Because Own Occupation Disability Insurance can be confusing and contradictory and because most claimants and many lawyers are unfamiliar with this coverage there is considerable misinformation and misunderstanding about these types of policies and the claims issues associated with them.
In dealing with disability insurance carriers on large claims a claimant should expect to experience even more obfuscation, and obstruction than is often the case with homeowner, automobile or medical insurance. Delay, the twisting and misinterpretation of policy language and attempts by insurance company claims departments to justify the substantial underpayment of claims are common. The use of biased medical and vocational evaluations and the deployment of self-serving and inaccurate accounting methodologies add to the claims problems associated with these policies.
Whether an insured will recover for a legitimate disability claim at all, and if so, the amount he or she will be paid, depend largely on the policyholder’s knowledge of his or her rights and responsibilities. Claimant, frankly, are at the mercy of their insurers. Their company wrote the policy, interprets the policy, evaluates the claim and holds the money.
That said, even though policyholders are at a substantial disadvantage there are ways to level the playing field. To do so, you must familiarize yourself with important principles of insurance law which judges and legislators have fashioned over the years for your protection. It is important to note that these rules apply only to insurance that was NOT obtained in the workplace. Workplace policies have NONE of these protections because they are governed by federal (ERISA) NOT state laws and because there are no protections against fraudulent or unfair claims practices under Federal law. This absurd situation is no accident. It is due to the hard work and generous campaign donations of insurance industry lobbyists nationwide.
Here are ten principles applicable to non-employment based insurance coverage that you need to be thoroughly familiar with:
1. An insurance company must act in good faith in the interpretation of their policies, and in the investigation and payment of claims. It is unlawful for an insurer to engage in unreasonable delay; to put their financial interests ahead of the financial interests of the policyholder; or to lowball (underpay) claims. They cannot use deception or trickery in sales or claims handling. They cannot compel an insured to hire an attorney in order to be paid what they are owed. They must be fair to their policyholders. The violation of any of these standards is a violation of the duty of good faith which the law imposes on insurance companies. It exposes the carrier to potentially significant damages.
2. If an insurance company unreasonably denies a claim or breaches its duty of “Good Faith and Fair Dealing,” and you must sue them in order to recover your policy benefits, the insurance company may be responsible for paying your legal costs and attorney’s fees. If the attorney’s fees and other damages were not available, the policyholder could not be made whole and the insurer would be able to under-settle claims merely by arguing that they are offering more to settle that than what the uninsured would net on the actual value of the claims, after payment of their legal fees. If an insurer makes this argument to you in an effort to underpay, thank them in advance for offering to pay your costs and attorney’s fees. That is exactly what they are doing by engaging in such conduct.
3. If an insurance agent misrepresents the coverage being provided at the time the agent sells you your policy, the insurance company will have to honor the coverage representations made by their agent. Insurance agents are really nice. Otherwise, they wouldn’t be able to sell you any policies. The same is true for claims adjusters. Otherwise, they wouldn’t be able to settle any claims. It is important to distinguish these nice individuals from the company itself. The purpose of an insurance company is not to be nice, but to make money for its stockholders. If it makes more money than expected, the stock goes up. If it makes less money than expected, the stock goes down. When the stock goes up, executives are given bonuses. When the stock goes down, they are given headaches. The name of the game in the home office begins with the word “profits.” Don’t ever forget this. When the home office trains agents or claims adjusters they don’t tell them to be sinister. There are no conventions at which agents are taught to misrepresent coverage and adjusters are taught low-balling techniques. What does happen, however, is that agents are told very little about the policies they are selling. They may know something about what is covered, but they know very little about what is not.
If you were to spend the rest of your life talking to insurance agents about policies they are selling, you would probably not find a single agent who would be able to simply pull out a policy and explain it. The truth is that agents don’t understand policies. They just sell them. Most agents won’t even show you a copy of the policy they are urging you to buy. If you ever see a policy at all, it will probably be sent to you in the mail directly by the insurance company days, or weeks, after you have purchased the insurance. So at the time of sale, you don’t know what you are buying other than what the company or agent promotional or sales pitch conveys to you. (See our Purchasing Disability Insurance Checklist.)
4. If the amount of your disability insurance coverage is not sufficient to cover your actual loss from being disabled because the insurance agent recommended that you insure for less than the amount you actually needed, the insurance company may be responsible for paying your entire loss, not just the amount of the policy benefits.
This is another good reason to take notes when you buy your policy in the first place, and to keep these notes in your insurance file. If the limits which you purchased were recommended by the insurance agent and they are insufficient, you are entitled to be paid for all losses on the basis of what your limits should have been.
5. Any ambiguity in your policy must be interpreted in your favor and against the insurer.
Disability policies often define Totally Disabled as the inability to perform “your important duties.” They define Partially Disabled as inability to perform “some of your important duties.” Just how someone could be unable to perform some of his/her important duties without being unable to perform his important duties is puzzling. What is not puzzling is how a carrier can use this phraseology to justify underpaying a Total Disability claim as a Partial Disability claim.
Every insurance company has a Mad Hatter Department. This Department is in fierce competition with its counterparts at other insurance companies to see who can write the most incomprehensible and loophole-filled gobbledygook in the industry. I’m convinced that insurance companies have secret awards dinners at which bonuses are given to those who have written the most obtuse, self-canceling phrases of the year.
The reason policies are so incomprehensible is not because insurance companies cannot find people who can write in plain English. It is because the companies know that the less clear the policy is, the less clear their obligation to pay will be. So they write policies that they have to obtain “coverage opinions” on from law firms to whom they pay hefty fees to explain what they have written. Believe it or not, even these lawyers are often wrong.
You can turn this confusion from a disadvantage to you and into an advantage by simply showing that an applicable provision is ambiguous. If it is, coverage must be provided, and the claim must be paid.
6. The insurance company, not the policyholder, has the obligation of providing the applicability of a “limitation” or “exclusion” in the policy.
Insurance policies typically contain a very brief “insuring clause” describing what’s covered. Dozens of paragraphs and thousands of words are then spent listing exclusions, exceptions and limitations.
When a large claim occurs, insurance companies want to be able to write a letter to their policyholder denying coverage by quoting from one or more of the “exclusions.” The bottom line will be that they sure would like to pay your claim, but golly darn, they just can’t.
Many insureds will either accept what they are being told or will seek advice from someone in the insurance industry or from a lawyer who doesn’t specialize in this field. As a result, many legitimate claims go either unpaid or severely underpaid.
What you should know is that the insurance company, not you, has the burden of proving that an exclusion or limitation in the policy is (1) clear, (2) conspicuous and (3) applicable. The shifting of this “burden” concerning exclusions – to the insurers – is
contrary to the usual rule of the law that the party making the claim is the one who hears this burden. Because most policyholders are unaware of this rule, insurance companies often avoid paying legitimate claims based on exclusions that, if challenged, the exclusions, to the company.
7. An insurance company that tries to rescind (eliminate) your policy coverage once you have made a claim, on the grounds that you made a misrepresentation on your insurance application, may be violating the law.
This point can be complicated. Just remember that some policy application questions are very, very broad. For example, on a disability policy application, you may be asked to “list all of the physicians you have seen during the past five years.” Or, “have you ever been treated for diabetes, cancer, heart disease, head injury or pain.”
Note that such a question is tricky. If an agent asks this question verbally, most people will think in terms of important medical visits or serious conditions. They will not think of every doctor they have seen during the past five years and may not focus on treatment for tension headaches, which technically fall within the latter question as “head injury or pain.” After fifteen or twenty questions all containing numerous sub-parts people tend to glaze over somewhat. So when the agent slides an application across the table one assumes that the answers the agent has written down are accurate. They sign under a declaration citing penalty of perjury. I have seen many insurance companies later try to escape paying a large claim by accusing a policyholder of trying to defraud them by obtaining insurance under false pretences. They point out solemnly that doing so is illegal. Some people become so frightened that they give up their claim. If you are innocent of any wrongdoing, don’t give in to such tactics.
There are three important principles to remember on this subject: (1) Read all policy applications yourself and read them sceptically; (2) Don’t fall for a bluff when an insurance company tries to rescind. If you have been honest, stand up for yourself and fight it. You will probably win and will wind up proving that the insurance company was engaging in bad faith as well by trying to take away your coverage after the claim occurred; and (3) There are “incontestability periods” in most policies and under the law.
That means that beyond a particular date (e.g. two years), the company can no longer rescind the policy for an alleged misstatement on the application. When they try to rescind, don’t rollover, examine the situation carefully.
8. Punitive damages are awardable against insurance companies of engaging in oppressive, fraudulent or malicious conduct. Use this fact in negotiations where applicable.
Insurance companies love to tell anyone who will listen that punitive damages are a terrible and unwarranted things, a concept cooked up by lawyer parasites to get rich off innocent, misunderstood insurance companies. Don’t buy it. Punitive damages are the only thing that prevents insurance companies from engaging in even more outrageous bad faith conduct than they already do. If a given insurance company has, let’s say $100 million, in valid claims that have been made, it knows that its investment profits on this money alone will likely exceed $15 million per year. It also knows that if it merely delays, long enough, many insureds (particularly if they are ill or have lost substantial assets or property) will substantially under-settle their claims. If they have died during the delay, the company may never have to pay.
In addition, the company knows that if it wrongfully denies the claims, many policyholders will not be willing or able to fight them. Last, even as to those who do fight, insurers know that most people will not be willing or able to fight them. Last, even as to those who do fight, insurers know that most people will probably wind up with a lawyer who knows little about insurance law or who doesn’t have the financial capacity to fight a multi-billion dollar industry with an infinite supply of lawyers. Therefore, instead of just paying out the money to policyholders to whom it is owed, an aggressive insurance company can keep much of the money owed, and can earn even more back on investments made during the delay period. So that little, or none of the actual money owed is ever paid.
The insurers also know how difficult it is to recover punitive damages in courts these days. Punitive damages are disfavored by judges and juries alike. If you are going to recover punitive damages against an insurance company, you had better have some very persuasive evidence or the judge will not even permit the issue to go to the jury in the first place. If punitive damages do go to the jury and the case is not extremely strong, the jury will toss you out the door. In addition, if punitive damages are awarded, the judge can reduce them. Finally, the insurance company can appeal the verdict.
So the insurance company has quite a bit going for it in avoiding ever having got pay a substantial punitive damages award. The rarity of punitive damages awards that actually stick, makes it very important that such an award be appropriate in light of the conduct and wealth of the particular insurance company. For years, insurers have been trying to get state legislatures or Congress to cap punitive damages at say, $300,000 or $400,000.
That sounds like alot of money until you look at the figures. If you must deter someone with a bank balance of $500 million from making money illegally, it would certainly not be too much to award one to ten percent – to make it less profitable to engage in the legal practice. Naturally, an insurance company is not going to be deterred by smaller amounts.
But if you take the same percentage, 4%, or 5% and apply it to an insurance company with a net surplus (beyond reserves and expenses) of $800 million, then punitive award comes to $40 million. There are very few $40 million or more punitive damage awards upheld against insurance companies. But a $300,000 or $400,000 cap would be laughable to a multi-million dollar insurance giant. They would continue with business as usual, because the illegal profits earned would be far greater than the potential damages threatened.
In any event, the prospect of punitive damages can give you as the Insurance consumer, important leverage to encourage an insurance company to treat you fairly in the first place. That is really what punitive damages are for, to make an insurance company think twice before ignoring the law. The companies realize that even those who know the least about insurance law may happen to wind up in the hands of a lawyer who, after subpoenaing the claims file, and fighting through fifty or so depositions, obtains the evidence necessary to ask a jury to set an example. This fact can be helpful for you to know when trying to negotiate a fair claim settlement on your own behalf.
9. You can usually get free legal advice from an insurance law expert so that you know your rights before you talk to your company, rather than after it is too late.
Long-term disability lawyers who take on these insurance bad faith cases have to evaluate them carefully beforehand. These cases are usually taken on a percentage or contingency fee with the lawyer advancing all the costs. The cases had better be good ones or the lawyer will soon be out of business.
Therefore, a great deal of time is spent giving free legal analysis to insureds, whether a case is ever filed or not. Use this to your advantage to get free advice regarding your claim. Make certain that the lawyer you are getting the advice from is truly an expert in this field. Obviously you should make sure that the expert insurance lawyer does not specialize in representing insurance companies.
10. Read the definitions contained in your disability policy. These definitions can sometimes change the common meaning of the words used. BUT be aware that policy language does NOT trump state laws and protections. For example, insurance companies cannot use policy provisions to diminish your rights under state law – such as your state’s definition of Total Disability. This is an important issue that is applicable to many aspects of policy interpretation. If this is a problem in your situation, consult with an expert who is familiar with your state insurance laws, regulations and court decisions.
As mentioned earlier you are spending a great deal of money every year on insurance. Be aware that to get what you’re paying for, against this industry, you have to know something about your rights. Store this article with your insurance papers. If the insurance underwriters were right in their projections, you will never need to review it because like most people you will never have a large claim.
Remember that protecting yourself and your family starts but does not end with this information. When it comes to insurance, Caveat Emptor is always the rule!