Disability Insurance Claim Advice
Disability: An Expert Opinion on Contractual Language
California Broker, June, 2013
By Arthur L. Fries, RHU
Often, a major insurance company purchases a block of individual disability business. Or a third part administrator is hired to handle claims for an insurance company that no longer writes disability insurance or no longer has the capacity to provide disability claim services.
Frequently, the new insurance company or TPA doesn’t know the intent of those who originally drafted the disability policy or how the policy was marketed to wholesalers or brokers/agents. Also, the new insurance company often has a different attitude than did the originating company. This disconnect had been evident in several cases for which I was hired to give an expert opinion.
The Insurance Company’s Attorneys
One case involved an individual disability policy with benefits payable for life if a disability occurred before age 55 for sickness or accident. Handling the originating company’s disability policy was the company with which it had merged. The company’s attorneys claimed that the cost of living adjustment (COLA) option ended at age 65. They also said that, at age 65, the monthly benefit reverted to a lower level than existed before the claim began. I had never seen a disability policy with this language. The policy would pay a monthly benefit for life as long as the claimant continued to meet the definition of total disability. But the monthly benefit would be less than expected from age 65 and thereafter.
We convinced the defense attorneys that the COLA benefit did not end at age 65, which would have meant lowering the monthly benefit to the pre-disability amount. We showed that the COLA benefit did not level out at age 65 and the monthly benefit kept on increasing.
In almost all situations, the COLA option increases with simple or compound interest (with a maximum or minimum). It may be related to the Consumer Price Index. This increase occurs after a one-year waiting period from the date of total disability. It increases each year until age 65. At that point, the monthly benefit levels off and is paid for life. If the monthly benefit begins at $7,500, it may increase to $9,500 at age 65 with COLA adjustments. From that point, $9,500 is paid for life. But, the insurance company’s attorneys believed that, beginning at age 65, only $7,500 a month should be paid for life.
The COLA ends under the following scenarios:
- The date your total or residual disability ends.
- The date the maximum benefit for the rider ends. The rider extended by lifetime benefit.
- The anniversary on or after your 65th birthday. The insurance company is saying that it doesn’t have to pay any COLA benefit. Note that there is no contractual description of the word “anniversary.” But I believe this to mean “policy anniversary.” The policy goes on to say how long the company will pay the increases. I interpreted this to mean, “COLA increase percentages.” The paragraph wording doesn’t say that the COLA benefit will not be paid. It doesn’t even say that the COLA increases will be eliminated at age 65.
I have audited several thousand individual, group, and association trust policies in connection with a disability claim since 1995. I sold mostly individual disability policies from 1963 to about 1992. Except for one insurance carrier, every policy had the COLA option ending at age 65. The COLA option leveled off if the policy provided a lifetime benefit. Whatever it had leveled off to was the monthly benefit payable for life.
I was an undeclared expert for this case. If the insurance company’s attorney had not settled, I would have then been a declared expert with an opportunity for my deposition to be taken and heard in a trial. The insurance company’s attorneys would have been in for a shock when they found out that they hired me as an expert, many years earlier, in two cases, and praised my work standards and ethics.
The threat of a class action lawsuit by others who were hurt by its wrongful interpretation was also a deterrent to the company continuing to proceed to trial and risking further embarrassment. As a result of my opinion, the lawsuit was settled for a much larger amount than even the claimant’s attorney anticipated.
As an aside, this carrier’s contract had a COLA option that did not level off at age 65. Like the Energizer Bunny, it kept going with the monthly benefit still increasing and payable for life, which was probably a mistake. The contract was created by a life insurance company that had gone into the disability business when many other disability carriers were no longer interested in providing disability insurance. The company used a TPA to handle its claims. I’m sure that the company was as shocked as the TPA was when it realized how much liability it had assumed.
If you sell disability insurance and you are not sure about contractual language, seek an expert who can provide an opinion. The answers are often provided at no cost since camaraderie has always been the mark of those involved in this end of the insurance business.