A disability insurance policy is an insurance policy that pays a person part or all of their income, if they become unable to work for a period of time because of an illness, injury or accident.
It is basically income insurance. People invest in disability insurance, so as to keep money coming into their household if they are unable to work.
Reportedly, some 90% of claims for long-term disability benefits are based on medical illnesses and not physical injuries. Some of the most common illnesses that lead to claims for disability insurance payouts are as follows:
- Back pain;
- Heart disease;
People often do not buy disability insurance, if it is not offered to them through their work. Their rationale is that Social Security will take care of them if they become disabled. But it is very difficult to qualify for Social Security Disability Insurance (SSDI), and the average benefit is reportedly only $1,234 a month. That would be far from enough to replace most people’s monthly income.
Workers’ compensation is another type of disability insurance, one that employers are required to have in every state. Workers’ compensation pays out if a worker is injured on the job. Many people assume that workers’ comp can substitute for disability insurance, but in fact, it offers much less coverage. Workers’ comp does pay out a monthly benefit in the event an employee cannot work because of illness or injury. However, workers’ comp is available only if the employee’s injury or illness arose in the course of their employment, e.g. in the workplace.
Generally, people plan to rely on their disability insurance if, for example, they become pregnant and their doctor prescribes bed rest for whatever reason. Or, a person may get cancer or another serious illness that renders them unable to work for a significant period of time while they receive treatment.
Some insurers put a “discretionary clause” into their disability insurance contracts. This clause gives the insurance company the discretion to make their own interpretation as to any ambiguous language that is in dispute. In addition, the clause gives the insurance company the sole discretion to make decisions about the nature of the insured’s disability. The insurance company has the right to determine whether or not a person’s disability falls within the contract’s definition of disability and justifies a payout of benefits.
Insurance policies are just contracts of insurance. If a contract is valid, courts enforce their legitimate terms and provisions, so a court would normally enforce a discretionary clause. The practical consequences of discretionary clauses are clear. If a case is close, and there is a question as to whether the insured qualifies for benefits, the insurance company has the authority to resolve the issue. Generally, an insurance company is likely to decide in its own favor.
Now, in some cases, an insurance company allows an insured to file an appeal with the company. And sometimes the company would change its decision and approve payment per the terms of the policy.
It is also possible for an insurance company to deny a claim that it should clearly pay. If an insurance company denies a clearly legitimate claim, it can give the insured person grounds to file a claim against the company for insurance bad faith. So, if a person has made a claim under their disability insurance policy that was denied, they would do well not to simply accept the company’s decision. They should consult a disability insurance lawyer and pursue the issue.
Because of this discretionary clause, if the insurance company denies benefits, it is very difficult to win a payout of disability benefits in court. Courts will be limited to reviewing the dispute between the insurance company and the person claiming the benefit, instead of deciding the case entirely anew. In order to overturn the denial, the court has to find that there was an abuse of discretion on the insurance company’s part, and this is a difficult standard to meet.
If a decision can only be overturned because it demonstrates an abuse of discretion, this means that the decision must have been illogical, implausible, or without factual support in the evidence presented.
On the other hand, if a disability policy does not contain a discretionary clause, the court generally makes a “de novo,” or independent, review of the insured’s claim for payment under the policy. In some cases involving discretionary clauses, courts have stated that they would choose to overturn a denial of disability benefits under de novo review. However, they believe they have to affirm the denial under the tougher “abuse of discretion” standard.
A 2004 study reportedly found that only 28% of lawsuits challenging denials of benefits were successful, when the policy had a discretionary clause. However, policyholders won 68% of similar cases involving policies that did not have discretionary clauses.
Bans on Discretionary Clauses
Courts are much less likely to reverse an insurance company’s denial of benefits when there is a discretionary clause in the policy, and for that reason more than twelve of the states in the U.S. have changed their laws to make these clauses illegal in order to provide more protection to insureds.
These bans generally contain language providing that no insurance company may, in any policy, contract or agreement, reserve discretion to interpret terms of the contract to the insurance company. Terms of the contract include whether benefits are justified and the amount of benefits.
Although a number of states have banned discretionary clauses, many insurance companies still include them, even for contracts in states with bans. This is another questionable business practice and an insured person should not just assume that a discretionary clause is valid in their state just because it is in their policy.
Fortunately for people with disability insurance policies in the states of Washington and Oregon, discretionary clauses have been banned in these states. And there have been lawsuits in both Washington and Oregon that have challenged denials of benefits. In both states, the courts upheld the bans and enforced the bans in disputes between insureds and insurance companies.
Conflicts with Federal Law
When there is a conflict between federal law and state law, federal law preempts state law. The Employee Retirement Income Security Act (ERISA) is a federal law that governs retirement benefits, including health and disability insurance benefits.
Sometimes a person is insured under a disability insurance policy that is governed by ERISA, because it is a benefit of their employment. When the person goes to court to challenge a denial of benefits, even in a state that bans discretionary clauses, they may see the denial of benefits affirmed by the court.
The court would affirm the denial because federal law has priority over their state’s law. Several federal courts have held that ERISA cannot preempt a state ban on discretionary clauses, so it is not clear at this point how any case would be decided, unless and until the U.S. Supreme Court decides to rule on this issue.
Should I Get an Attorney?
A consumer’s best bet is to avoid disability insurance policies that include discretionary clauses. If you have a policy that does have a discretionary clause and your claim for benefits has been denied, you should consult a workers’ compensation lawyer.
Your lawyer can study your disability insurance policy and research the law regarding discretionary clauses in your state. They can advise you as to whether you have grounds to challenge the denial of disability benefits in court.