Thinking About a Policy Buyout? How Lump Sum Settlements Work: Part 2

In this two-part series we are addressing the two most common scenarios in which insurance companies pursue lump sum buyouts.  In Part 1, we talked about buyouts for individuals who are totally and permanently disabled and have been on claim for several years.  In Part 2, we will address the other scenario in which buyouts occur: after a lawsuit has been filed.

In the context of an individual disability insurance policy, a lawsuit is generally filed in one of two common scenarios: (1) a person on claim with a legitimate disability has their benefits terminated; or, (2) a person with a legitimate disability has their claim denied.  A lawsuit is typically considered to be the last line of defense in the claims process.  By the time a lawsuit has been filed, the claimant’s attorney has likely exhausted every available means to resolve the claim without legal action.  Litigation is costly, time-consuming, and can drag on for years.

If an insurance company offers a lump sum buyout during litigation, it will typically be at one of three stages in the case: (1) after the Complaint and Answer are filed; (2) after all stages of pretrial litigation and discovery are complete; or (3) after the claimant/plaintiff wins at trial.

The first stage of any lawsuit is the filing of the Complaint.  This is a document the plaintiff files with the court outlining all of the claims and allegations against the defendant.  After receiving a copy of the Complaint, the defendant then has a specified period of time in which to file an Answer responding to the plaintiff’s allegations.

Prior to the filing of a lawsuit, a contested claim has likely been reviewed only by the insurance company’s in-house attorneys.  However, once litigation begins, the insurance company will retain a law firm experienced in insurance litigation to handle the case.  After the filing of the Complaint, the insurance company’s outside counsel will have the opportunity to evaluate the strength of the case and the claim.  Viewing the case through the prism of their experience, the insurer’s litigation team may recommend offering a buyout to avoid the risk, costs, and time associated with the lawsuit.

The second point of a lawsuit at which a buyout may occur is after all stages of pretrial litigation are complete.  Once the parties have had the opportunity to conduct discovery and litigate any pretrial motions, they will have a full picture of the case and their prospects at trial.  Through discovery both sides will be able to obtain all documents and interview all witnesses the other side intends to use at trial.  Through the filing of pretrial motions the parties can attempt to prevent or limit the use of certain evidence or witnesses at trial.

At this juncture, the insurance company may seek to avoid the risks of trial and settle the claim before the first juror is ever impaneled.  The insurance company’s incentive to resolve the case at this point – even after both sides have invested substantial resources in the litigation – is the financial exposure and bad publicity it faces with a loss at trial.  Additionally, a bad result at trial for the insurance company could create undesirable legal precedent for future cases.

If a jury (or a judge, depending on the case) determines that the insurance company has unlawfully denied or terminated a legitimate disability claim, the insurer will not only be required to pay the benefits the claimant/plaintiff is entitled to, but may also be liable for damages and other costs.  The insurer may be required to pay back benefits, plaintiff’s attorneys’ fees and costs, consequential damages, and punitive damages.

In the context of a disability insurance lawsuit, consequential damages come in the form of any financial harm to the claimant/plaintiff resulting from the insurer’s denial or termination of benefits.  For example, if the insurer’s termination of benefits led to the claimant/plaintiff losing their house in foreclosure, the insurer could be liable for consequential damages.  Punitive damages are designed to deter the insurer from denying legitimate claims in the future, and can be multiplied several times over if the insurer is found to have acted in bad faith.  Additionally, some states allow acceleration of benefits – in which the courts can order the insurer to immediately pay future benefits that would owed to the claimant/plaintiff over the full life of the policy.

The final stage at which a lump sum buyout may be offered is after a victory at trial by the claimant/plaintiff.  You may be wondering why anybody would entertain a settlement offer right after a being awarded back benefits, damages, and costs at trial – why accept anything less?  The answer is simple: appeals.  The insurance company can tie up a trial court victory in the court of appeals for years, which they can use as leverage to offer a settlement smaller than the trial award.

Though these three stages of litigation are the most common points at which a buyout may occur, buyouts themselves are uncommon during litigation.  Depending on the situation, the specter of a long, drawn out legal battle can either provide the insurance company with the incentive to settle the lawsuit early with a buyout or harden its resolve to fight the claim to the bitter end.  You cannot count on simply filing a lawsuit and expecting the insurance company to be eager to settle.  Some insurance companies want to settle early and avoid the financial risks and bad publicity of a defeat at trial, while others take a hard line and use their nearly limitless resources to fight a war of attrition.  Ultimately, whether or not an insurer offers a lump sum buyout in the midst of litigation depends largely on the individual facts of the case, the risks at trial, and the parties and attorneys involved.