Becoming an attorney and establishing a practice requires a tremendous investment in education and financial resources. Yet all of that hard work and effort can become worthless overnight if sickness or injury strikes. For that reason, many lawyers wisely invest in disability insurance. However, recent exposes on "60 Minutes" and "Dateline NBC" regarding the practices of certain disability insurers have led many to question whether such coverage is illusory. The answer is that disability insurance remains a valuable, if not necessary, product that all professionals should possess. However, disability insurance is a unique insurance product; and when issues do arise regarding benefit payments, a specialist should be immediately consulted to avoid the mistakes that could fatally damage the claim before it even gets to court. Some of the most important issues are discussed below.
Individual Disability Insurance
There are several sources of disability insurance. In addition to Social Security disability, which is secured automatically through FICA deductions, disability insurance is available in the form of individual policies, through policies made available by associations, and through group policies. However, regardless of the source of coverage, all disability insurance can be divided into two types — "general" and "occupational". Social Security disability insurance is the primary example of "general" disability: To qualify for benefits the insured must establish an inability to perform the duties of any occupation. "Occupational" disability insurance, on the other hand, insures against the inability to perform the material or significant duties of one’s own occupation. In some cases, occupational disability insurance is further defined to insure against the inability to perform one’s particularly specialty; i.e., "trial lawyer." A twist relating to occupational disability insurance, though, is if the insured has more than one occupation; i.e., teaching and practicing. If the insured is capable of performing the duties of one of the occupations, benefits may not be payable.
Also, the concept of residual disability is important to understand. If the insured suffers from an illness or injury that results in the inability to perform one or more significant job duties or the inability to perform the job for the same number of hours as before, and income loss results, the insured may be able to recover a proportionate benefit. Such claims can be exceedingly complex and require the insured to produce volumes of billing and time records.
Unfortunately, unlike commercial general liability insurance, disability insurance has not been standardized and policy language varies dramatically between carriers. Even the same insurer can offer policies that have varying coverages, which makes it crucial to examine the policies carefully to ascertain the coverage being provided.
Another issue regarding individual insurance is the amount of the benefit. Individual insurance generally pays a fixed monthly indemnity, so the effect of earnings increases and inflation needs to be considered in purchasing coverage. Many policies provide an optional benefit allowing for automatic increases in the amount of insurance without the necessity of medical proof of underwriting qualification. Although indemnity that adjusts for cost of living increases used to be prevalent, such policies are now rare; thus, it is important to plan both for anticipated increases in earnings as well as the effects of inflation.
Unfortunately, "own occupation" coverage that insures against the ability to perform one’s own occupation to age 65 or for life is virtually impossible to obtain. The best alternative is to purchase insurance that offers as many years of "own occupation" coverage as possible and then reverts to any occupation coverage qualified by a requirement that the occupation must be one that would provide earnings commensurate with pre-disability income.
Group disability insurance differs markedly from individual disability income insurance. An individual policy of insurance insures one’s ability to earn a living. Group coverage, on the other hand, insures income. Benefits are paid as a percentage of earnings, usually between 50-70% of the insured’s base annual salary which potentially penalizes workers who receive bonus compensation as a substantial component of overall earnings. Also, because such policies usually limit benefits to a maximum amount, highly compensated individuals are unable to fully insure their income.
Another feature of group coverage is that it coordinates with benefits from other sources. Most group policies contain provisions reducing benefits dollar for dollar by the insured’s recovery of "other income benefits" such as Social Security disability benefits paid both to the insured and to the insured’s dependents, workers’ compensation, other government disability benefits, or other group disability insurance. Such reductions do not encompass benefits received under a policy of individual disability income coverage, however. Nonetheless, the offsets can significantly reduce the value of the group coverage; and it is important to keep the potential offsets in mind when figuring the value of the benefits.
Business Overhead Expense
Another form of disability insurance is business overhead expense coverage (BOE). Such coverage will reimburse the insured for certain fixed overhead expenses for a period of time (frequently a maximum of two years) in the event disability prevents the insured from working. Unlike individual disability income or group disability insurance, BOE does not provide a fixed monthly amount, only a maximum subject to submission of monthly expense reports.
It is possible to shield disability insurance payments from taxation, although BOE payments are always be taxable. So long as the insured pays premiums with after-tax dollars, the benefits are tax-free. However, if an employer pays its employees’ disability insurance premiums, the benefits are taxable. Therefore, for a solo practitioner or partner in a law firm, premium payments should be structured in such a way that they are made with after-tax dollars in order to maximize the value of the disability insurance payment.
Another reason to utilize after-tax dollars to pay premiums is that if the employer pays premiums, that may have the effect of creating an employee benefit plan and triggering the applicability of the Employee Retirement Income Security Act (ERISA) to any resulting claim.
The ERISA law has had a pervasive effect on disability insurance claims and litigation. Although the law was drafted to protect contractually promised benefits, the law has been effectively utilized by insurers to insulate their determinations from meaningful judicial review. That is because insurers are able, without any regulatory oversight, to incorporate language into their policies reserving discretion to determine benefit eligibility and to interpret the policy terms and conditions. With such language, the standard of review applied by the courts is the highly deferential arbitrary and capricious standard which provides that so long as there is any rational support for the insurer’s decision, that determination will be upheld even in the face of overwhelming contrary evidence.
ERISA preemption is triggered by the establishment of an employee benefit plan. That is accomplished, according to many court decisions, simply by the purchase of insurance that covers employees. Thus, if a law firm buys group disability coverage for its partners, associates, paralegals and clerical staff, it has established an employee benefit plan, and any claim made under that policy will likely be governed by the ERISA law. There is one caveat to that statement, though. The ERISA law applies to claims by employees; law firm partners are employers. The federal circuits are currently split as to whether a law firm partner’s claim would be subject to ERISA.
The effect of having a claim subject to the ERISA law is dramatic. In addition to a potentially outcome-determinative standard of review, it is unlikely that the court would allow for a jury trial. Extracontractual damages are completely excluded. Even provisions such as 215 ILCS 5/155 of the Illinois Insurance Code, which provides for penalties in the event of an insurer’s "unreasonable and vexatious" conduct, are deemed preempted by the ERISA law. The court would likely also exclude any evidence that was not presented to the insurer prior to suit, which also means that discovery during litigation is generally disallowed. For that reason, pre-suit appeals, which are mandated by Section 503 of the ERISA law (29 U.S.C. §1133) are crucial and require input from an attorney because of the potential traps of not doing the appeal properly. Intimate familiarity with the governing regulations promulgated by the United States Department of Labor at 29 C.F.R. §2560.503-1 is essential if the appeal is to be successful.
One way in which practitioners attempted to mitigate the harsh standard of review in ERISA cases was by reliance on a doctrine of Social Security disability law known as the "treating physician rule." That principal requires a factfinder to defer to the treating physician’s opinion so long as the treating physician is a specialist with respect to the condition under consideration, the doctor has a longitudinal treatment relationship with the patient, and the doctor’s opinion is consistent with the laboratory test results and with the record as a whole. The United States Supreme Court recently ruled, though, in The Black & Decker Disability Plan v. Nord, 123 S. Ct. 1965 (2003) that disability insurers are not required to give deference to the treating physician. The Court did, however, express skepticism about reports from consultants frequently retained by the insurers, and the Court insisted that insurers must give consideration to the treating source opinions and weigh those opinions, particularly in light of the Congressional statement in the ERISA law that the statute was enacted to protect contractually promised benefits.
There are a number of other issues that are frequently litigated, which must be kept in mind when thinking about disability insurance.
Psychiatric and Subjective Disability Claims
Psychiatric claims may often be problematic. Almost all group disability insurance policies limit the duration of benefit payments due to psychiatric conditions; and the courts have accepted the legality of such distinctions. However, the distinction between mental and physical conditions are often blurred; and courts have, in some cases, found the policy definitions of "mental and nervous" conditions ambiguous.
Other claims involving "subjective" impairments such as chronic pain, chronic fatigue syndrome, and fibromyalgia, are frequently challenged. A recent Seventh Circuit ruling, Hawkins v. First Union Corp. Long-Term Disability Plan, 326 F.3d 914 (7th Cir. 2003) found an insurer improperly rejected such a claim and that subjective complaints may be just as disabling as claims that can be proven with objective evidence.
Nonetheless, insurers have countered "subjective" claims by issuing new disability insurance policies containing specific limitations for "self-reported illnesses" such as chronic fatigue syndrome or even migraine headaches. There is, as yet, only a handful of court rulings as to the validity of such policies and as to the meaning of objective versus subjective. The first court rulings have found that a physician’s detection of symptoms on examination is objective evidence which removes the claim from the realm of a self-reported illness.
Disability insurance is a very complex product, and because of its unique nature, it is easy to see how disputes can arise regarding even the most basic question: What is a disability? For that reason, there has been an explosion in litigation regarding disability insurance, and because of the ERISA law, the litigation has grown even more contentious. Clearly, this is an area that requires highly specialized knowledge and skill to navigate the treacherous traps that await the unwary practitioner.
Mark D. DeBofsky is an attorney in private practice in Chicago, Illinois with the law firm of of Daley, DeBofsky & Bryant. He received his Bachelor of Arts degree from the University of Michigan, and his Juris Doctor in 1980 from the University of Illinois College of Law. DeBofsky’s practice is primarily concentrated in litigation and consultation relating to employee benefit claims, disability insurance claims, Social Security disability claims, and employment law.
DeBofsky is the author of numerous publications and is also a frequent speaker at seminars sponsored both by legal and lay organizations. DeBofsky is active with many professional organizations such as the American Bar Association, the Association of Trial Lawyers of America, the Illinois State Bar Association, the Chicago Bar Association, and the National Organization of Social Security Claimants’ Representatives.
DeBofsky also serves as adjunct professor of law at the John Marshall Law School, Chicago, Illinois, Center for Employee Benefits and Taxation.