There is a big difference between an individual long-term disability (LTD) policy and an employer-provided group LTD policy. The type of policy you have directly impacts how you pursue a disability claim and may determine your chances of being approved. Most employer-provided group plans are legally governed by the Employee Retirement Income Security Act, a federal law commonly referred to as ERISA for short. ERISA regulations govern:
- Employer-sponsored disability plans: The ERISA statute applies to both LTD and short-term disability (“STD”) plans.1 Such plans can be self-insured by the employer in which the employer itself or an outside third party administrator (“TPA”) administers the plan.2 More commonly, ERISA disability plans are insured by traditional disability insurers.3
- Employer-sponsored retirement plans containing a disability retirement benefit. ((See, for example, Seman v. FMC Corp. Retirement Plan for Hourly Employees, 334 F.3d 728 (8th Cir. 2003)(employer’s retirement plan provided for a disability benefit through its retirement plan for employees forced to retire early due to disability).))
- Union sponsored disability plans.4
The ERISA framework provides specific procedures that disability claimants must follow when applying for LTD benefits and when filing appeals.
Note: Although technically group plans, all long-term disability plans provided by state and government employers are exempt from ERISA. Long-term disability group plans offered by trade organizations are also generally exempt from ERISA.
Individual LTD policies, on the other hand, are simply contracts between LTD insurance companies and individual policyholders and are governed by state insurance law. That means all policies purchased by an individual directly from an insurance agent or insurance company are exempt from ERISA.
There are many other differences between group (ERISA) and individual (state law) policies, including the costs of premiums, portability of coverage, taxation of benefits, and the process of filing appeals. It’s important to keep these differences in mind whether you are shopping for a new policy or thinking about filing an LTD disability claim on an existing policy.
Costs of Premiums of Group vs. Individual LTD Plans
The majority of long-term disability policies are offered to employees by an employer who also pays the monthly premiums. Employees who do not receive coverage through their employers, or who wish to supplement the group coverage they have through their employer, can purchase individual policies.
Group policies are generally less expensive; however, group plans provide more limited benefits. Individual policies can be customized to an individual’s specific needs and offer better coverage.
Benefits of Group vs. Individual LTD Plans
The most important provision in any long-term disability policy is how the term “disability” (or “total disability”) is defined under the policy. Under many group plans, you are considered disabled under the policy only if you are unable to perform any occupation in the economy. It is important to note that this is different than saying that you are unable to perform your own occupation. Other group plans define the term disability as the inability to perform the material duties of your own occupation for the first 24 months of coverage, but then the definition of disability shifts to the broader “any occupation” after 24 months. It is much harder to prove that you are unable to perform “any occupation” than your “own occupation”. That is why the broadening of the definition after 24 months frequently results in claimants’ LTD benefits being cut-off or terminated at the two year mark.
Individual policies, on the other hand, can be “own occupation” for the life of the policy, “any occupation” for the life of the policy, or a combination of the two. The individual buying the policy can control how long the “own occupation” period lasts. Generally speaking, it would be best to have an “own occupation” definition of disability for the duration of the policy.
Most LTD policies, whether group or individual, contain restrictions on the duration of payments for disability claims based on mental or nervous disorders (and/or substance abuse). Most policies will limiting payments for mental or nervous disorders to 12 or 24 months. However, if you are purchasing an individual policy and want to be covered for a longer period for specific conditions such as depression, anxiety, PTSD, bipolar disorder, fibromyalgia, or chronic fatigue syndrome, some insurance carriers may be able to write that into the policy in exchange for a higher monthly premium.
The amount of money you will receive in monthly benefits may also differ between group ERISA and individual policies. Group plans usually pay benefits equal to 50% to 60% (sometimes up to 75%) of your pre-disability earnings, often with a maximum of $5,000 or $10,000 per month. Individual policies may allow you to collect a greater percentage of your pre-disability salary with a higher monthly maximum benefit.
Finally, most group plans only pay to retirement age, typically 65 years of age. With individual policies, you may be able to purchase a rider for lifetime disability benefits, payable well after retirement age – until you pass away.
LTD Coverage When You Change Jobs
Another huge advantage in individual Long Term Disability policies is their portability. Individual insurance policies may travel with you from one job to another and, depending on the language of the policy, may even remain effective during periods of unemployment. Group LTD coverage, on the other hand, terminates when your employment with the sponsor employer ends.
Note: You may be familiar with COBRA regulations that may allow your health insurance to continue for a period of time after you’ve been terminated; however, COBRA does not apply to LTD insurance policies. If you apply for long-term disability benefits after leaving your position with your employer, you will probably be denied as you are no longer covered under the disability insurance policy. This is very important to remember when you are having difficulty maintaining employment and are considering filing a disability claim.
Taxation of LTD Benefits
Policy premiums for individual long-term disability insurance policies are typically paid for with the individual’s after-tax dollars and thus the LTD benefits are tax-free. However, in a group plan, the employer typically pays the premiums with before-tax dollars. Under such circumstances, the LTD benefits are taxed to the beneficiary as ordinary income.
The LTD Appeals Process
Administrative Appeals: If your group plan ERISA claim has been denied by the LTD insurer (or plan administrator), you must “exhaust” your insurance company’s internal review appeals process before you have the right to file a lawsuit in federal court. This means that if your claim is denied or terminated you must ask your insurance company to review its denial or termination before you can sue the insurance company for breach of contract. This request for review is called an administrative appeal. The time file an administrative appeal is very limited, typically 180 days from the denial or termination of benefits.
Individual LTD policyholders do not have to exhaust their administrative appeals before filing a lawsuit, the lawsuit may be filed in state court as opposed to federal court, and the claimant may present new evidence in court during the lawsuit.
State vs. Federal Court: Individual policyholders may sue the insurance company in state court for breach of contract, negligence, bad faith, or other causes of action available under his or her state’s insurance laws. Moreover, individual LTD policyholders are entitled to a jury trial.
As stated above, a group plan participant needs to exhaust the administrative review process before filing a lawsuit in court. Group LTD policies are governed by ERISA, a federal act, so the claimant would need to sue in federal court for the failure to pay benefits. The group plan participant must be extraordinarily careful to satisfy all filing deadlines for administrative appeals before filing a lawsuit. A claimant’s failure to file a mandatory administrative appeal under the policy could be considered a failure to exhaust the claimant’s internal appeals, and this could prevent the claimant from being able to sue the insurance company in federal court.
Federal ERISA cases are decided by a judge. The right to a jury trial is taken away from a group plan participant. In most ERISA cases the final decision is made after written briefs from the parties via the filing of a motion for summary judgment. Moreover, ERISA law limits new evidence in federal court. The Judge will only consider the evidence in the claim file. The Judge will not consider any new evidence at trial that was not in the claim file at the time the insurance company made its final decision. Thus, the claimant must be sure to submit all relevant evidence regarding the claim to the insurance company during the course of the administrative appeal.
Note: This is why you should not appeal by simply saying, “I appeal.” You should gather all of the evidence that would be helpful at trial, including medical records and opinions from your doctors, and submit it with your letter of appeal. We work very closely with our clients and their treating physicians to “pack the record” with supporting documentation in an effort to make sure that our ERISA disability appeals are submitted with an overwhelming amount of evidence to support the claim. A well-documented appeal is essential in order to maximize your chance of winning an appeal or court battle.
Standard of Review: The legal Standard of Review applied by courts is also different depending on whether you have group or individual coverage. Under ERISA, the actions and determinations of insurers and plan administrators are often evaluated under a lenient “abuse of discretion” standard. The Judge must determine whether the the insurance company’s decision to deny benefits was “arbitrary and capricious”. That means the denial or termination of benefits must be wholly unsupported by the evidence, or clearly incorrect without any rational basis, for the federal judge to overturn the decision.
Long term disability insurance companies are not given the same discretion under the state laws that apply to individual policies. Instead, the state court judge or jury will evaluate whether the insurance company satisfied its promises to you under your LTD contract.
Money Damages: Under ERISA, the court can only award you damages for the amount of back-due benefits you should have received, plus interest. Unfortunately, ERISA regulations do not allow any claims for bad faith or punitive damages against the insurance company for the insurer’s wrongful denial or termination of long-term disability benefits. “Worst case scenario” for a disability insurance company in an ERISA trial is to pay the claimant past due benefits and possibly interest and attorney fees. However, a state law claim under an individual policy may allow you to recover compensatory damages and punitive damages, depending on the law in the particular state.
Attorney’s Fees: In most federal circuits it is difficult to receive an award of attorney fees as the prevailing party in an ERISA disability case. In an individual disability claim, the insurance company may be forced to pay your attorneys’ fees under certain circumstances. With individual disability policies, the availability of an award of attorney fees is generally determined by the laws of the state in which the disability policy was originally delivered. Several states do not permit attorney fee awards in a long-term disability lawsuit.
29 U.S.C. §1002(1)(A) ↩
See, for example, Abram v. Cargill, 395 F.3d 882 (8th Cir. 2005) (self-insured plan for Cargill administered by UNICARE as the TPA). ↩
See, for example, Galman v. The Prudential Ins. Co., 254 F.3d 768 (8th Cir. 2001)(law firm’s disability policy insured by Prudential Insurance Company). ↩
See, for example, Cavegn v. Twin City Pipe Trades Pension Plan, 223 F.3d 827 (8th Cir. 2000)(retirement plan sponsored by the Twin Cities Pipe Fitters Union containing a disability feature). ↩