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 law governs disability insurance claims disputes?When making a disability insurance policy claim, it is important to clarify whether the insured has an individually-purchased policy or an employment-based group policy. If the insured is a member of a non-governmental employment-based group disability insurance plan, the disability insurance will be governed by a federal law called the Employee Retirement Income Security Act of 1974 or ERISA, which establishes the standards for the parties responsible for administering an ERISA plan and claim and has stringent requirements for processing disability insurance claims. If the insured owns an individual disability insurance policy, any required deadlines and standards in processing a disability insurance claim will be administered according to state law. As discussed more in the Insurance Bad Faith FAQs and ERISA FAQs sections, it is critical to determine whether ERISA or state law applies as the available remedies and potential damages are very different.
What timelines govern a disability insurance claim?In making a disability claim, an insured will first want to clarify whether he/she has an individually-purchased policy or an employment-based group plan. If the insured has a non-governmental employment-based group policy, the plan will be governed by a federal law called the Employee Retirement Income Security Act of 1974 or ERISA, which sets the standards for the party responsible for administering an ERISA plan. ERISA has stringent requirements for processing benefit claims. If the insured owns an individual disability insurance policy, any required deadlines and standards in processing a disability insurance claim will be administered according to state law. California law is particularly beneficial to disability insurance claimants.
General Timeline for ERISA governed disability insurance plans:
- A claim should be approved or denied within 45 days of receipt of the claim. See 29 C.F.R. § 2560.503-1 (f)(3).
- Should more time be necessary to review a claim, the plan can extend the time frame for up to 30 days, but the plan must inform the insured within the initial 45 days that additional time is needed, why the additional time is needed, if there are any unresolved issues or additional information needed, and when a final decision will be rendered. See 29 C.F.R. § 2560.503-1 (f)(3).
- Should additional information be needed, the insured will have 45 days to provide the additional information.See 29 C.F.R. § 2560.503-1 (f)(3).
- Once the additional information has been provided the claim should be decided no later than 30 days or during the timeframe set out by the policy, whichever comes first. See 29 C.F.R. § 2560.503-1 (f)(3).
- If disability insurance claim is denied, the insured has 180 days to file an appeal. See 29 C.F.R. § 2560.503-1 (h)(3)(i).
- A decision on an appeal must be made not later than 45 days after receipt of the insured’s request to review a denied claim. See 29 C.F.R. § 2560.503-1 (i)(3).
- Should special circumstances require an extension, the plan may take up to 45 more days, but the plan must provide an explanation in writing of the special circumstances along with providing a date by which the plan expects to make a decision on the claim. See 29 C.F.R.§ 2560.503-1 (i)(3).
- Traditionally, an ERISA matter in the state of California can be brought four years after all administrative remedies are exhausted as long as the plan does not provide a contractual limit on the time to sue.
- A claim should be approved or denied within 30 calendar days of receipt of all necessary information to determine liability for a claim. See Cal. Ins. Code §10111.2 (a).
- The 30-day period does not begin to run until all relevant medical information has been received, all relevant information has been requested and received or if an investigation for fraud has been reported to the California Department of Insurance and is being conducted. See Cal. Ins. Code § 10111.2 (a) (1-3).
- Should the insurer require additional information to conclude the claim investigation then it must notify the insured in writing within 30 days after the claim is filed, and provide a written list of all information reasonably need to investigate the claim. See Cal. Ins. Code § 10111.2 (b).
- California law requires an insured wait 60 days after filing a claim to file suit. See Cal. Ins. Code § 10350.11
- An insured typically has three years after the time written proof of loss is furnished to an insurer to file suit. See Cal.Ins. Code § 10350.11.
How does a claimant make a disability claim?The most important document in filing a disability insurance claim is the disability insurance policy, or if the insured is a member of a group insurance program for which ERISA applies, the summary plan description and group insurance certificate. These documents typically provide a detailed overview of how the plan or policy works, what benefits it provides and how to file a claim for benefits. If the insured is a member of a union or a plan associated with a collective bargaining agreement, he/she should also check any applicable collective bargaining agreement’s procedures for filing, claims, grievances and appeals. If the insured does not have a copy of the disability insurance policy or summary plan description, the insured should immediately make a written request for a copy of his/her policy, summary plan description and/or group certificate that contains the claims procedures. The plan administrator in ERISA matters is required by law to provide the insured with a copy upon written request. The insured will also want to contact his/her insurance agent or plan administrator to obtain claim forms.
It is important to keep copies of all letters, so the insured has an easily accessible timeline in the unfortunate event he/she has to pursue a claim through litigation. Also, it is the best policy to send all letters by certified mail with return receipts, so there is a record of when documents were received and who is processing those documents.
When filing a disability insurance claim, the insured will want to include, among other things, a detailed discussion of his/her medical condition(s), why he/she cannot perform the material and substantial duties of his/her occupation in the usual and customary manner, a list of medical providers he/she has seen and a certification from a medical provider as to why the insured is totally disabled. The more information that the insured presents at the outset of the claim the less likely he/she will experience unnecessary delays.
Remember, a disability insurance claim is a very proof intensive process, and the insured should document all interactions with insurer, plan administrators, employers and representatives of the insurance company (such as insurance agents) every step of the way. Always memorialize all telephone or in-person conversations by letter summarizing what was discussed, and send it to all parties involved in the processing of the claim to confirm the communication occurred. Also, the insured should maintain a file of everything related to the claim and keep a chronology of claim related events. This way should the insured be forced into litigation, there is a clear and definitive record of how the claim was handled.
What is an incontestability clause and how does it work?An incontestability clause is a policy provision that prevents an insurer from denying a claim or rescinding (i.e., voiding) a policy after it has been in force for a specified period. California Insurance Code section 10350.2 states that all disability insurance policies require an incontestability provision, and further provides that every disability policy must contain specific form language either limiting the contestability period to two years or having no limitation in time, but requiring that insurer prove fraudulent intent. During the contestability period an insurer can void the policy or deny a claim based on a material misrepresentation made on the application. A material misrepresentation is a statement made by a potential insured person in the application process that is factually incorrect. The misrepresentation is considered material if knowledge of the misstated fact would have caused the insurer to refuse to issue the policy or would have caused the insurer to issue the policy with limitations or a higher premium.
An insurer must take immediate action to cancel the policy or deny the claim should it discover a material misrepresentation during the contestability period. A mere declaration that it intends to void the policy will have no legal force unless the policy is rescinded within the contestability period. An insurer can potentially waive the right to rescind the policy in the contestability period if it continues to accept premium payments after it has asserted that it can rescind the policy. See Anaheim Builders Supply, Inc. v. Lincoln Nat'l Life Ins. Co., 233 Cal. App. 2d 400, 411(1965). Furthermore, an insurer cannot claim a material misrepresentation occurred if the applicant fails to appreciate the significance of the information. See Miller v. Republic Nat’l Life Ins. Co., 789 F.2d 1336, 1340 (9th Cir. 1986) (applying California Law).
If the contestability period expires, the insurer will be prohibited from rescinding the policy based upon a material misrepresentation in the application process. However, many incontestability provisions set forth an exception for fraudulent misrepresentations discovered after the two year contestability period. These exceptions allow insurers to rescind the policy if there is a factual showing by the insurer that the insured provided false information on the application with the intent to deceive. Whether fraud has occurred or a simple misstatement was made will be determined by the facts of each particular case. Therefore, the incontestability provision attempts to strike a balance between providing predictable insurance coverage and protecting the rights of the insurer against misrepresentations by applicants. If an insurer asserts that it is entitled to rescind the policy because of a material misrepresentation, it is imperative the insured contact experienced disability insurance attorneys to determine whether the insurer’s attempt to rescind the disability insurance policy was improper.
What should an insured do if the insurer improperly lapses a disability insurance policy?A lapse in coverage occurs from an insured’s failure to pay a scheduled premium or the insured otherwise manifesting intent not to renew the policy. Express provisions in the disability insurance policy provide for the legitimacy of the insurer to allow a disability insurance policy to lapse for failure to pay premiums. However, California law requires that disability insurance policies include a grace period during which coverage remains in effect even if the renewal premium is not paid before expiration of the policy period. Payment of the renewal premium during the “grace period” will prevent any lapse in coverage. Insurers are required to provide the insured with a written statement outlining the specific reasons for cancellation and a summary of his/her rights under the California Insurance Code. Written notice must be provided at least 30 days prior to the expiration of the policy.
If the insurer improperly lapses the insured’s policy, it is important to take immediate action. The first step is to contact the insurer and insurance agent to confirm that the policy has indeed lapsed and is not currently in a grace period. If the policy has indeed been lapsed, then the insured should inform the insurer and the agent of the impropriety of the policy lapse, and request that the insurer reinstate the policy. Where a policy has lapsed for nonpayment of premiums, the insurer may offer to reinstate the policy upon receipt of the unpaid premiums. Typically, an insurer may condition such an offer on receipt of a new application so it can underwrite the policy based upon new/updated medical information (which means that if the insured’s health has materially changed for the worse, the premiums could be much more expensive or the insured may not even be insurable!). Insurers often will exclude coverage for losses between the lapse date and reinstatement date. Insureds should be advised that an insurer that receives a new application in conjunction with policy premiums is required by California law to notify the insured of any decision to reject the application within 45 days or the policy will be reinstated.
Furthermore, should the insurer act as if the policy is still in force through misleading representations, by retaining premiums or through conflicting notices for past-due payments, then it may be deemed to have waived its right to cancel the policy. If the insurer attempts to exclude coverage for losses because of improper lapse it is important to remind them of the circumstances that caused the lapse, and document the entire chain of events in a formal letter to the insurer. It is also important to assess the agent’s actions because it may be possible to render the insurer responsible for the negligent actions of the agent, who may also independently liable for the wrongful lapse. This area of potential liability is extremely complicated under the law so the insured should talk to an experienced disability insurance attorney about exploring his/her legal rights further.
Can social media impact a claim for disability insurance benefits?There is a high likelihood that social media could impact the insured’s claim for disability income benefits. Insurers are increasingly utilizing social media to investigate the legitimacy of disability claims. Generally, information on social media sites can be obtained without the insured’s knowledge or permission. In fact, recent case law suggests that social networking sites are not considered private and may be subject to discovery by defendants. Increasingly, insurers are relying upon electronic surveillance to paint claimants in an unflattering light based upon social media entries and photographs. The best practice when filing a claim for disability income benefits is to remove cancel or suspend all social media accounts.
However, should the insured choose to keep social media accounts active, we recommend that the insured ensure that all of his/her social media accounts are set to the most restrictive privacy setting possible. The insured should take every possible step to ensure that none of his/her personal information and any questionable photographs are accessible to the public.
The insured should take the following precautions while in the process of filing a claim or litigating to recover disability benefits:
- Set all social media accounts to the most restrictive privacy settings.
- Refrain from connecting, linking up with or “friend-ing” anyone that the insured does not know personally and cannot identify.
- At no point should the insured make any comment about his/her case or matters surrounding the disability insurance claim or case.
- Avoid making any comments about physical or mental conditions. These status comments can potentially be used to show that the insured’s condition has improved or is inconsistent with what the insured has represented.
- Do not post anything about meeting with lawyers or a lawyer’s staff members. This can result in a challenge to the attorney-client privilege.
- Be very discrete about any photos posted, and avoid posing for any photos that can be misconstrued as the insured participating in a sporting event or physically challenging activities. Photographs showing physical activity inconsistent with the insured’s claims can be very damaging.
- Do not post any “party” photos that show the insured drinking alcohol or otherwise being engaged in activity that the insurer can potentially misconstrue as reckless or irresponsible behavior.
- Do not send any e-mails regarding the insured’s claim or case to anyone other than the insured’s attorneys. Emails often contain emotional content that may be inconsistent with the insured’s recollection if the insured is deposed later in litigation. Additionally, the insurer may attempt to subpoena these emails.
- At no time should the insured participate in any blogs, chat rooms or message boards concerning insurance companies.
Are employment prospects considered when determining total disability?In determining whether an insured is “totally disabled” (either under an “own occupation” or “any occupation policy”), the job market for the insured’s particular occupation must be considered by the administrator or insurer. For example, if employers in an insured’s particular occupational field are generally not willing to hire individuals with the insured’s disability, the lack of employment prospects would be evidence of “total disability.” Moore v. American United Life Ins. Co.,150 Cal. App. 3d610, 630 (1984). If an insured has returned to work or accepted other employment, evidence of this would be relevant to determination of a claim for total disability. However, simply performing certain duties does preclude a finding of total disability if the insured performed those duties against the advice of his/her physician. For example, the fact that an insured performed certain material duties of his/her occupation during the time for which he/she is claiming disability benefits is not conclusive evidence that the insured’s disability was not total if reasonable physicians would advise against doing so. See Fitzgerald v. Globe. Co. of N.Y., 84 Cal. App. 689, 698 (1927).
What does an insured do when his/her insurer denies a disability insurance claim?If a policy is not governed by ERISA, then the next step following an insurer’s denial of a claim would generally be to bring a civil lawsuit against the insurer, since unlike under ERISA governed policies, there is no requirement that the insured submit an appeal. However, an insured should review the policy and denial letter to ensure that he/she has completed all the necessary steps for claiming disability benefits. After doing so, the insured should consult with an experienced disability insurance attorney regarding bringing a civil action. Most attorneys, including the McKennon Law Group PC, will take a meritorious case on a contingency fee basis (meaning the insured does not pay a fee unless there is some type of recovery from which a fee may be earned).
If a policy is governed by ERISA, then the insured cannot immediately file a civil action to recover disability insurance benefits until he/she appeals the initial claim denial. Instead, ERISA requires that the insured first appeal the initial determination in accordance with procedures contained in the plan documents/policy. Under the Department of Labor Regulations, an insured has no more than 180 days to appeal a denial decision relating to disability insurance benefits. If the insured does not timely appeal an adverse benefit decision, then he/she may lose the right to collect benefits under the Plan. When an insurer denies a disability insurance claim, it is required to advise the insured of the specific reasons for the denial and describe any additional material or information necessary to perfect the claim. Additionally, the insurer must inform the insured of the plan’s review procedures and inform the insured of his/her right to file a subsequent civil action. However, the insurer never tells the insured that he/she will not be allowed to use new evidence to support a subsequent civil action. Because the insured may be limited to the information contained in the Administrative Record in the lawsuit, it is crucial that the Administrative Record contains all information that supports the insured’s disability insurance claim.
As such, following denial of a disability insurance claim, the insured should immediately consult with an experienced disability insurance ERISA attorney and discuss appealing the insurer’s initial decision. As discussed above, time is of the essence and the insured does not want to risk losing disability insurance benefits by failing to file a timely appeal. But, the insured should not simply submit an appeal stating that he/she disagrees with the insurer’s denial decision. The insured should have an attorney prepare the appeal and ensure that the file contains all of the documents and information needed in a subsequent lawsuit. Specifically, a qualified attorney can help the insured review the insurer’s often voluminous records and identify any problems or irregularities in its initial denial. An experienced disability insurance ERISA attorney can also ensure that these problems or irregularities are noted in the Administrative Record and are backed up by applicable case law citations. Moreover, when confronted with the arguments of experienced disability insurance ERISA attorneys such as McKennon Law Group PC, the insurer or plan administrator will often reverse itself and approve the claim for benefits without the need to file a lawsuit.
What are the typical provisions contained in a disability income policy?“Notice and Proof of Loss”: The burden of proving disability is on the insured. Disability policies require the insured to notify the insurer of a potential claim, to submit a sworn proof of loss and to cooperate with any investigation. The form and content of notice and proof of loss is determined by statute. See Cal. Ins. Code §§ 10350.5–10350.7. Proof of loss is usually required within 90 days after the date of loss. However, Courts have interpreted these provisions with varying degrees of flexibility. A delay in providing notice or proof of loss does not invalidate “any claim if it was not reasonably possible to give proof within such time.” See Cal. Ins. Code § 10350.7. Furthermore, under the “notice-prejudice rule,” an insured’s delay in giving notice of claim or proof of loss does not bar recovery unless the insurer is actually prejudiced by such delay; otherwise the delay is excused as immaterial. If an insurer denies liability prior to the time proof of loss is required, then proof of loss is waived. Finally, an insurer may be held to have waived the requirement of a timely proof of loss if the delay in the presentation is caused by the insurer or if the insurer failed to object promptly and specifically on that ground. Generally, courts have looked favorably on claims of waiver by insured on the time requirement for proof of loss in order to avoid forfeiture of benefits. See Beasely v. Pacific Indem. Co., 200 Cal. App. 2d 207, 209 (1962).
“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.
“Own occupation” provision: “Own occupation” provisions require that disability benefits be paid if the insured is unable to perform the material and substantial duties of his/her customary occupation in the usual and customary manner and with reasonable continuity. However, the precise definition of “own occupation” differs from policy to policy based on the precise language contained in the policy. Some policies provide benefits if an insured is unable to perform the duties of the insured’s own occupation as that job was actually performed. Under these types of policies, insurers and administrators have a duty to carefully evaluate the insured’s material and substantial job duties when determining whether the insured is disabled from insured’s own occupation. In doing so, insurers and administrators generally must consider the employer’s description of the material duties of the insured’s occupation and the insured’s own description of insured’s occupational duties. To a lesser extent, the insurer may look at the description of the position as it is traditionally performed. However, the latter is typically not very relevant to the inquiry. With these types of policies, it does not necessarily matter that the insured is working in another occupation as this would not disqualify the insured from collecting benefits.
Other types of disability insurance policies define “own occupation” as “not engaged in any other occupation.” With this type of policy, if an insured is working in another occupation, then he/she will not likely qualify for disability insurance benefits.
Yet other policies define disability from an insured’s “own occupation” as inability to perform the material duties of a vocation of the same or similar general characteras is typically performed in the general economy. In this type of policy (typically found in group insurance policies), the insured’s actual occupational duties are relevant but carry less weight. Under these policies, the insurers and administrators are not limited to considering the insured’s own occupation duties, but may consider the way the occupation is generally performed in the national economy. This often involves using the Department of Labor’s Dictionary of Occupational Titles. Under these policies, the insurer or administrator will take the position that it can deny an insured’s claim if it determines that the insured is capable of performing his/her occupation generally, even if the insured’s actual occupation is more demanding or strenuous. These “own occupation” provisions give insurers and administrators more leeway in determining what job description to apply to a particular insured. However, the descriptions applied are often inaccurate and do not fit the insured’s occupation. As such, these denial decisions are often incorrect and a basis for appeal.
“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.