In a world where medical uncertainties abound, having a safety net for unexpected medical events is crucial. Disability insurance provides that financial safety net, ensuring that individuals who are unable to work due to illness or injury can still support themselves and their families. One common avenue for obtaining disability insurance is through group disability insurance plans, which are often offered by employers.

If you are considering purchasing disability insurance, one issue you may be facing is whether to enroll in a group plan offered by your employer or to procure an individual policy independent of your employment. Whatever decision you make, there are both advantages and disadvantages of enrolling in a group policy and purchasing an individual policy. Therefore, your decision should be based on how these advantages and disadvantages are suited to your situation.

If you work for an employer who sponsors a group benefit plan, that plan is most likely governed by the Employment Retirement Income Security Act of 1974, or ERISA, a federal statute that provides a set of rules and regulations concerning everything from issuing the policy to making benefits determinations. Below we discuss some of the advantages and disadvantages of enrolling in a group disability plan.

Advantages of Group Disability Insurance

Ease of Qualification: Unlike individual disability insurance, group plans typically have less stringent underwriting requirements. This means that individuals with pre-existing health conditions or a history of illness may find it easier to qualify for coverage through a group plan. For employees with health concerns, this accessibility can be a lifeline in obtaining crucial coverage. And, enrolling in a group plan is a streamlined process for you to acquire coverage. Typically, the plan has been established for some time and your employer handles the administrative aspects of enrollment, so your role boils down to simply deciding the level of coverage you want. For an individual policy, your role in the administrative process of obtaining coverage will likely be much more involved. Thus, these plans allow you to get coverage more quickly and easily than individual policies.

Less Expensive: Enrolling in a group policy is generally less expensive as compared with individual policies. Group plans necessarily involve a minimum number of members, which allows the insurance company to provide the coverage for a lower cost to each member of the group. Additionally, many employers contribute some or all of the premiums for group coverage. Therefore, you may be able to get coverage without paying anything more out of your pocket, whereas you may need to pay the premiums for an individual policy on your own.

Governed by ERISA: Your policy will likely be governed by ERISA, which may have some advantages for you. Because ERISA is a federal statute, this means that should you have occasion to bring a lawsuit against your employer, insurance company, or other plan fiduciary, you can do so in a federal district court rather than in the state court system. The federal court system often moves more efficiently than its state court counterparts and federal judges know ERISA well and are adept at interpreting it. Also, a stated purpose of the ERISA statute is to protect those who are insured by a disability policy, and therefore many ERISA regulations may be more favorable to you as an insured than the state laws.  Moreover, while some favorable state laws are not applicable in ERISA, federal law under ERISA makes it much easier for you to collect attorneys’ fees if you have some success in your lawsuit.

Disadvantages of Group Disability Insurance

Disadvantage Policy Provisions: As compared to individual coverage, group plans may have less favorable standards for receiving disability benefits. A group plan’s definition of what constitutes a disability may be more vague or restrictive than that in an individual policy. Specifically, a group plan will typically consider you disabled if you are unable to perform the requirements of your “own occupation” for the first two years of receiving benefits, but after two years, will consider you disabled only if you are unable to perform the requirements of “any occupation.” This change can result in you receiving benefits for two years because they conclude that you are able to perform “any occupation” for which you are qualified by education, training and experience. Most individual disability insurance policies do not have these provisions.

Caps on Certain Types of Benefits: Benefits will likely be capped with some types of disabilities. It is typical in group disability plans to have maximum benefits payable for a short period of time regarding mental-nervous medical conditions, often two years. Individual policies do not typically have such limitations.

Offsets that Reduce Benefits Payable: Group policies almost always contain certain offsets, called deductible income, that will reduce your benefits paid under the disability policy. For example, if your disability insurance provides for a monthly benefit of $5,000, and you also qualify for monthly disability benefits from another source, like state disability benefits or Social Security Disability Income (SSDI) benefits, of $2,000, the group plan will reduce your benefits by that amount and will pay you $3,000, so that the total monthly benefit you receive from all sources is $5,000. This can be further complicated if your group plan insurance company pays you benefits for some time, then you later get a favorable decision as to state or SSDI benefits, as your group plan insurer will expect you to then pay it any applicable offset because it “overpaid” you.

Less Control: You will have less control over your policy with a group plan compared with individual coverage. Group plans often do not offer any portability, so if your employment ends, so does your coverage. Also, your employer and the insurance company have the power to alter or even terminate a group plan without your input. And your group plan almost certainly provides broad, umbrella-type coverage that will apply to the entire group, and you will not have the option of customizing the coverage to suit your circumstances. Obtaining individual coverage gives you more control over these factors.

Tax Implications: While the premiums for group disability insurance plans are often paid with pre-tax dollars, the benefits received in case of disability are usually taxed as income. This can result in a lower net benefit for the insured individual compared to benefits from individual disability insurance policies, which are often tax-free. Understanding the tax implications is essential for accurate financial planning.

Limited Choice of Providers: Group disability insurance plans typically limit participants to a specific list of insurance providers chosen by your employer. This limitation means that individuals may not have the opportunity to shop around for the best coverage or to select a provider that aligns with their preferences. Limited provider choices can impact the quality of service and flexibility in managing claims.

Whether you decide to enroll in a group plan or obtain individual disability insurance coverage, obtaining disability insurance will likely present you with considerations and issues that you will have to weigh in making the decision. And, once you have disability insurance, if your disability claim is denied, call on the disability insurance experts at McKennon Law Group PC to get the help you need.

Judge Dale Drozd of the Eastern District of California recently brought at least some clarity to authority that in the past has allowed for only a murky, muddled understanding of how courts may handle issues of financial conflicts of interest and procedural irregularities in the context of ERISA disability claims, in Chacko v. AT&T Umbrella Benefit Plan No. 3, __ F.Supp.3d. __, 2023 WL 5806455 (E.D. Cal. Sept. 7, 2023).

The Plaintiff, Ruby Chacko, had been a software engineer for twenty years when she began experiencing severe pain in her eyes, neck, shoulders, and arms, as well as blurred vision, prompting her to file claims for short-term disability (“STD”) and long-term disability (“LTD”) benefits, which claims were initially approved by AT&T’s third-party claims administrator Sedgwick Claims Management Services, Inc. (“Sedgwick”). However, Sedgwick then terminated her LTD benefits after only three months on the basis that the medical evidence did not support ongoing benefits. After Sedgwick also denied her appeal, Ms. Chacko filed suit to recover her LTD benefits. Using an “abuse of discretion” standard of review, the court found that Ms. Chacko is entitled to receive LTD benefits because Sedgwick and the defendant AT&T Umbrella Benefit Plan No. 3 (“Plan”) abused their discretion in denying the claim. The two main issues the court addressed were the reviewing physician’s conflict of interest and procedural irregularities during Sedgwick’s review of the claim.

As to financial conflict of interest, the court concluded that Sedgwick’s reviewing physician, Dr. Howard Grattan, had a financial conflict of interest, not based on the amount the doctor was paid to perform a review and provide an opinion, but rather, on how much he had billed Sedgwick over a period of two years prior to his review in this matter, during which he concluded over 80% of the time that the claimant was not disabled. Ms. Chacko argued that “when the statistics show that a doctor finds an overwhelming number of claimants alleging disability to be capable of work, the court can infer from this that the doctor harbors significant bias towards finding a claimant capable of working.” Id. at *18-19. Relying on Demer v. IBM Corp. LTD Plan, 835 F.3d 893, 902 (9th Cir. 2016) (finding a financial conflict of interest where the independent physician consultants earned $125,000–$175,000 annually based on performing 200–300 reviews/addendums each year), the court agreed and noted that a financial conflict of interest’s severity is determinative of how much weight the court should give when factoring such a conflict of interest into its analysis. The reviewing physician had billed Sedgwick a relatively low amount over those two years and during that time, the proportion of claimants the physician found to be disabled was extremely low, but not as low as in the examples Ms. Chacko provided to the court. Thus, having considered these factors, the court found that there was “a conflict of interest surrounding [the physician’s] review of [Ms. Chacko’s] medical records that warrants a low-to-moderate level of skepticism,” indicating that the concept of a financial conflict of interest should be viewed on a sliding scale as opposed to a binary analysis that would result in either the existence of a conflict, or no conflict. By doing this, the court could then identify where the conflict lies on this sliding scale and apply the appropriate amount of deference, and skepticism, to the plan administrator’s claim determination.

The court then addressed the procedural irregularities in Sedgwick’s review of Ms. Chacko’s claim. The court’s reasoning was based on the concept that the presence of procedural irregularities in the claim review process brings with it heightened skepticism of the claim review, which tempers the abuse of discretion standard. Again, this factor exists on a sliding scale, such that procedural irregularities may be present that are not egregious enough to warrant de novo review rather than abuse of discretion review, but they will still result in the court giving reduced deference to the plan administrator’s claim decision. The court specified four procedural irregularities that were present in Sedgwick’s claim review process.

First, the court discussed Sedgwick’s failure to consider the physical requirements of Ms. Chacko’s job. Sedgwick had acknowledged the importance of considering the job requirements when evaluating Ms. Chacko’s claim, but it then issued a denial letter indicating that it did not consider those physical requirements. Rather than discussing the requirements of keyboarding and mousing, Sedgwick instead focused on Ms. Chacko’s job being classified as “sedentary.” Additionally, Sedgwick did not consider the physical requirements of other potential alternative jobs that Ms. Chacko may be able to perform. The court found Sedgwick’s failure to assess whether Ms. Chacko was able to perform the physical requirements of her job, as well as those of potential alternative jobs, to be a significant procedural irregularity.

Second, the court discussed Sedgwick’s reliance on a transferable skills analysis (“TSA”) that failed to consider Ms. Chacko’s keyboarding and mousing limitations despite having already approved her STD and LTD claims based on those limitations. Sedgwick performed four TSAs for Ms. Chacko’s claim; the first two indicated that she was restricted from performing even sedentary work, as even sedentary jobs still have basic physical requirements like keyboarding and mousing. However, in determining that Ms. Chacko’s LTD benefits should be terminated, Sedgwick instructed its claims representative have a third TSA and to utilize only the limitations that had been set forth in a QME report, essentially instructing her to no longer consider the keyboarding and mousing restrictions that her treating physicians continued to include in their progress notes and work status reports. The court found that Sedgwick’s conduct resulted in a procedural irregularity that warranted skepticism of Sedgwick’s claim determination. The court noted that the restrictions and limitations provided in the first two TSAs, on which Ms. Chacko’s STD and initial LTD claims were approved, were consistent with those provided by her treating physician.

Third, the court addressed Sedgwick’s reliance on Dr. Grattan’s biased and flawed pure paper reviews. The court noted that there was no evidence that Sedgwick had cherry-picked which medical records to provide to Dr. Grattan and that performing only a paper review, without also performing an independent medical exam (“IME”), is not a procedural irregularity in itself, at least not if the reviewing physician was provided all the medical records for review. However, while Sedgwick’s reliance on a paper review without an IME was not a procedural irregularity in itself, the court considered the substantive adequacy of Dr. Grattan’s paper review in determining whether Sedgwick had abused its discretion. In this case, Dr. Grattan had a history of evidently rubber-stamping conclusions provided by Sedgwick and providing cursory conclusions which were not consistent with the related medical records.

Finally, the court discussed Sedgwick’s failure to properly consider the Social Security Administration’s (“SSA”) approval of Ms. Chacko’s claim for Social Security Disability Income (“SSDI”) benefits. The court noted that while ERISA plan administrators are not bound by the SSA’s determination (as the SSA has its own set of standards and ERISA plan administrators each have their own respective standards), Sedgwick’s conduct amounted to a procedural irregularity. Sedgwick had considered only the fact that the SSA had approved Ms. Chacko’s claim for SSDI benefits but did not make any effort to obtain her SSA file in order to evaluate why her SSDI claim was approved. The court noted that in this case, the Plan was in regular contact with the attorney representing Ms. Chacko in her SSDI claim and still made no effort to evaluate the SSA’s analysis of her claim. The court noted it has been recognized that a plan does not sufficiently “grapple” with an SSDI’s contrary conclusion where the plan “merely pays lip service to the existence of a contrary SSA disability determination” and includes “standardized language” explaining that the SSA and plan use different definitions of “disability” and that unlike the SSA, private plans are not required to give special deference to the opinions of the claimant’s treating physicians. See Hertz v. Hartford Life & Acc. Ins. Co., 991 F. Supp. 2d 1121, 1129, 1131, 1142 (D. Nev. 2014). This is exactly what the Plan did in Ms. Chacko’s case. Thus, the court found that the Plan’s failure to request Ms. Chacko’s SSA file, to engage in a meaningful review of the rationale underlying the SSA’s approval of her SSDI benefits claim, and to explain why the Plan was reaching a different conclusion constituted a procedural violation of ERISA’s regulations.

Ultimately, the court concluded that Sedgwick had abused its discretion in determining that Ms. Chacko was not entitled to ongoing LTD benefits. In providing this opinion, the court highlights some of the many gray areas of ERISA law and demonstrates that many elements of ERISA contain nuance and must be considered in the proper context of an individual matter. Chacko serves as a reminder that ERISA is a complicated, nuanced area of the law. If you are involved in an ERISA matter, the best thing you can do is enlist knowledgeable, experienced ERISA attorneys to utilize the expertise necessary to navigate such matters. The attorneys at McKennon Law Group PC are without rival when it comes to understanding and litigating ERISA law.