Insureds may think that if their claim is approved and the insurer begins paying benefits, they have won the battle. In reality, however, even the insurer’s complete admission that the insured is disabled within the terms of the policy does not mean that the insurer will pay the full monthly benefit listed in the policy. Most of us think of disability insurance as providing a stream of income to replace lost salary, but few understand that these policies often contain language effectively cutting off other benefits to which the insured would otherwise be entitled.
Disability insurance policies, especially long-term disability policies, frequently contain “offset” provisions, which offset other benefits against the insurer’s monthly payments. Common offsets include benefits which the insured receives from Social Security disability or retirement, unemployment compensation, worker’s compensation, no-fault auto insurance, sick leave, severance pay, and others. The net effect of these offsets is that should the insured receive a benefit from another source, the disability insurance company will reduce its monthly payment by the same amount.
Because of these offset provisions, insurers often require that claimants seek Social Security disability benefits. To “assist” claimants in obtaining Social Security benefits, insurers even assign third parties to guide insureds through the governmental process. Because of this seeming act of compassion, insureds may believe that the insurer has their best interests at heart. Unfortunately, the lesson is often learned the hard way when the approval of Social Security benefits is followed by the insurer’s denial letter.
Even if benefits are approved, the offset provision means that the insurer, not the insured, pockets the government’s money. But these offsets really become egregious when the insurer attempts to consider other benefits, such as a settlement received from a third-party in litigation relating to the disabling condition.
In one case, the insurer took a lump sum settlement, divided it into monthly amounts, then attempted to offset its monthly benefits by the pro rata share of the settlement. As the settlement exceeded the disability benefits, the insurer determined that the insured was only eligible for the minimum monthly payment of $1,500. The insured was forced to sue to enforce his rights under the policy and, at least in that case, the court ruled that it was unreasonable for the insurer to apply a tort settlement as an offset to disability benefits.
What should insureds do when the insurance company attempts to offset other benefits? The answer is to understand your policy, including its offset provisions. Insureds should also consult an experienced disability insurance attorney if they are filing or considering filing a claim.