If you are forced out of work as a result of an illness or injury, you can suddenly find yourself dipping into your life savings just to pay normal household bills. Some individuals in this situation even find themselves threatened with foreclosure or bankruptcy.

For this reason, many individuals, especially those in high-income occupations with expensive lifestyles, elect to purchase disability insurance.

In recent years there have been some big changes in this field. In the 1980’s when interest rates were sky high, insurance companies engaged in cutthroat competition to sign up policyholders. Underwriting standards and policy provision were liberalized in order to attract new business. The major insurance carriers had their eye on the high-end portion of the market as they struggled to sign up physicians, dentists, corporate executives, and other such individuals. This was a very profitable strategy during the 1980’s.

However, when interest rates plummeted, things began to change. Reserves had to be increased, sometimes very substantially. For example, in the early 1990’s Provident Life Insurance Company of Chattanooga, Tennessee took a charge of some $423 million and developed strategies to try to reduce expected claims and to terminate existing ones. Once again, it was the high-end portion of the market that received most of the attention. Provident, and other insurance carriers, began trying to find ways to save money by denying or terminating claims.

One of the strategies for selling policies in the 1980’s was to promise coverage that would be non-cancelable and premiums which could not be increased. Therefore, the problems resulting from the above scenario are increasing and will continue to do so for some time.

If you are a disability insurance policyholder or are thinking of purchasing such insurance, here are some tips that you may find helpful.

Are there different types of disability insurance?

Yes. One is called an "Own Occupation" policy. It insures you against becoming unable to perform "the substantial and material duties of your occupation." This type of coverage pays a monthly benefit if you can no longer perform the specific tasks of your work (as vice president of your company, for example, or as a dentist etc.). Benefits for this type of coverage are paid regardless of whether you are able to perform other types of work.

A second type of policy is a loss of income policy. This coverage pays only for loss of income. In other words, if you switch occupations due to a disability, the policy will provide benefits based on a specific formula relating to losses suffered. You will not be paid just because you can no longer perform your occupation, and your benefits will depend on the difference between what you could have earned and what you do earn in a new occupation.

These two policies are very different in what they require in order for coverage to be provided.

What are the important coverage issues to look for in disability insurance policies?

Some of the more important issues include:

• Is the premium fixed or can it be raised?
  
  
• Are benefits flat or is there a cost of living adjustment provided (COLA)?
  
  
• Does the policy pay to only age 65 or for life?
  
  
• Can the insurer cancel or non-renew coverage for any reason, and if so for what reasons?
  
  
• Does the policy provide "own occupation" or "income replacement" coverage?

These are all important matters and the value of your insurance will vary widely depending on the answers to the above.  

What do disability policies mean by "inability to perform the substantial and material duties of your occupation"?

This means that you can no longer perform those tasks necessary to be able to do your work in the manner that you have been doing it. 

Are only physical conditions covered as disabilities or are psychological illnesses or injuries covered as well?

Most disability policies cover both. 

Who decides whether or not a policyholder has become disabled?

The treating doctor(s) are always the best judge of this. Where pain is a disabling factor it is wise to consult with a physician who is a Board Certified pain management specialist. Sometimes insurance companies will try to substitute the opinions of their own medical consultants (hired by them). Often, this medical opinion will be rendered without so much as a consultation with one or more of the treating physicians. The credibility of such a practice may be problematic.

In addition to medical opinions, sometimes what is called a "functional capacity analysis" is helpful. Such an analysis relates a physical or psychological injury or illness to the specific duties of the person’s particular occupation.  

What is the distinction between "total disability" and "partial disability"?

In most "own occupation" policies, total disability is defined as above mentioned in terms of inability to perform one’s substantial and material duties. Partial disability, on the other hand, is defined as a person’s inability to perform one or more of the "important duties" of his or her occupation. If this policy distinction seems vague and ambiguous to you, you are not alone.  

What standards must an insurance company follow in evaluating a disability claim? 

There are many. But basically, the insurance company is required:

• To conduct a fair, objective and thorough investigation before denying a claim.
  
  
• To refrain from putting its own financial interests above the financial interests of its policyholder.
  
  
• To avoid misrepresenting the terms and conditions of coverage.
  
  
• To pay claims promptly without engaging in unreasonable delay.
  
  
• To pay claims fairly without requiring the insured to hire a lawyer in order to collect benefits.
  
  
• To interpret any ambiguity in favor of the policyholder.

Insurance companies are required to act reasonably in all dealings with policyholders. Violating this duty constitutes what is known as "bad faith."  

What are the consequences if a company violates these principles?

If a company acts unreasonably, they become responsible for all financial damages which they cause as a result. This would include loss of the policy benefits; emotional distress damages, if applicable; loss of use of the benefits for the period in question and consequential financial losses such as having to pay capital gains or ordinary income taxes resulting from the sale of stock or of real estate necessitated by the withholding of benefits. In addition, the policyholder is entitled to recover attorneys’ fees and costs incurred in having been forced to take legal action against the company. In cases where the evidence clearly established malicious, fraudulent or oppressive conduct by the insurance company, punitive damages can also be awarded.  

What is ERISA preemption and how does it affect all of this?

If you obtain your disability insurance through your employer, your ability to enforce your rights may be severely limited. ERISA (Employee Retirement Income Security Act) does not permit recovery of consequential damages, general damages, or punitive damages. For that reason, policyholders have no leverage to compel an insurance company to do what they are supposed to do under their policy. This can be complicated and you may need to seek expert advice concerning this subject.

Although the above may not answer every important concerning disability insurance, hopefully it will help somewhat in your efforts to protect yourself from the people you are paying to protect you. 

For additional information concerning this subject, you may Email us:
info@bourhis-mann.com

Mr. Bourhis is partner with Ray Bourhis in San Francisco. For twenty-five years he has specialized in Insurance Law representing policyholders in insurance coverage and bad faith litigation. He was recently featured on 60 Minutes and has written and lectured extensively on the subject of Insurance Law throughout the country.

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