The state of California and UnumProvident have settled the state’s accusations that the insurer violated state law in its long-term disability claims process.

Without admitting any wrongdoing, the insurer has agreed to take steps requested by the state. The California Department of Insurance already has indicated it will expect all insurers, not just UnumProvident, to adopt the claims handling provisions of the settlement agreement.

This settlement will affect the recovery of the so-called Social Security offset in group LTD policies in California.

Most group LTD contracts contain an offset for Social Security benefits. The offset may apply to the worker’s Social Security Disability Insurance, Supplemental Security Income and applicable dependents’ benefits.

If a disabled employee, for example, is receiving $1,000 a month in LTD, and then the employee is awarded $400 per month in SSDI, the LTD payment drops to $600 a month. What’s more, the LTD usually begins paying before the SSDI is awarded, so a later award of SSDI creates an LTD “overpayment” that the employee is then obligated to pay to the insurer from the lump sum SSDI award for past-due benefits. Depending on how long the SSDI case is pending before an SSDI award, the offset can be substantial, amounting to at least $20,000 in many cases.

To receive an SSDI benefit, however, the employee first must apply for it. Sometimes an employee does not want to apply, or, after the application is made, the employee does not want to pursue it fully. In cases where the insurer believes an employee has refused to apply or to pursue application properly, a common practice by insurers is to estimate the offset; that is, they reduce the LTD benefit by what they believe the SSDI amount would be if awarded.

The California settlement agreement prohibits using SSDI offsets except as to amounts actually received by the claimant. So, if an employee refuses to apply for the benefits, this provision apparently is intended to forbid the estimate of an offset.

To be sure, sometimes a person is unable to make the required application, through no fault of his own. Those situations tend to be where the worker is mentally ill and just can’t get it together, such as to appear for an interview at the Social Security Administration, or to follow through with the claims process.

A person unable to carry out these steps will be protected by the new requirements in California.

In practice, however, insurers are sensitive to these kinds of situations anyway and make appropriate allowances. That observation is based on my experience.

Perhaps the prohibition of an offset was intended to remedy a related accusation by California. The state alleged that the insurer told disabled employees that they must apply for SSDI in order to receive an unreduced benefit, even though the policy contained no such duty. Apparently, the policies provided for the offset but did not specifically state the requirement that the claimant apply for benefits to avoid an offset. Of course, the offset is meaningless without the concomitant requirement that SSDI benefits be pursued; so it would appear reasonable to require the SSDI application even in the absence of specific language.

In addition, one would expect insurers to amend their policies as needed to provide that an SSDI application is required to maintain benefits. In other words, the failure to file could be considered a breach of contract, in which case the LTD benefit can be terminated entirely. And, since these cases fall under the preemption provisions of ERISA, the insurers can cut off benefits without being concerned about jury trials, or awards for anything other than the benefits themselves and attorneys’ fees for the plaintiff.

Assuming that government regulators jockey for the most favorable result in these matters, the bottom line here may be that group LTD policies in California become more expensive.

The offset provisions are a consideration in determining premiums. The employer has paid FICA taxes in addition to LTD premiums. The combination of the two is intended to provide disability benefits, not just one or the other. While most employees apply for SSDI benefits, if a significant number refuse to do so, the insurers may have to take that into consideration.

Another provision of the settlement agreement that may be of interest to Social Security specialists is that the 24-month mental and nervous limitation will apply only after a physical condition ends. It will not run concurrently with a physical condition.

This means that if a person has a mental and physical disability, and the physical disability ends after 24 months, for example, the worker still may receive benefits for another 24 months for the mental disability. Similarly, “self-reported” condition (e.g., pain, weakness) benefit limitations will be prohibited.

Also, mandatory rehabilitation will no longer be permitted under the settlement agreement. This has been another way to coax a worker back to the work force–and a socially beneficial method at that.

The definition of “total disability” for the “own-occupation” period shall be defined as “a disability that renders one unable to perform with reasonable continuity the substantial and material acts necessary to pursue his or her usual occupation in the usual and customary way.”

For the “any-occupation” period, in addition to meeting the own-occupation requirements, the definition further requires the inability “to engage with reasonable continuity in another occupation in which he or she could reasonably be expected to perform satisfactorily in light of his or her age, education, training, experience, station in life, physical and mental capacity.”

Depending upon the particular policy language involved, these definitions may be more or less favorable to the insured. The better policies should have language that is more favorable. One would expect that more favorable language would still be acceptable, as the required language should be only a minimum requirement.

This settlement follows one earlier this year by UnumProvident that was a multistate agreement, which California opted out of. Interestingly, that agreement did not apparently address the offset issues found in the California settlement. The settlement contains other provisions affecting the claims process but not the SSDI part of it as directly as those discussed above.

Since all insurers will be required to meet these requirements, including appropriate policy language, the California department has issued approved policy forms. This may require insurers to refile their forms, unless the existing policy language is deemed sufficient. Since definitions are involved, insurers may have to refile their forms with amended language.

As for the claims handling requirements, insurers that already are operating in accordance with these issues should be able to continue to operate without making changes in operations.

On its face, the settlement agreement has no exceptions to the general rule prohibiting offsets. Of course, one would expect that new policy language may help to alleviate this loss of insurer clout.

The courts may ultimately have to determine whether the offset prohibition applies even if the insurer deems the insured as noncompliant, that is, in breach of the policy contract. These provisions may make group LTD more expensive in California, albeit, while making a difficult situation easier for some insureds. Without even rehabilitation as an option, the insurer will have fewer tools available.

Douglas I. Friedman, a partner in the Friedman & Downey, P.C. law firm of Birmingham, Ala., is national counsel for Social Security Disability for insurers. His e-mail address is doug@fdatty.com.

The California settlement agreement prohibits using SSDI offsets except as to amounts actually received by the claimant

One provision of the settlement is that the 24-month mental and nervous limitation will apply only after a physical condition ends; it will not run concurrently with a physical condition.