What is disability income insurance?Disability insurance refers to coverage against loss of income or ability to earn income resulting from accident or illness. It is designed to provide a substitute for earnings when, because of bodily injury or sickness the insured is deprived of the capacity to earn his living. Disability income policies typically provide that an insured is totally disabled if he or she is unable to perform the substantial and material duties of the insured’s own occupation in the usual and customary manner. Some policies provide for “specialty coverage” for various types of occupations which involve specialties (e.g., medical doctors and attorneys). Additionally, some policies, especially group insurance policies, have “any gainful occupation” provisions after one or two years after the insurer has paid disability benefits.
What are the typical provisions contained in a disability income policy?“Total disability” provision: these provisions typically provide that an insured is totally disabled if he or she is unable to perform the substantial and material duties of the insured’s own or usual occupation in the usual and customary manner. “‘(T)otal disability’ does not signify an absolute state of helplessness but means such a disability as renders the insured unable to perform the substantial and material acts necessary to the prosecution of a business or occupation in the usual or customary way. Recovery is not precluded ... because the insured is able to perform sporadic tasks, or give attention to simple or inconsequential details incident to the conduct of business .... ” Erreca v. Western States Life Ins. Co., 19 Cal. 2d 388, 396 (1942). Note that ERISA policies issued as part of an employee benefit plan governed by ERISA are interpreted under federal common law standards, rather than state law.
“Residual/Partial disability” provision: these provisions typically provide that if the insured is not totally disabled and can perform “one or more” of the substantial duties of his or her employment, they may be entitled to benefits. This coverage protects against loss of income rather than the inability to work. These provisions typically define “partial” or “residual” disability in terms of the percentage of duties the insured is able to perform and the percentage of lost earnings. For example: “‘Residual Disability’ means that due to Injury or Sickness: a. (1) You are unable to perform one or more of the important duties of Your Occupation; or (2) you are unable to perform the important duties of Your Occupation for more than 80% of the time normally required to perform them; and b. Your Loss of Earnings is equal to at least 20% of Your Prior Earnings while You are engaged in Your Occupation or another occupation ....” Partial or residual disability benefits are usually set at a percentage of total disability benefits (in proportion to the degree of disability) and are payable so long as the disability continues or until age 65.
“Any occupation” provision: “Any occupation” means disability benefits must be paid if the insured is disabled from working “in his customary occupation or in any other occupation in which he might reasonably be expected to engage in view of his station and physical and mental capacity and given his education, training and experience. The occupation must be “gainful,” which usually means that it pays the insured at least 50%-60% of his pre-disability income. It is common for insurers to misapply this definition. For example, in determining whether the insured is “totally disabled” (under an “own occupation” or “any occupation” policy), the job market for his or her services must be considered. If employers are generally unwilling to hire persons with such a disability, the lack of employment prospects is evidence of disability. See Moore v. American United Life Ins. Co., 150 Cal. App. 3d 610, 630 (1984).
“Offset” provisions: Disability policies (especially group policies) often provide for offsets (usually dollar for dollar reductions in benefits) where income is received from other sources on account of the same disability (e.g., income from other disability income policies, Social Security disability income benefits, state disability income or workers' compensation benefits, and settlements in lawsuits for the injury causing the disability). By far the most important of these offsets is for Social Security disability income. Often times, the policies provide that insureds must sign reimbursement agreements and apply for such benefits, otherwise, an estimate can be made.
“Elimination period” provision: Almost all policies establish an “elimination period” following onset of a disability (e.g., 30, 60, 90, 180 days) during which no benefits are payable. Under such a policy, the insured must establish that he or she is “totally disabled” continuously during the elimination period. If he or she returns to work during the elimination period, there is no coverage. See Moore v. American United Life Ins. Co., 150 Cal. App. 3d 610, 618 (1984).
“Illness vs. Accidental Injury” provisions: Disability insurance policies often distinguish between disabilities caused by illness and those resulting from accidental injury. Typically, a shorter period of benefits is provided for disability based on sickness (e.g., 2 or 3 years, or to age 65); while longer benefits are payable for disabilities resulting from accidental injury (e.g., lifetime payments). A disability results from “accidental injury” if the accident is a proximate cause of the disability. It is enough that the accident “triggered” or set in motion the chain of events that ultimately resulted in the insured's total disability.
Limitation on Benefits for Mental Illness: Disability policies often provide more limited benefits for a disability based on “mental illness.” These provisions may or may not be enforceable depending on the language of the limitation provision and depending on the nature of the condition at issue. For example, conditions commonly thought to be primarily psychiatric in origin but that are organically based (e.g., autism, schizophrenia, bipolar disorders) will not be subject to the provision. See Bosetti v. United States Life Ins. Co. in City of N.Y., 175 Cal. App. 4th 1208 (2009).
Preexisting Condition Exclusions: Disability policies often limit or exclude coverage for disabilities attributable to preexisting illness or disease. These provisions differ substantially and it is important to review the applicable language. Some policies require the illness “first manifest” during policy period. In order for this provision to apply, typically the insured must have been correctly diagnosed and treated for the condition causing disability before the policy was issued. If this language is used to contest the policy, it may not be enforceable, depending on the contestability period. Note that a preexisting condition exclusion applies only if the insured's disability is substantially and directly caused by the preexisting condition. If a condition is not diagnosed before the policy issuance date, the exclusion may not apply.
“Receiving Physician's Care” and “Appropriate Care” provisions: Disability policies often require, as part of the disability provision, that the insured must be “receiving a physician's care” or is receiving “appropriate care” for the condition causing disability.