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APRIL,
2004 HEALTH
INSURANCE UNDERWRITER (N.A.H.U.)
Disability Claims...Shooting from the
hip may be okay for the hero in a western movie. It may
look good, but it might not hit the mark.
By
Arthur L. Fries
When you submit
a disability claim, you must hit the mark. This means
that you or your client must submit information to
an insurance company with no mistakes and you must
present a clear picture of your medical
problem thoroughly and indisputably backed up by medical
evidence. Once you submit the initial claim forms, you
must continue to hit the mark in everything you
do in order to avoid problems. “Shooting from the hip” just
doesn't work when it comes to disability claims.
Penalties for Shooting from the Hip
That's simple: the insurance company declines your claim
or terminates your claim at a future date.
“Hey, I paid
premiums. My broker/agent said I have a good policy
with a good company. I thought I even
heard said that this was the ‘Cadillac' of disability
policies. I'll sue!”
Oh, really? Are you sure what you're up against?
What a Lawsuit Means in the Real World
You contact
your attorney. That attorney may or may not be adequately
experienced in handling disability claims. If he is
not experienced, he may settle for too little
money, too early in the process. If experienced, he
may do a terrific job in representing you and might
effectuate a settlement in your favor without having
to go to court.
But if your
attorney and the insurance company attorney
cannot agree, both sides prepare for trial. This means
a lot of additional paperwork requested by the insurance
company during the discovery process, depositions by
both sides, and a tremendous amount of physical and emotional
time on your part. In many situations, the parties
to the lawsuit will settle prior to going to trial. But
there are also times when neither side can agree because
both feel very strongly about the claim.
Regardless
of the outcome, filing a lawsuit is an expensive
endeavor. Assume your or your client's case never gets
to trial. Even in this situation you could run up $40,000
to $80,000 in costs and fees advanced by your attorney
which is subtracted from any gross settlement amount
you might receive. This is in addition to the 30% to
40% (typical) “contingency fee” that the attorney
representing you will charge before actual costs are
even deducted.
Assume $1,000,000
of potential benefits and you settle for $600,000,
gross. Applying a 40% contingency fee ($240,000) and
actual costs of $60,000 leaves you with a net settlement
amount of $300,000... or 30% of the potential $1,000,000
payout!
Additionally,
the path a lawsuit can take is never straight. Let's
say neither you nor your insurance company
wants to settle and you go to trial. If you reside in
a state that permits you to sue for “bad faith” (punitive)
damages that is money above and beyond the compensatory
damages (what your policy is worth in terms of a monthly
benefit), you can include that aspect of the claim in
your initial lawsuit. Or you might have to wait until
you win the compensatory damages before you can bring
an action for bad faith. Or you may be located in a state
that does not recognize bad-faith lawsuits under any
circumstances.
When a lawsuit
is first presented, most times it will involve your
local district court. In most cases the insurance company
will get the case moved to federal court on the basis
that its home office is not located in your state.
What is important here is that federal court judges
tend to be more conservative when it comes to considering
punitive damages.
Further, if your claim for punitive damages is denied,
you cannot discuss anything in the trial that concerns
bad faith on the part of the insurance company or its actions
related to other claimants and/or lawsuits in the past.
You can only talk about the compensatory issues (language
of the policy) at trial.
The Long and Winding Trial
The trial to resolve a DI case can involve several days,
perhaps a week or even longer. Witnesses and expert witness
(who charge large sums of money) are called in to participate
in the trial. In this situation, costs can run an additional
$50,000 or more. Again, you are responsible for covering
these costs. And these relate only to your attorney.
So what happens if you lose?
You may also be required to pay the costs of the insurance
company attorney (and their related costs). This could
amount to $100,000 or more. And, in federal court, you
must have a unanimous decision on the part of the jury
in order to win—in contrast to district court where you
need only a majority to win.
Who sits on the jury panel? Typically, I've found jurors
to be retired people, unemployed persons and those who
earn a lot less money than you or most of your clients.
You won't find all college graduates on this panel!
The jury panel will take into consideration what you
are doing now in the way of employment. For example,
say you were a surgeon with a “your occupation” definition
in your policy but you developed a problem in one of
your hands that prevents you from practicing as a surgeon
since two good hands are required.
After going on a claim for total disability, you decide
to go to law school and become an attorney earning $500,000
per year after overhead. Your DI policy, from a contractual
standpoint, may say you are entitled to compensation
since you can no longer perform the functions of a surgeon.
But an individual sitting on a jury panel earning $40,000
per year or less—or not employed-—is not going
to be too excited about you collecting a “windfall” of
money from the insurance company while earning a great
living from your new job as an attorney.
And then you look pretty good sitting in front of the
jury because you are not a “basket case” from a physical
standpoint. The jurors can't see or feel your disability.
You won't see too many people who sit on juries who also
own an individual your-occupation Dl policy or one of
the policies issued in the “go-go” 80s with a specialty
letter.
More likely, those on the jury will either have no disability
coverage or group disability with an “any occupation” definition
with restrictive policy wording and offsets. Even with
the best instructions provided to the jury by the judge,
that jury can still be prejudiced by its beliefs and
emotional feelings with respect to you receiving
money from the insurance company.
If the jury cannot all agree on your case, you have
what is called a “hung jury.” That means
you either go another round in court at a future date
(a new trial), with further added costs—or you might
attempt to settle.
Conversely, let's say you or your client was lucky enough
to win in the first trial. You may want to bring up the
bad-faith action that you lost in round one. In this
scenario, the insurance company will appeal the first
trial decision (which you won) as well as defend against
a bad-faith action if the court permits it.
But the cycle continues. Let's say you lose the second
trial. Now you may be out of pocket the costs for the
insurance company attorney related to the second trial,
in addition to the original “other side” costs, and this
can be in the area of another $150,000 by this point
in time.
Let's say you win in this second trial and the jury
awards benefits related to the compensatory damages
(the policy value) as well as bad-faith damages.
Some of the bad-faith damages on disability claims
are quite high and the insurance company will usually
appeal that decision (the bad-faith aspect of the claim).
So even if you were awarded $10,000,000 in bad-faith
damages, the appeal will cause the case to drag on
for another four, five or perhaps even six years—and
you still haven't received even one dollar! These cases
often get settled for a much lower figure as the years
drag on.
Understand that a $40 million bad-faith award is what I
call “monopoly money.” It's the stuff you read about in
the newspapers. A case like that might ultimately settle
for $7 million or so—not anywhere near the original award.
By that time, unless you already had a large amount of
money in the bank, economically you're dead. This is what
a lawsuit is all about.
What's a Good DI Company
I regularly receive calls from brokers and agents asking
me what is a good company for disability coverage with
respect to how they pay claims. Or they might ask, “What
is a good company that used to sell disability insurance
that pays claims?”
If you define “good company” as one that doesn't ask
many questions or doesn't ask for much paperwork and
accepts everything your client and doctor says as
the absolute truth, the answer is there aren't any good
companies. In today's claim environment, almost
all disability claims are handled vigorously and carriers
relentlessly pursue information.
Some insurance companies take it one step further and
use an arsenal of weapons as they try to get blood from
a stone or “crawl into cracks” to make them wider. What
you or your client may have expected when the policy
was sold is very different from the reality of to how
claims are handled today.
Policy Language Can Hurt You
Policy language indicating that you are covered for
total disability if you cannot perform the “substantial
and material duties of your occupation” may mean one
thing to you or your client at the time of policy purchase,
but at claim time mean something entirely different.
For example, say your dentist client cannot practice
dentistry any longer because of cervical and low-back
problems. He has a repetitive movement problem in these
areas and takes medication for pain. He cannot work any
longer with a high-speed drill since he is now a danger
to his patients as well as himself.
He asks you if he can go to a law school and become
an attorney since this is a completely different profession.
You tell him his policy permits him to do so. However,
you have not considered the side effects of medication
he may be taking or the amount of pain that may continue
if he doesn't take medication.
There may also be some deterioration related to both
the cervical and low-back areas that will continue in
spite of the fact that the policyholder no longer practices
dentistry. For example, sitting in a classroom at law
school, or working in a law office all day, may not meet
all the “smell tests” for someone who indicates they
can't sit or stand for long periods of time while performing
the duties of a dentist.
Or your client may become a trial attorney and have
to drive frequently to depositions or court and the length
of time he spends in his car or stand in court may not
meet the smell test. How your client acts post-disability
with respect to business or social/athletic activities
can make the difference between your client being paid
on a disability claim or having the claim denied or terminated.
DI
Remains “Must—Have” Coverage
In spite of
all I have said related to disability claims, you should
clearly understand that disability insurance is still
an important product that is intended to
provide cash flow to keep you or your clients financially
secure in the event of a disability. In the absence of
this cash flow, without access to a personal “money well,” you
or your client can face economic suicide. An income is
a valuable asset. The ability to generate an income
is not guaranteed. The risk of losing the ability to
produce an income is very real. DI protects
against that risk.
Nonetheless,
the vigorous claim-management practices being used
by disability carriers and TPAs should be taken seriously.
In the event of a serious claim, you and your clients
should seek competent help. Shooting
from the hip doesn't cut it. If you miss, you lose.
Getting help
can reduce personal apprehension and provide the necessary
handholding your client might need to make it through
the long and tedious ordeal. It will also increase
the chances of the claim being paid.
_____________________________________________________________
Arthur
L. Fries, RHU,
is an independent life/health broker and a disability
claim consultant based in Newport Beach, CA. He can
be contacted at (800) 567-1911
or via www.afries.com. Back
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