Recently, we participated in a mediation with a large national insurer who is showing up more and more in our litigation files. Our client is a thirty-year employee who suffered from a terrible spinal condition and failed back surgery. Three medical treating physicians and an independent medical examiner found her totally disabled. One opined she was incapable of ever working again. She drained her 401(k) to pay her living expenses. She has applied for Social Security and is awaiting a decision.

The insurer denied the claim and has paid nothing for two and a half years while this financial wreckage has ensued.

The insurer’s claim denial was based upon a file review performed by a single East Coast doctor who never examined the insured and was contracted through a national vendor. The national vendor has a contractual relationship with the insurer.

The file reviewer’s report lists the medical evidence she claimed to have reviewed which includes MRIs (both actual images and reports). The file reviewer then opines that the restrictions could not be “substantiated” because there were “no MRI reports” in the file. This is not a misprint – the insurance company doctor lists the MRIs in the reviewed materials portion of the report and then somehow writes that those images do not exist.

Obviously, the denial is made in bad faith and is particularly sloppy.

At mediation, the insurer who has paid nothing now argues that the insured should get a mere stipend of because her “estimated” disability income is really the responsibility of the Social Security Administration, and the insurer merely provides a secondary benefit. We told the insurer to take a hike, and we will fight to get the decision and try to set precedent.

Unfortunately, this is the typical scenario in an ERISA group long-term disability case today.

More and more, private disability insurers who collect hundreds of millions in premiums are basically turning over the financial responsibility to the federal government to re-insure these private insurance contracts. Disability insurance companies argue this other income “offsetting” is keeping insurance rates low, but what they omit mention of is that this same “low-rate insurance” is not really insurance at all. All the insured has purchased is the right to apply for Social Security and maybe get a small stipend from the insurer.

The insurers have figured this out. The long-term disability contracts require an application to Social Security to get benefits flowing from the federal government, regardless of whether the insured even qualifies. Long-term disability contracts typically contain a 180-day waiting period (the same as Social Security). These same long-term disability contracts contain a “minimum” benefit usually of $100 per month.

Why do the insurance companies pay a $100 per month? Disability insurers know that an employee earning $40,000.00 a year with one or more dependents is really is never going to collect much private disability insurance, and if they don’t pay just a little something to the insured, the contract will fail for want of consideration. In other words, the contract will fail because the insured is getting nothing in return.

So, you have a long-term disability insurance contract, but do you really have any insurance coverage?

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