives, business owners, and others with substantial incomes purchase individual disability policies to protect their earning capacity.
The individual owns the policy and generally pays the premiums personally. Because the coverage is not dependent upon employment with a particular company, an individual policy is generally portable. If the insured changes jobs, the policy ordinarily remains in force as long as its contractual requirements are satisfied.
Individual disability insurance is generally governed by state insurance law and contract law, rather than ERISA. That distinction has enormous practical consequences.
Individual policies may also contain provisions specifically tailored to the insured’s occupation or financial circumstances. Depending on the policy, coverage may be based on an “own occupation” definition of disability, provide residual or partial disability benefits, or use an income-loss standard. The policy language controls everything.
Group Disability Insurance vs. Private Disability Insurance: The Major Differences
ERISA May Govern Group Disability Claims
One of the most consequential differences is ERISA. An employer-sponsored disability plan typically falls within ERISA. When it does, federal law imposes specific requirements concerning disability claims, adverse benefit determinations, notices, and administrative appeals.
The Department of Labor’s ERISA regulations establish procedural protections for claimants, including requirements concerning the handling and timing of disability claims and appeals.
An individual disability policy does not become an ERISA plan simply because an employer made employees aware of the policy or helped facilitate its purchase. The actual legal structure of the arrangement matters.
The Appeal Process Can Be Fundamentally Different
An ERISA claimant must follow the plan’s administrative claims and appeal procedures. The appeal is a critical opportunity to submit medical records, physician opinions, functional assessments, vocational evidence, occupational information, and other evidence supporting disability.
An ERISA appeal should not be treated as a routine letter objecting to the denial. The administrative record is central to subsequent litigation. Depending upon the governing plan, the applicable standard of review, and the circumstances of the case, a federal court’s review may be substantially constrained by the administrative record developed before the insurer or plan administrator.
An ERISA appeal should be prepared with the possibility of federal litigation in mind.
Individual Disability Claims Follow State Law
An individual disability policy ordinarily presents a different legal landscape. Rather than proceeding through ERISA’s federal administrative framework, the dispute generally involves the insurance contract, applicable state insurance statutes and regulations, and state-law principles governing insurance contracts and claims.
Depending on the jurisdiction and circumstances, the claimant may have different procedural rights and potentially different remedies from those available under ERISA.
The difference can affect where litigation occurs, what claims may be asserted, what evidence can be presented, and what remedies may be available.
Does Your Employer Have Influence Over the Insurance Company?
Employees sometimes assume that their employer’s size gives it leverage over the disability insurer. That’s a mistake. A large corporation may have significant purchasing power, but the disability insurer evaluates individual claims according to the governing policy and claims procedures. The fact that an employer has hundreds or thousands of employees covered by the insurer does not necessarily mean the insurer will give an individual claimant favorable treatment.
Why High-Income Disability Claims Receive Serious Scrutiny
Disability insurance is an insurance business. Insurers price policies based upon actuarial assumptions concerning disability, mortality, longevity, occupations, income, and other risks. Claims represent payments under those policies.
That does not mean every disability claim is improperly denied, nor does it mean an insurer automatically acts in bad faith when it investigates a claim. Insurers are entitled to investigate whether the contractual requirements for benefits have been satisfied. But the financial stakes for the company become substantial when the claimant’s potential benefits are large.
Consider a high-income professional who has purchased multiple disability policies to protect a substantial annual income. A successful claim could potentially result in significant monthly benefits over many years. For the insurer, the claim is evaluated within a larger business and risk-management system. It’s all business.
The Particularly Difficult Reality of an ERISA Disability Appeal
Here is another problem that should not be overlooked: the person required to prove disability is often the person least capable of managing the process.
The insurer may request medical records, attending physician statements, functional assessments, occupational information, authorizations, and other documentation. But the person who is too ill or injured to work may also be dealing with medical appointments, diagnostic testing, medication changes, treatment complications, financial pressure, and the ordinary demands of daily life.
The claimant must then determine what information is relevant, identify deficiencies in the insurer’s reasoning, and respond within applicable deadlines. This is a lot for someone while they are coping with a disability. The insurance companies are counting on a certain number of people to do nothing.
Under ERISA, the importance of the administrative appeal can make the burden even greater. A claimant who submits an incomplete appeal may create problems that become difficult to correct later.
Medical Evidence Is the Foundation of a Disability Claim
Whether a claim is governed by ERISA or state law, disability disputes are fundamentally evidence-driven. A diagnosis is important, but a diagnosis alone does establish contractual disability. Does the person’s disability impact their ability to perform the material duties and tasks of their occupation?
Strong medical evidence should address, where relevant:
o The nature and severity of the medical conditions.
o Symptoms and their frequency.
o Physical restrictions and limitations.
o Cognitive limitations.
o Medication side effects.
o Treatment history and response to treatment.
o Functional capacity.
o Expected duration of impairment.
o Restrictions affecting concentration, attendance, stamina, lifting, sitting, standing, walking, or other relevant functions.
o The claimant’s ability to perform the material duties of the occupation consistently and reliably.
The distinction between having a medical condition and being contractually disabled is crucial. An insurer may concede that an insured has a legitimate diagnosis while arguing that the medical evidence does not establish an inability to perform the duties required by the applicable definition of disability.
What Happens When You Leave Your Job?
We receive a lot of queries about people who aren’t able to work, are filing for disability, and are worried about being fired or feeling like they need to quit. Portability is a problem for employee benefits.
Employer-sponsored group disability coverage is generally connected to the employment relationship. Depending upon the plan, an employee who leaves the employer may lose eligibility for group coverage.
An individual policy is generally owned by the insured and therefore can remain in force despite a job change, provided premiums and other contractual requirements are satisfied.
What About Premiums and Taxes?
Group coverage is often less expensive than individual coverage because group insurance spreads risk across a larger population. Tax treatment can also differ.
When an employer pays disability premiums, some or all of the resulting benefits may be taxable depending upon the circumstances. Benefits from an individually purchased disability policy may generally be received income-tax-free when premiums are paid with after-tax dollars.
There are exceptions and variations, so tax consequences should be evaluated based upon the actual premium arrangement and applicable tax rules.
Which Is Better: Group or Private Disability Insurance?
There is no universal answer. Group disability insurance can provide valuable income protection at relatively low cost. It may be available through employment without the employee having to undergo the underwriting process associated with some individual policies.
Individual disability insurance can provide greater ownership and portability and may contain more favorable contractual provisions, depending upon the policy. However, it’s more expensive than group insurance.
For high income earners, the strongest approach is to have both.
Group coverage can provide a foundation of protection, while an individual policy can supplement the benefit and remain in place independently of employment.
What Should You Do If Your Disability Claim Is Denied?
An ERISA claim and an individual disability claim cannot be handled the same way. Before responding to a denial or termination of benefits, determine:
o Whether the policy is part of an ERISA-covered plan.
o What definition of disability applies.
o What deadline governs an appeal or legal action.
o What evidence the insurer relied upon.
o What evidence is missing or inaccurate.
o Whether an administrative appeal is required.
o What remedies may be available.
o What standard of judicial review may apply.
o Whether the administrative record could control subsequent litigation.
The consequences of missing an appeal deadline, submitting inadequate evidence, or misunderstanding the governing legal framework can be significant.
If your long-term disability benefits have been denied, terminated, reduced, or placed under review, consider consulting an experienced long-term disability insurance attorney before responding. The governing law, policy language, administrative procedures, and evidentiary record can all matter
