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.