Employer provided disability insurance benefits, which are governed by the Employee Retirement Income Security Act (ERISA), pay a portion of a claimant’s earnings if they cannot work because of illness or injury. Typically, the first six months of disability insurance benefits are paid by what is referred to as short term disability (STD) insurance. The benefits paid thereafter, typically until the age of 65 are paid by long term disability (LTD) insurance.
The ERISA claim regulations apply to both STD and LTD insurance benefits. While STD insurance and LTD insurance pay benefits, the terms under which such benefits are paid and calculated differ significantly.
Both STD and LTD insurance benefit claims are started with a notice of claim that must be given within a certain period of time that is stated in the insurance policy. Typically, the process of providing notice of claim starts with an inquiry to the employer’s human resources department. The claimant should receive a three-part form or be provided with a web address to file the claim. On the form, one part is filled out by the employer, one part by the claimant’s doctor and one part by the claimant. See, Frequently Asked Question (FAQ’s) No. 11. This form is sent to the insurance company. Within a specified period, the insurance company should contact the claimant for the continuation of the claim process. If the insurance company does not contact the claimant, the claimant has an obligation to provide additional information required by the policy. See, Common Issues in ERISA Claims II 1a.
Once a claim is made, the insurance company has a certain period of time to make a decision. Special circumstances allow the insurance company to obtain an extension of time. If the insurance company determines to pay the benefits, it will issue monthly checks for the STD or LTD benefit in the amount calculated according to the terms of the policy. If the insurance company determines that it will not pay the benefits (See, FAQs Nos. 23 and 24.), it must issue a denial letter with the items required by the ERISA regulations. See, FAQ No. 13.
The denial letter, among other things, must advise the claimant that the claimant has 180 days to appeal the denial determination and identify the information necessary to perfect the appeal. The additional information typically includes office visit notes, doctor letters, tests and/or films.
Once the appeal is filed, the insurance company has a specified period of time and extensions to make a determination. It may reverse its decision and start to pay benefits. It may uphold its decision to not pay benefits. Some insurance companies allow for a second appeal which is governed by the same regulations for the first appeal.
If the claimant is not willing to accept the adverse benefit determination, then the claimant must file suit. This suit is generally filed in a federal court. The case is presented to the judge without a jury and is limited to the evidence in the administrative record with respect to the merits of the claims. See, Common Issue in ERISA Claims, II 2E. The case typically is decided on the basis of whether the insurance company abused its discretion in denying the benefits. See, FAQ No. 17. The conflict of interest of the insurance company is a factor that is considered by the judge.
The time involved in an ERISA STD or LTD insurance benefit claim can be substantial and will tax the financial endurance of any claimant. From the date a claim is filed, it may take the insurance company 90 days to make a determination, the claimant may take 180 days to file an appeal, the insurance company may take 90 days to reach a decision, if necessary, suit is filed with a trial date of 13-15 months, a decision by the judge may take 6 months and an appeal to the court of appeals adds 18 to 24 months. The entire process may total 43 to 51 months.
The definition of disability is usually the same for both STD and LTD insurance benefits. See, FAQ No. 16. Some of the differences between STD and LTD benefits, in addition to the duration of the benefits, are very significant. STD insurance benefits may be calculated based on 100% of the claimant’s weekly earnings with no offsets. LTD benefits are typically 60% of the claimant’s monthly earnings offset by numerous sources of other income, most notability Social Security Benefits. The LTD definition of disability changes at a point, typically 24 months, from using your own occupation as the criterion to any occupation that the claimant can perform based on their education, training and experience. So the promise to pay 60%, if you cannot do your job, is not necessarily the most accurate way to state the benefit amount or the obligation.
The STD insurance benefits claim may or may not be subject to a pre-existing condition clause. The LTD insurance benefits claim is always subject to a pre-existing condition clause which may be avoided in certain circumstances.
The LTD insurance benefits are subject to more defenses to the obligation to pay than STD insurance benefits. One such defense is the limitation of benefits to 24 months for disability based on a mental or nervous condition and/or alcohol/drug abuse. Some insurance policies also have a similar limitation for subjective symptoms which cause disability.
Taxability of the benefits depends on whether the claimant paid the disability insurance with after-tax dollars. In such case, the benefits most likely would not be taxable. If the employer paid or the claimant paid with before-tax dollars, the benefits most likely would be taxable. See, Common Issues in ERISA Claims, II 9.