Short- and long-term disability insurance are important benefits that many employers offer to their employees. These benefits can provide a valuable safety net for those employees lucky enough to have an employer who includes them as part of their benefits package. However, is the benefit as valuable as it appears to be?

In most circumstances, if long-term disability is offered through your employment, then the plan is governed by the federal statute known as the Employee Retirement Income Security Act of 1974, or ERISA. ERISA establishes the deadlines for review of the claim and the standard of review for claim denials, but it does not establish what must be in the disability insurance policy.

The policy establishes the contract between the insurer and the insured and defines the terms of the insurance. It establishes the definition of disability, the benefit to be paid and how the benefit will be calculated. It will also establish the parties' obligations under the policy and any exclusions to coverage. Most policies provide for payment of 60% to 80% of the insured's base monthly salary, but that is usually not the amount the insured actually receives.

First, most ERISA disability policies provide a dual definition of disability. For the first 24 months, the definition of disability is whether the employee is capable of performing their regular occupation. This phase of the disability definition seems appropriate enough; however, this may be a difficult burden of proof depending on how the regular occupation is classified.

It is important to know how your occupation is defined under the Dictionary of Occupational Titles, or DOT, when assessing your disability claim. For example, my occupation is a lawyer. The DOT classifies the occupation of a lawyer as sedentary duty, but it is a highly skilled occupation with a Specific Vocational Preparation level, or SVP, of 8. Sedentary duty is the least physically demanding occupational level, requiring lifting of no more than 10 pounds and sitting throughout the day. As any trial lawyer will tell you, this may not be an accurate assessment of the position as I recall lifting heavy boxes of files and exhibits weighing far more than 10 pounds while entering the courthouse. Nevertheless, that is how the DOT classifies the position and that will generally be how the insurance company reviews the position.

Consequently, I would need severe physical impairments for an insurance company to conclude that I could not perform my regular occupation. However, since the position of a lawyer is a highly skilled occupation, one way to attack that position would be to present evidence of mental or psychological impairments that limited my ability to concentrate, focus or interact with people. If I have depression or anxiety that severely affects my concentration and focus, then it is conceivable that I could be limited to simple, routine and repetitive tasks. This limitation would eliminate my ability to perform my regular occupation as a lawyer and then I would be disabled.

Take a moment and think about all the occupations, beyond a lawyer, which are sedentary in nature. Most office jobs are classified as sedentary duty. A secretary is sedentary duty, skilled work. A data entry clerk is sedentary duty, semi-skilled work. In fact, I would wager that most jobs where a disability benefit is offered through the employer are sedentary or light duty jobs.

An insurance company is happy to offer affordable group disability claims to many employers because they know that a disability claim for a sedentary duty position is going to be extremely difficult to prove. As shown above, one avenue of success to prove disability is to rely upon the effects of a psychological impairment and show the inability to concentrate and focus.

However, insurance companies are savvy. They did not become billion-dollar corporations by paying out claims. Insurance companies recognize the effect that psychological conditions have on eliminating an individual's ability to perform sedentary duty work. They add to most insurance policies a term providing that if a claim for disability is based upon a psychological or mental impairment, then the policy will only pay that claim for a specific period, which is usually less than the 24 months for a regular occupation. Insurance companies have limited their exposure and you would have no idea that your future is not as secure as you thought unless you read the policy.

Now, let's consider an occupation that is more physical than my occupation. Prior to law school, I worked as a mason's helper—a very physical job. This position is classified under the DOT as heavy-duty work and low-level semi-skilled work with an SVP-3. Let's assume for the purposes of this hypothetical that I sustained a work-related injury to my lower back, consisting of a disc herniation, while driving a work truck. Chances are, I will satisfy my burden of proof as defined under the policy and show that I cannot perform my regular occupation as a mason's helper.

Once I receive benefits under the policy for 24 months, I enter the second phase of the dual definition of disability under my policy. The definition of disability now changes dramatically to whether I can perform any occupation in the national economy. This definition is a heavy burden of proof. Furthermore, the new definition of disability will not account for my age when determining whether I can make the adjustment to a new occupation. Age, for instance, is a crucial factor in a Social Security disability claim but plays no role in the analysis of an ERISA claim. With the second phase definition, the insurance company has now reduced their exposure to 24 months of benefits in most cases.

Moreover, insurance companies have additional measures to reduce their ultimate exposure even further. Most insurance policies require the insured to file a claim for Social Security disability. With this requirement, the insurance company aims to reduce the disability benefit by the amount the insured receives in Social Security disability benefits. Furthermore, insurers may also offset the benefit by the amount paid in family benefits.

For example, an insured's policy provides for payment of $4,000 per month and their Social Security disability benefit is $1,600 per month. If they do not have children, then the insurance company will pay them $2,400 per month. Social Security provides for a family benefit equal to one half of the disabled parent's benefit, so if that person had a child then they would credit an additional $800 per month and the insured would only receive $1,600 from the insurance company.

Insurance companies also have the right to be repaid out of any past-due Social Security disability benefits. Thus, anyone who received long-term disability and is then awarded Social Security disability should not spend their past-due check because most, if not all, of it will have to be repaid to the long-term disability insurer.

Additionally, insurance companies may also estimate the Social Security disability benefit even if the insured is not actually receiving them. This estimation typically occurs when the insured is beyond the first 24 months. The rationale for this is that the individual is claiming they cannot perform any occupation, so they must also believe that they are a candidate for Social Security disability.

In one instance, I had a client who had a benefit amount of $1,545 per month under the policy. She was paid this amount for 22 months, then the insurance company terminated her claim. She filed for Social Security disability, but was denied, primarily because she was 45 years old. She appealed the decision and lost, then appealed to federal court. While attempting to settle the claim, the insurance company estimated her Social Security disability benefit to be $1,300 with an additional $650 for her children, totaling $1,950 per month. This completely wiped out anything that the insurance company would have owed the claimant. The insurer further had the gall to say that the claimant owed it money.

Insurance companies do not just limit this offset to Social Security disability benefits but will likewise apply an offset to Social Security retirement benefits. Many people work after they receive Social Security retirement benefits. Typically, it is in a part-time job, but there are still people, mainly professionals, who work beyond age 65 in full-time positions. Working, whether part or full time, does not disqualify someone from receiving retirement benefits since age is the only qualifying factor. Frankly, there is no rational basis for an insurer to use Social Security retirement payments to offset long-term disability benefits. However, if the policy provides for such an offset, policyholders will lose out on hundreds, if not thousands, of dollars a month simply for being over age 65.

In one case, a 69-year-old client was receiving $2,300 per month in Social Security retirement benefits and filed a claim for short-term disability because he was experiencing daily lower back pain resulting from degenerative disc disease. He had been with his company for over 30 years, so the insurance company could not deny the claim based on preexisting conditions. The policy provided a maximum benefit of $600 per week, despite that he was making far more than that amount while working. The policy allowed the insurance company to offset the Social Security retirement benefits from the payable short-term disability benefits, resulting in the client only receiving approximately $50 per week. The paltry amount resulted simply because the claimant was over age 65. It is almost criminal that the insurance company continued accepting premiums in such a circumstance.

Finally, an important offset, if not an absolute exclusion, is for workers' compensation benefits. Careful attention must be given to the policy before an insured pursuing a workers' compensation claim applies for disability benefits. Most insurance applications will require the insured to sign a form binding the insured the insured to repay any overpayment that results from the successful pursuit of workers' compensation benefits.

Let's revisit the hypothetical from earlier in this article where the mason was injured at work and applied for long-term disability benefits. For the purposes of this hypothetical, the workers' compensation insurance carrier denied the claim. The mason received short-term disability benefits and then it converted to long-term disability benefits. He also was forced to litigate his workers' compensation and won. He can expect to receive a letter from his disability carrier indicating an overpayment has occurred and he will be forced to repay what could be a massive amount, potentially wiping out most of his past-due workers' compensation benefits.

Additionally, the insurance carrier will apply an offset to future long-term disability benefits. In this scenario, great care needs to be given when drafting a compromise and release agreement resolving the workers' compensation claim to protect the client's future wage loss. The settlement should be pro-rated over the client's life expectancy. The claimant also has the right to appeal any determination on an overpayment. In many situations, the overpayment requested in the original letter sent to the insured is not properly calculated and a reduced figure will be calculated after an appeal is filed. The rules of evidence do not apply in an administrative appeal with an insurance company, so think about submitting the defense medical examiner's report from the workers' compensation case when appealing. Consider how often defense medical examiners determine that there was no worker related injury and instead the condition was related to the aging process, such as degenerative disc disease in the spine. This opinion can be used to show that the client's disability was not work-related when dealing with an overpayment scenario.

The bottom line is long- and short-term disability benefits are valuable benefits offered to help employees when they can no longer work, but the insurance companies have stacked the deck against paying insureds what many think they are entitled to under the policies. Furthermore, an insured is bound by the insurance contract his or her employer negotiated with the insurance carrier.

Individuals seeking to protect their future should consider obtaining a disability benefit on their own and not rely upon the benefits offered by their employers. ERISA does not govern such policies and policyholders are free to negotiate the terms with the insurance carriers. Also, since ERISA does not apply, an insured may file suit against an insurance carrier for breach of contract, pursue a bad faith claim and request a jury trial. All of these are prohibited under ERISA. These remedies greatly enhance the value of a private disability claim.

Michael J. Parker, an attorney at Pond Lehocky Stern Giordano focuses his practice on advocating for the disabled for almost 15 years. In addition, he spearheaded the formation of the firm's long-term disability department.