How to determine if denial of disability claim is fair

May 30, 2008
Claims that once would have been routinely paid are now being denied due to industry trends, contractual misunderstandings, and consumer lack of knowledge or inability to contest.

by Larry Schneider

It's a fact that disability income insurance claims have increased dramatically over the last several years, along with a disproportionate number of inappropriate denials. The claims departments of too many insurance companies have been told to "tighten-up." Claims that once would have been routinely paid are now being denied due to industry trends, contractual misunderstandings and consumer lack of knowledge and inability to contest.

During the last 35-plus years experience as a disability income specialist and expert witness/consultant, I have been called upon by attorneys and claimants in dozens of cases to either testify or submit written opinions on denied claims and as a result, most were then ultimately settled in favor of the claimant.

In this article, I am going to discuss claims that have been inappropriately denied and also pass comment on those which can or should be justifiably be denied, due to the claim being invalid or fraudulent. Some of the reasons why the claim could be judged invalid, could be due, but not limited to:

• elimination period not being satisfied, either due to the inadequate number of days, or days not being consecutive

• definitions, terms, conditions for benefits to be paid not satisfied — total disability or residual disability

• renewability

• exclusions

From these, was there a common denominator or one major reason for claims denial? Yes, it seems that one of the biggest reasons for claims denial, had to do with satisfying the Definition of Total Disability; some of which that are commonly used by the industry and primarily based on occupation etc. are:

• Own occupation — This pure own-occupation definition allows payment to be made so long as the insured can't do the duties of their occupation even if the insured is working elsewhere so long as it is another occupation. Some carriers even offer an own-occ medical specialty definition, based on AMA recognized specialties. The definition could be for the full benefit period, or for part of the benefit period. See below for examples.

• Own occupation, not gainfully employed elsewhere — A policy with this type of split definition pays benefits (sometimes as per above for a period of time and then changes), if the insured can't do the duties of his or her occupation and is not working elsewhere. Working or not, then becomes the choice of the claimant. If they do work elsewhere, and there is a loss of income, residual benefits will then kick in (assuming this option is part of the contract and its terms/conditions are satisfied).

• Own occupation, unable to work elsewhere — This is an other example of a split definition that gives true own-occ (see the first definition above) for a period of time, usually two to five years, then changes to unable to work elsewhere (by reason of education, training, experience, and sometimes prior economic status.) This is one of the least desirable of all and gives the carrier some control in minimizing the impact of the claim.

• Loss of earnings — This is the same as a residual (proportionate) definition. An example might be if an insured has a 30% loss of income while disabled (and under the care of a physician), they will be paid 30% of the monthly benefit. While this policy does pay proportionately, please note that the insured also starts off with an initial minimum 40% shortfall in view of the fact that the carrier's participation tables only allowed approximately 40-60% of pre-disability income to be covered/issued. Issued amounts in many cases are currently basically capped at $10K-15K/month, depending on occupation and income. Note: Additional coverage past these amounts (up to $50K/month), are available in a secondary market.

Another major reason for claims denial, has to do with misstatements and/or omissions which have been made on the application by the claimant. With regard to these, I can safely say that in some cases, they have been unintentional due to the poor wording of the questions appearing on the application.

I've stated many times over and over in the last 20 years as an expert witness that the claim starts with the application. Who is at fault? Is it the carrier for poorly constructing the wording of the questions, or is it the fault of the applicant who intentionally withholds pertinent information that could negatively impact the underwriter's decision as to whether or not to issue a contract as applied for? Some critical areas of the application which affect a claim and could be inadvertently answered incorrectly, or dishonestly, have to do with 1) occupation/duties, 2) health, 3) income, 4) and other pertinent facts such as; avocations, etc.

Incidentally, some of the "honest" mistakes unintentionally made by the applicant might be "overlooked" after two years, as outlined in the contract's incontestability clause, unless there is other wording or state statutes to over-ride that clause.

What may not be "overlooked" however, are fraudulent misstatements or omissions such as; health or income (see above). Come on, can someone honestly say that they "forgot" that they had a back operation, or a heart attack two years ago? With the same view in mind, let's not forget the agent's role in completing the application. Did the agent record all answers exactly as they were answered, or was there some hidden agenda or motive for writing them down in such a way so that the policy would be issued as "applied for" (without a declination, rating or an exclusion)? In this case, did the agent really do the proposed insured a favor, or were these omissions for the agent's own gain?

As you can see, some of the above comments largely have to do with invalid claims, and as a result, these fall into the category of being appropriately denied. What about those claims which have been inappropriately denied? Some of these denials were seemingly based on straightforward and uncomplicated reasons. Others, because of the contract's convoluted language and integrating benefits/riders/exclusions/etc., were more complicated.

One claim, which was seemingly straight-forward, was submitted by an internist and whose attorney asked me to evaluate the denied claim for damages. The policy holder had submitted a claim, unaware the policy had lapsed due to a change of address. The claims department initially denied the claim due to the policy not being in force.

What then was the basis for the claimant's appeal? Upon closer scrutiny, the contract clearly stated that all policy changes must be submitted in writing. The claimant's agent verbally made the change and the submitted change was incorrect. Why then did the carrier initially continue to deny? That was for carrier's attorney to justify. However, in my opinion, they had no basis (except wanting to escape the liability of a very "rich" contract). My report containing several pages of additional reasons and analyses supporting the internist's claim for substantial damages, ultimately got the claim paid.

Another case that I worked on, had to do with definitions, and as previously mentioned, the one that is most often party to a denial, has to do with the definition of total disability. In this particular case, the agent's client was a cardiologist who also did invasive procedures as a small part of his duties. To protect future income, he "purchased" a disability policy after reading the agent's brochure (which had printed on it, "your own-occupation/specialty"). After the policy was issued, the insured asked the carrier for an "own-occ" specialty letter, since he wanted his specialty as an invasive cardiologist, to be part of the own-occ Definition for Total Disability. This request, according to the plaintiff, was clearly stipulated to the agent.

The specialty letter was finally issued, however, it only made mention of cardiology. When the cardiologist complained to the agent that "invasive cardiology" was not addressed as requested, he was told not to worry. To further compound the claim, his policy only had benefits covering total disability, i.e. no residual. A claim was submitted and was paid even though the doctor was back to work (but not doing invasive procedures).

The doctor finally went off claim. Time went by and a new claim (same basis as before) for disability benefits was submitted. This time it was denied! The carrier stated that his claim did not satisfy the definition for total disability. So far they are correct since the issued specialty letter didn't address his "specialty," however, my report pointed out amongst other issues, that in view of the fact that such a big issue of sub-specialty was made, the carrier had an obligation to clearly respond, that the specialty had to be an AMA recognized specialty and at that time it wasn't.

Another claim that I worked on had to do with a dermatologist who went out under a claim using her group LTD certificate, which as we all know, have many restrictions and limitations. She was paid $6,000 per month and after only 24 months, these benefits stopped even though the policy's stated benefit period was to age 65. Why did the benefits stop? Again definitions! In this case, the carrier invoked their split definition for total disability which meant that after 24 months, it changed to a more restrictive definition. However, the doctor's claim was finally paid as a result of my report pointing out that the claims department had misinterpreted their own definition.

What actually happens when a claim is submitted for payment?

After the claim is reviewed for completeness, the initial application is pulled and compared with the information appearing on the claim form for any inconsistencies. To support the claim, APS's will be ordered. Other pertinent application documentation (such as tax returns) will once again be reviewed and will be evaluated to determine if there are inconsistencies. If the claim is valid, payment will follow.

On the other hand, due to the terms of the policy, e.g. elimination period, etc., correspondence will address those issues. If the claim is invalid due to fraudulent omissions, etc. and it is within the contestability period, the policy will usually be rescinded and all premiums from the policy's inception will be refunded. If it is invalid and it is past the incontestability period, it might be paid, unless the carrier strongly feels there was a strong intent to commit fraud, then rescission/denial could be instituted and might result. While fraud might be hard to prove, over the years the courts have gotten more lenient in favor of the carrier and the carriers have gotten more aggressive in protecting their rights. In any event, if it is a long-term appropriate claim, expect possible surveillance and or a possible buy-out of the claim.


I strongly believe that denial of inappropriate claims has got to stop so that litigation is only for acts of bad faith (on the part of the carrier) and fraud (on the part of the claimant). All other disputes usually can be handled by arbitration. If the current method of disputing an inappropriately denied claim doesn't stop, then in most cases the insurance company with its deep pockets, will surely win over the disadvantaged! It has been my experience that there are some carriers who habitually take this approach by excessively denying legitimate claims.

Disability Insurance Resource Center is the nation's largest agency exclusively specializing in disability insurance, including but not limited to, hard-to-place (health issues etc). Its founder, Larry Schneider, also provides expert witness and consulting services and has written over 40 published articles on the subject and is a disability insurance specialist with over 35 years of experience. He can be reached at [email protected] or, on his toll free number, 800-551-6211. For more information and or his CV, his web site is: