Answers to Frequently Asked Questions
By Ray Bourhis

Purchasing Insurance and Filing Claims (Please see insuranceconsumers.com)

Q. Who is responsible for regulating the Insurance Industry?

A. Each state has a Department of Insurance, which is responsible for regulating insurance companies doing business within its' borders. The duties of each state insurance department include:

• Overseeing insurance companies and agents
  
  
• Promulgating and enforcing regulations to which the insurance company must adhere
  
  
• Handling consumer complaints about alleged unfair sales or claims tactics.

Q. What general rules apply to the interpretation of insurance policies?

• Any ambiguity or uncertainty must be interpreted in favor of the policyholder and against the company.
  
  
• Words used in a policy are to be interpreted according to the plain meaning, which a layperson would ordinarily attach to them, not as an attorney or insurance expert might analyze them.
  
  
• Coverage provisions will be interpreted broadly. Exclusions and limitations will be narrowly construed.
  
  
• Insurance contracts are interpreted so as to accomplish the 'objectively reasonable expectations of the insured.'

Q. What is meant by the term "Statute of Limitations"?

A. A statute of limitations is the maximum amount of time that you have to file a formal claim, either with your insurance company or, (if the claim has been terminated or denied) in court. The statutes of limitation applicable to a particular claim depends on your policy, the theory of your case, and the laws of your state.

For example, you may claim that the insurance company broke the contract (a contract claim) and/or that the insurance company committed fraud or bad faith (tort claim). Under state law, contract claims and tort claims may have different statutes of limitations.

In addition to statutes of limitations imposed by state law, some insurance policies contain contractual limitations provisions, which require the policyholder to file a lawsuit within a given period.

Such provisions inserted by the insurance company can pose a serious problem to the consumer, and therefore some states do not enforce them. This is especially so when the insurance company is negotiating and discussing the claim with the policyholder while the period is running.

Other states do enforce these provisions. It is very important for you to find out whether or not there is a contractual limitations period set forth in your particular policy.

Q. What is meant by the phrase ERISA PREEMPTION?

A. ERISA is an acronym for the Employee Retirement Security Act of 1974. ERISA severely limits policyholder rights to insurance obtained through most employers.

In such cases, policyholders cannot obtain the protections of the Law of the State because the Federal ERISA Law has been held to replace or preempt all such protections.

Duty to Defend

Q. In the context of a liability policy, what is meant by 'duty to defend?'

A. Under most liability policies, the insurance company owes a duty to defend its' insured in situations where a claim against the insured ever potentially seeks damages within the scope of coverage.

The scope of the duty to defend and the specific responsibilities of an insurance company concerning this duty can vary considerably depending upon the facts and the type of policy in question.

Q. What does it mean if the insurance company agrees to defend you, but only under a "reservation of rights"?

A. If the insurance company agrees to defend you under a reservation of rights, then the insurance company is not conceding that your policy covers the claim against you. If it is not covered, you will have to reimburse the insurance company for its legal costs and other expenses incurred.

Under these circumstances, the attorney appointed to represent you may have a conflict of interest. If so, your insurance company may be required to appoint a second lawyer, one who is only responsible for representing your best interests.

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Special FAQs related to Disability Insurance

Q: Are there different types of individual disability insurance policies?

A: Yes. There are several types of policies. Two of the most common include:

(1) The "Own Occupation " policy.
This type of policy insures you against becoming unable to perform "the substantial and material duties of your own occupation". This coverage pays a monthly benefit if you can no longer perform the specific tasks of your work (as a contractor, for example, or as a dentist, etc). Benefits with this type of coverage are paid regardless of whether you are able to perform other types of work.

(2) The 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 reduced income. 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 actually do earn in a new occupation. Other types of individual disability policies provide coverage only if the insured is disabled from performing any gainful employment. Some states provide, however, that an insured is entitled to benefits if unable to perform his or her occupation or an occupation for which he or she might reasonably be expected to engage, in view of the person's station and physical and mental capacity. Disability policies can vary substantially in what they require in order for coverage to be provided.

Q. If an insured tries to return to work but is unable to continue, how would this affect on the issue of disability coverage?

A. In most states, a failed attempt to return to work does not reduce the right to receive disability benefits.

Q. What is an incontestability clause?

A. An incontestability clause puts a time limit on an insurer's right to deny or terminate coverage based on statements made by the insured in the original policy application. The incontestability period is usually two years. In the case of a disability policy, unless fraud is specifically excepted in the policy, an the incontestability clause would normally bar rescission (cancellation of the policy) even if the rescission is based on information in the application submitted by the insured.

Q. What is "ALE" and how will it affect me if my home is destroyed by a natural disaster?

A. "ALE" - Alternative Living Expense - benefits cover the insured’s immediate and
critical needs for food and shelter following a substantial or total loss.

ALE benefits provisions have a cap, which gives insurance companies leverage against the insured as benefits run out. Be careful not to accept a less than acceptable settlement if the company drags out your dispute and closes in on your Alternative Living Expense cap.

Q. What standards must an insurance company follow in evaluating a Disability claim?

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

• Conduct a fair, objective and thorough investigation before denying a claim.
  
  
• Refrain from putting its own financial interests above the financial interests of its policyholders.
  
  
• Avoid misrepresenting the terms and conditions of coverage.
  
  
• Pay claims promptly without engaging in unreasonable delay.
  
  
• Pay claims fairly without requiring the insured to hire a lawyer in order to collect benefits.
  
  
• Interpret any ambiguities in the policy in favor of the policyholder. Insurance companies are required to act reasonably in all dealings with policyholders. In most states, violating this duty constitutes a breach of good faith and fair dealing. In such a case, the insurance company can often be held responsible for any damages that they have caused beyond the contract benefits, themselves.

Q. What is ERISA preemption and how does it affect your rights?

A. If your disability insurance was obtained at work as an employment benefit, your ability to enforce your rights under the insurance laws of your state may be severely limited by a Federal law known as ERISA (The Employee Retirement Income Security Act).

This law bars recovery of consequential damages, general damages, or punitive damages. For that reason, policyholders have no leverage to compel an insurance company to do what it is required to do under the policy and under state laws.

The whole subject of "ERISA Preemption" has become very complicated. It is extremely unfair to most non-exempt employees who receive disability insurance through their work

If you are a victim of bad faith or fraudulant insurance practices, or have a question regarding your insurance claim denial, please click here to submit a question through our online form.

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