Chapter Thirty-One

• Jurisdiction: New York

Chapter Thirty-One

Disability Insurance

Robert P. Lesko, Esq. Joshua Bachrach, Esq. Thomas M. Gambardella, Esq. Daniel J. McMahon, Esq. Jason M. Kuzniar, Esq.

I. Introduction

A crucial first step in handling disability insurance litigation is determining whether the case is governed by state law or the federal Employee Retirement Income Security Act (ERISA).⁴²⁵⁴ If it is the latter, state law is completely preempted with limited exceptions. This chapter first discusses common issues that arise in prosecuting and defending disability insurance claims under New York law and then gives an overview of litigating disability claims under ERISA.

II. Common Issues

A. Definition of Total Disability

The New York Insurance Law specifically requires that every life insurance policy or annuity contract that provides benefits by reason of the disability of the insured must contain in substance a provision that disability benefits will be paid or allowed only in a case of total disability.⁴²⁵⁵ The statute prescribes the definition of “total disability” as “incapacity of the insured, resulting from injury or disease, to engage in any occupation for remuneration or profit.”⁴²⁵⁶ Courts in New York have generally held that such definitions are clear and unambiguous.⁴²⁵⁷

Total disability policies may also define disability by reference to the whether the insured is disabled from a specific occupation or any occupation.⁴²⁵⁸

The term “total disability” by its very nature excludes mere partial disability,⁴²⁵⁹ but under the rule of reasonable construction does not require the insured to be absolutely helpless.⁴²⁶⁰ The mere fact that the insured loses a member, such as a leg or an arm, does not of itself establish total disability,⁴²⁶¹ although it may amount to such disability under the circumstances.⁴²⁶²

The burden in an action for disability benefits under a policy defining disability to be total when the insured is prevented thereby from engaging in any occupation or performing any work for compensation of financial value is on the insured to prove that he or she was not employed during the period for which he or she claims to have been disabled.⁴²⁶³ It is generally a question for the jury to determine whether the policyholder was totally disabled within the meaning of the policy provision.⁴²⁶⁴

B. Your Occupation Versus Any Occupation

If the policy contains a “general disability” clause, as distinguished from the more limited occupational disability clause, total disability requires that the insured be unable to perform not only all the substantial and material acts necessary to the prosecution of his or her business or occupation, but also the substantial and material acts of any occupation in the usual and customary way.⁴²⁶⁵ Consequently, under a general disability clause the performance of trivial and immaterial acts by the insured, regardless of whether such acts pertain to his or her usual occupation or employment or are unrelated to it, does not as a matter of law preclude his or her recovery so long as such acts do not amount in their totality to a performance of all the substantial and material acts necessary to the prosecution of an ordinary business or occupation.⁴²⁶⁶ It is a question for the jury whether upon the evidence the insured was capable of performing any substantial part of any of his or her duties.⁴²⁶⁷

The question whether there is a total disability when the insured is able to work in other occupations, notwithstanding his or her injury, depends primarily on how the contract defines disability.⁴²⁶⁸ In the case of an “occupational disability” policy, inability to perform all the substantial and material acts necessary to the prosecution of the insured’s business or occupation is sufficient to constitute total disability of the insured.⁴²⁶⁹ In the case of a “general disability” policy, it is not sufficient for a recovery that the insured is disabled only from engaging in his or her usual business or occupation, but he or she must also be unable to engage in any comparable occupation or employment for which he or she is fitted by education, experience, and physical condition.⁴²⁷⁰ These types of cases proceed upon the theory that the term “total disability” as used in general disability clauses is a relative one, depending in large measure upon the character of the occupation or employment and the capabilities of the insured, and upon the circumstances of the particular case. In other words, while it is not sufficient that the insured is disabled from engaging in his or her usual business or occupation, he or she need not be disabled from following any occupation whatsoever regardless of its character, since the total disability contemplated by such a policy provision does not require an inability to perform even the simplest chores. To qualify, the insured need not be “hopelessly bedridden or limited to selling pencils on the corner.”⁴²⁷¹ A disability provision that specifically requires the insured be unable to engage in his or her usual occupation or in other occupations for which he or she is reasonably qualified by education, training or experience precludes benefits where the insured is able to perform other work, even if not within the same field or at the same level of remuneration.⁴²⁷²

C. Legal Disability

If an insured is precluded from working because of a legal prohibition, such as revocation of a professional license, the inability to work is not due to an illness or injury, and therefore is not typically compensable under a policy of disability insurance. This is generally referred to as a legal disability.

In cases where there is also present an illness or injury, the issue will turn on whether the inability to work arose from the legal prohibition or the illness or injury.⁴²⁷³ If the cause is the legal prohibition, the disability is not covered.⁴²⁷⁴

In Jacobs v. Northwestern Mutual Life Ins. Co., the court articulated a process by which to assess whether the disability was cause by a legal prohibition or by illness: “first, whether the claimed factual disability is medically bona fide; second, whether its onset actually occurred before the legal disability; and, third, whether the factual disability actually prevented or hindered the person seeking disability benefits from engaging in his or her profession or occupation….”⁴²⁷⁵ The plaintiff in Jacobs was a plastic surgeon with Bipolar II Disorder, secondary to substance abuse. He lost his medical license after a finding that his “continued practice constituted imminent danger to the health of the people of New York.” In finding for the plaintiff, the court concluded that the factual disability, his medical conditions, came first and caused his legal disability, the loss of his license.

D. Future Benefits Not Recoverable

“[I]n an action on a disability policy, the insured is not entitled to a lump-sum money judgment for future payments, nor to a declaration to that effect with respect to the insurer’s future obligations.”⁴²⁷⁶ This rule applies even if there is an alleged repudiation of the contract by the insurer, unless special circumstances apply⁴²⁷⁷ such as where the insurer refuses payment, cancels the policy and refuses future premiums.⁴²⁷⁸ Otherwise, the plaintiff’s claims of entitlement to future benefits under a disability income contract depends on whether the plaintiff continues to be disabled in the future.⁴²⁷⁹ This must be established by future claims submissions and cannot be adjudicated at the pleadings stage of the case.⁴²⁸⁰

E. Notice of Claim

A provision in a disability insurance policy or clause relating to notice of claim is distinct from a provision relating to proofs of loss, although these are often lumped together.⁴²⁸¹ The basic distinction between the two is that the purpose of the notice of claim is to apprise the insurer of the occurrence of the loss, while the requirement of proofs of loss is to enable the insurer to learn the particulars of the loss and all necessary information so as to determine its liability.⁴²⁸²

In relevant part, Ins. Law § 3216(d)(1)(E) requires that “[w]ritten notice of claim must be given to the insurer within twenty days after the occurrence or commencement of any loss covered by the policy, or as soon thereafter as is reasonably possible.” The requirement of notice of claim within a certain period of time or as soon thereafter as possible has generally been upheld as reasonable and valid, and New York law provides that an insured has an obligation to comply with the notice of claim clauses of an insurance policy.⁴²⁸³ The insured’s failure to provide timely notice of a claim constitutes a complete defense for the insurance company whether or not it was prejudiced by the delay⁴²⁸⁴ unless the insured offers a credible excuse for the delay in notification and where the underlying facts are not in dispute and do not raise conflicting inferences.⁴²⁸⁵

The duty to provide notice to the insurer is triggered when “circumstances known to the insured at the time would have suggested to a reasonable person the possibility of a claim.”⁴²⁸⁶ However, an insured’s failure to provide timely notice may be excused if the insured has offered a valid excuse for the delay.⁴²⁸⁷ It is the burden of the insured to prove that the delay in notifying the insurance company was excusable.⁴²⁸⁸ Moreover, while the question of whether delay is excusable is generally a question of fact for a jury to decide, “a delay may be unreasonable as a matter of law when either no excuse is advanced or a proffered excuse is meritless.”⁴²⁸⁹

There is authority that the insanity or illness of the insured does not excuse his or her failure to comply with a requirement of notice or proof of loss or disability as contained in the policy.⁴²⁹⁰

In this regard, the preclusive effect of late notice of claim for benefits under life, health and disability policies is vastly different than under liability policies in New York. Failure of an insured to...