Two Faced Disability Insurers
The U.S. Court of Appeals for the Sixth Circuit, covering Michigan, Ohio, Kentucky and Tennessee, has been on a roll in the last couple of years. We’ve seen several really well-reasoned ERISA decisions from that Circuit in that time. Last month’s decision, Glenn v. MetLife, 2006 U.S. App. LEXIS 22432, is the latest in the hit parade.
There are several noteworthy comments in the decision but the one I wanted to talk about is how the case deals with the relationship between social security disability benefits and insurer disability benefits. First a little background.
Under the Social Security Act a person may apply for and receive disability benefits from the federal government if he “. . . cannot, considering his age, education, and work experience, engage in any other kind of substantial gainful work which exists in the national economy, regardless of whether such work exists in the immediate area in which he lives.” If that sounds like a difficult standard to satisfy, you’re right. How does it compare with the language in private insurance policies to qualify for benefits from UNUM, MetLife, Hartford or Prudential, to name a few of the largest disability insurers?
There is no uniform standard for how these private insurers define “disability” for purposes of providing benefits under their policies. They can and do design their policies any way they want. However, they have to compete with one another and there is a fairly common standard in the disability insurance industry for defining how you get benefits. Most insurers initially provide benefits if you are disabled from your own occupation. Then, after a year or two or longer, they will usually switch to a stricter standard and provide benefits only if you are disabled from any occupation.
The language of the MetLife policy in Glenn is fairly typical for this “any occupation” standard. After two years of paying benefits if a person is disabled from his own occupation, MetLife switches to paying benefits only if the claimant is “completely and continuously unable to perform the duties of any gainful work or service for which he is reasonably qualified, taking into consideration his training, education, experience and past earning.”
So why do we care about how the definition of disability under the federal statute compares with the language of your average private disability insurance policy? Well, almost every disability insurer places language in its policy giving it the right to take a dollar for dollar offset of social security benefits against what it would otherwise have to pay its insured under the policy. If you’re entitled to $2,000 a month in disability insurance from UNUM and you also qualify for social security in the amount of $1,500 a month, UNUM gets to offset the entire social security award. They owe you only $500 a month. I’ve had a lot of clients complain mightily about it but the insurers can and do clearly put this right to offset in their policies. Nothing prevents them from doing it. As I talk about here, it’s one of the reasons long term disability policies for relatively low wage earners are often not a very good deal.
You can see how insurers have a tremendous financial motive to encourage their insureds who are making a claim on their disability insurance policy to also apply for and get social security disability benefits. And insurers make sure the claimants do just that. They will often hire, or direct claimants to, social security disability lawyers or advocates to do all they can to get their insureds federal disability money.
If you take a close look at the language I’ve quoted above from the Social Security Act and compare it to the language of the MetLife policy, you’ll see that the Social Security Act language is more difficult to qualify under than the language in the insurance policy. The insurance policy definition must take into account where you live and whether there are jobs there as well as the claimant’s past earnings. Not so for social security disability income. In other words, under the plain language of the two definitions, it would appear that if you qualify for social security disability benefits, you would surely qualify for private disability insurance benefits.
But nooooooo. In fact, I cannot count the number of clients I’ve had and cases I’ve read where, despite qualifying for social security disability benefits, the private insurer cuts off the claimant’s benefits arguing that the person is not disabled under the insurance policy. Not being satisfied with an offset that often consumes most (sometimes all) of the insurance policy benefits, the insurer reaches out to snatch the remaining portion of policy money from the disabled person.
Notice any inconsistency in the insurer’s actions? It first sends the claimant off to get social security disability benefits. Why? Solely because having its insured qualify for those benefits puts that money right back in the insurer's pocket. However, if the claimant gets that social security disability award, the insurer does not hesitate to ignore the fact that its insured has qualified for benefits under a definition that is almost always more rigorous than the definition for disability in the insurance company’s own policy. It often rushes to cut off the flow of its own money to its insured. The golden thread that ties the insurer’s actions together is that it follows its own financial interests.
Now you would think that the judges and courts hearing cases involving denied disability claims would see through and put an end to this little charade pretty quickly. But again, by and large, you would be wrong. Most courts simply say that a determination of disability by the social security administration is not binding on a private disability insurer and often go on to join the insurer in pretty much ignoring it. Some courts go so far as to say a social security disability award isn’t even relevant to the insurer’s decision about whether the claimant is disabled!
Which brings us back to Glenn. The Sixth Circuit deals with this insurer shell game simply and directly, recognizing the inherent conflict and inconsistency of the insurer’s actions. It reverses the insurer’s denial of the claim, reinstates Glenn's disability benefits and directs trial courts in the Sixth Circuit to take into account the “significant factor” that the social security disability determination plays in an insurance company’s evaluation of disability.
In support of its decision, the court quotes at some length Judge Richard Posner in Ladd v. ITT 148 F.3d 753 (7th Cir. 1998). Judge Posner is usually insightful and always a good read.
There is other good stuff in Glenn. It earns its spot in the “hits” section of the website library.