Author(s): William P. Dale and Charles F. Fuller
A major concern of individuals today is the provision of some form of income protection during extended periods of illness. Although many consumer loans, such as credit cards, automobiles and mortgages have disability insurance riders that allow consumers, for a monthly premium, to have disability coverage in the event of sickness or prolonged illness, often this coverage is inadequate to provide for the ongoing basic needs of a disabled individual. Put simply, these policies do not provide for payment of groceries, medical bills, utilities, automobile insurance, and other basic necessities in today’s world. For protection from these everyday expenses, an employee often needs a wage disability policy providing for short-term and/or long- term disability coverage.
Many employers provide a comprehensive employee benefit package which includes some type of income protection. This package may contain short-term disability coverage for illnesses up to six months in duration, and long-term disability coverage for illnesses that prohibit an employee from working for some extended periods. This may be a matter of months, years, or for life. Employers may fund these policies through their own assets or purchase a disability insurance policy to provide for its employees.
Disability plans provided by employers are most likely regulated by the Employee Retirement Income Security Act of 1974, as amended (ERISA). This federal statute provides certain rights to a “participant” of a disability plan. The participant’s rights are not only protected by federal law, but they are also governed by the plan document, which is often the insurance policy issued to the employer. Both the plan document and ERISA provide certain procedural rights to participants. The substantive rights of the participant, such as the benefits available, their duration, the proof that a participant needs to submit in order to be qualified for benefits, are governed by the plan document. ERISA leaves it up to the individual employer or employer/employee organization to determine what rights would be both appropriate and affordable for that employer or organization. ERISA provides guarantees that the participant’s rights will not be unduly infringed upon by the insurance carrier or “plan administrator” who makes the eligibility determinations for benefits and the amount of those benefits.
Unfortunately, it is a fact of life that, at times, disability claims are denied. If a person is covered by a disability plan under ERISA, when that individual’s claim for benefits is denied, he/she is usually required to file an administrative appeal with the plan administrator or insurance company setting forth the reasons why the claim should be approved. The participant may usually submit additional evidence, including doctors’ reports, and other medical records, proving the individual is disabled under the plan. After the participant exhausts these administrative remedies, he/she can file suit to obtain the disability benefits due under the plan. Suit can be filed in a United States District Court or in State Court.
If suit is filed in State Court, the plan administrator or insurance carrier may have the case “removed” to Federal Court. This means that the case would be transferred to the local United States District Court, where ERISA actions are usually brought, since these Courts have more experience dealing with the ERISA statute. If an individual is successful in his/her claim for benefits under ERISA, he/she is entitled to contractual damages, meaning the amount of benefits to which he/she would have been entitled, had proper payment been made, interest on these benefits, as well as the payment of reasonable attorney’s fees and costs incurred in the action. Given the cost of litigation, this is one of the greater benefits provided to participants by ERISA.
In an ERISA action, claims may be reviewed by the Court under either a de novo or an abuse of discretion standard. The de novo standard allows the Court to look at the claim anew and to substitute its own judgment in place of the insurance carrier’s decision regarding the right to obtain disability benefits. Under the abuse of discretion standard, the Court’s function is to determine whether or not the plan administrator or insurance company acted reasonably in denying the claim, not if they were correct. Thus, depending upon the type of review the Court provides for your disability plan, the participant’s rights are both varying and afforded different procedural protections. It is therefore a good idea to consult with an attorney who deals with these types of claims in order to determine what course of action should be taken. If the abuse of discretion standard is applicable, it is highly advisable that a disabled employee consult with an attorney during the administrative handling of the claim. It is in the individual’s best interest to obtain benefits without resort to litigation since the very purpose of these benefits is to replace loss of income. Proper handling of the administrative claim may help avert the need to file suit for benefits. We often assist people with their disability claims and would be happy to consult with you should you require assistance.
Individuals under an employer-sponsored ERISA plan are generally taxed on the disability benefits they receive because the premiums are paid by the employer. There are some exceptions to this general rule, depending upon the particular funding method used by the employer, which could result in substantial tax savings to the disabled employee. Again, we are happy to consult with you on this matter.