Disability
Know Policy Provisions About Offsets
To Ensure Your Client’s Disability Plans
Pays You What It Should
There Are Rules That Govern
How Insurers May Govern Offsets

 

by Glenn Kantor and Peter Sessions


If your client is entitled to disability benefits through an employer-provided or private plan, you may be surprised to find that their plan has provisions that allow the insurer to deduct, from their benefits, other types of income they receive or are eligible for their disability. These deductions are called “offsets,” and are permissible under state and federal law. Common offsets include Social Security disability benefits, workers’ compensation benefits, and benefits from state disability programs like those in California, New York, New Jersey, Rhode Island, and Hawaii. Insurers can also deduct any amounts from their benefit that your client receives from working part-time (usually called “partial disability” or “residual disability” benefits), as well as retirement or pension benefits (including disability pension benefits).

The rationale behind offsets is this: If your client were allowed to keep the full amount of all of the various disability benefits to which they might be entitled, it would be possible for them to earn more money on disability than they would by working. Disability benefit programs, both public and private, are designed to avoid that result.

When people are receiving benefits from enough different sources so that their disability income exceeds the benefit amount in their policy, most policies have a minimum monthly benefit that is payable regardless of the total offset amount. Each policy calculates this benefit differently. Some policies have a set amount, such as $100; some set the amount as a percentage of their regular benefit; and some have a combination of the two. However, some policies do not have a minimum monthly benefit at all; insurers are not required to include one in their policies.

You can determine whether their plan contains offsets by looking at the part of the plan that explains how their benefit amount is calculated. Most plans have language indicating that the insurer is allowed to deduct “other benefits” or “other income benefits.” The policy will then have a separate section shortly thereafter explaining what types of benefits constitute “other benefits,” and how the insurer can offset them from their regular benefit. This language can vary significantly from policy to policy, so it is always extremely important to read and understand their policy to make sure that your client’s insurer is applying the offset provisions accurately.

You may wonder what kinds of offsets are allowed under the law and if there are any restrictions on how insurers can apply them. For the most part, offset provisions are not heavily regulated. For example, the Employment Retirement Income Security Act (ERISA) governs employee benefits, including disability benefits. However, ERISA is primarily concerned with explaining what employers and insurance companies must do if they offer benefits to employees. It does not tell employers and insurers what kinds of benefits they have to offer or how those benefits should be calculated.
You may also wonder if there is anything you can do to change the offset provisions that are in your client’s policy. Unfortunately, if your client is receiving a disability benefit through their employer, the terms of their disability benefit plan have already been negotiated between their employer and the insurance company and they can do nothing to change those terms. If your client is receiving benefits through a private policy of insurance, they can try to negotiate with their insurer to remove offset provisions, but they are unlikely to be receptive to their requests.

There are, however, some rules that govern how insurers may apply policy offsets. Here are some examples:

Workers’ Compensation

Workers’ compensation benefits are designed to compensate injured workers for replacement of wages, loss of use, and medical treatment, among other things. If your client gets workers’ compensation benefits, the insurer may attempt to offset all of their workers’ compensation benefits, even if they are not attributed specifically to lost wages. There is a strong argument that insurance companies should not be allowed to do this. Under this argument, it would be permissible for an insurer to offset their “temporary total disability” benefits, because these benefits are typically based on their prior salary. After they have become “permanent and stationary,” the insurer would not be allowed to offset the full amount of their “permanent total disability” benefits, because these benefits include compensation for multiple injuries, not just their lost wages.
California recently enacted an insurance regulation that supports this argument. It allows group disability insurers to offset temporary total disability benefits, but prohibits them from offsetting permanent total disability benefits. (California Code of Regulations Section 2232.45.4)
As always, read the policy carefully because it may contain language that limits the insurer from offsetting your client’s entire workers’ compensation benefit. For example, some policies only allow offsets for benefits based on “loss of time,” while others are more broadly worded. This can be a confusing issue, so your client should consult with their workers’ compensation attorney to ensure that their benefits are properly attributed to avoid being offset.

Subrogation

An insurer can also offset your client’s benefit by money they receive in a lawsuit against a party who caused their disability. The legal term for this situation is called “subrogation,” and involves the legal rule called the “make whole” doctrine. Suppose your client is entitled to benefits from different sources for their injury (for example, from both the person who caused their injury and the insurer). The insurer can only collect its offset, (enforce its subrogation rights) if your client has been fully compensated for their injury -- in other words, they have been “made whole” for their injury.
If their claim is governed by ERISA, conflicting legal decisions govern whether the make whole doctrine applies to their claim. In some states, such as California, the courts will apply the doctrine, but in others, they will not. If your client is in this situation, they should consult with an attorney who specializes in ERISA law to determine whether the make whole doctrine applies to their claim so they can determine if the insurer has the right to offset their benefits, and if so, by how much.

Social Security

Social Security disability benefits typically increase over time to compensate for the effect of inflation on fixed incomes. This increase is called a cost-of-living adjustment (COLA). Some states, such as California, have laws that prevent insurance companies from reducing their benefit if their Social Security disability benefit goes up. (California Insurance Code Section 10127.1) Even if no law prohibits an insurer from reducing their benefit, insurance policies often contain a provision stating that the insurer will not do so.

If your client is receiving family Social Security benefits, or “dependent benefits,” in addition to their individual Social Security benefit, be aware that these benefits may also be offset. Most policies limit offsets to benefits your client is entitled to receive personally for their disability, but there is no law prohibiting insurers from offsetting dependent Social Security benefits as well. Again, every policy is different, so read the policy to see whether their insurer has the right to apply this kind of offset.
Regardless of what offsets might apply in you client’s case, you may be surprised to learn that their policy probably gives their insurer the right to estimate those offsets before they even begin to receive them. Insurers assume that if your client is eligible for benefits from them, they are probably eligible for benefits from other sources, such as Social Security, as well. The insurer will estimate and apply an offset for those benefits as soon as possible. Sometimes, the insurer will give your client a choice. An insurer might ask if they want to estimate the other benefits and apply the offset now or whether they want to wait until they receive the other benefits and then pay the insurer back.
Some states, however, prohibit certain kinds of estimates. For example, in California, group disability insurers are not allowed to estimate retirement benefits (California Code of Regulations Section 2232.45.2) or workers’ compensation temporary total disability benefits (California Code of Regulations Section 2232.45.3), and therefore may not offset those kinds of benefits until they actually receive them.

In sum, offsets are an important part of a disability benefit plan since they directly affect, and often substantially reduce, their benefit amount. However, they can also be very confusing. If your client is concerned that their benefit has been miscalculated because their insurer has not applied the policy’s offset provisions correctly, they should request a detailed calculation in writing from their insurer. If their benefits are governed by ERISA, as most disability benefits are, they have the right to appeal the insurer’s calculation. If that appeal is denied, they have the right to bring a lawsuit in federal court. To maximize their chances of succeeding, they should contact an attorney who specializes in ERISA law before going through the ERISA appeal process. ERISA imposes strict evidentiary limits, so if they do not present their best evidence and arguments during the appeals process, they may be prevented from doing so later when they get to court. As a result, it is important to get legal advice as early in the process as possible.
––––––––––
Glenn Kantor is a founding partner of, and Peter Sessions is an associate with, Kantor & Kantor, LLP in Northridge, California. The firm represents policyholders in insurance disputes regarding denial of ERISA and other health-related benefits. They can be contacted at (818) 886-2525, or by e-mail at gkantor@kantorlaw.net. For more information, log on to www.kantorlaw.net.