South Carolina Lawyer
SC Lawyer, September 2009, #4.
Long Term Disability Offsets: What to Look for from a Claimant's Perspective
South Carolina LawyerSeptember 2009Long Term Disability Offsets: What to Look for from a Claimant's PerspectiveBy Robert E. Hoskins When will some workers' compensation and Social Security disability claimants' attorneys have to deal with the Employee Retirement Income Security Act of 1974 (ERISA)? Unfortunately, the answer is sometimes when it is "too late." While health insurers' ERISA subrogation rights have become common knowledge among personal injury attorneys, many workers' compensation and Social Security attorneys are oblivious to the same sort of subrogation like pitfalls that face their clients who draw long term disability (LTD) benefits. This article discusses what to look for when representing a workers' compensation or Social Security disability claimant who also draws LTD benefits from an ERISA plan.
Plan document language governs
At their core, ERISA plan documents are contracts. The Fourth Circuit has noted:
"We adhere to plan documents unless they contravene ERISA or other binding authority. But ERISA "does not mandate any minimum substantive content for [welfare benefit] plans" (citation omitted). "Employers have large leeway to design disability and other welfare plans as they see fit." Black & Decker Plan v. Nord, 538 U.S. 822, 833, 155 L.Ed.2d 1034, 123 S. Ct. 1965 (2003).  Indeed, "ERISA neither requires a welfare plan to contain a subrogation clause nor does it bar such clauses or otherwise regulate their content." Ryan by Capria-Ryan v. Fed. Express Corp., 78 F.3d 123, 127 (3d Cir. 1996). ERISA allows plans broad discretion to draft such clauses." Kress v. Food Employers Labor Relations Assoc. & United Food and Commercial Workers Health and Welfare Fund, 391 F.3d 563, 568 (4th Cir. 2004).
What are offset terms?
Offset clauses reduce the amount an LTD insurer owes when the insured receives income from other specified sources (other income). Although not universal, offset clauses are "common." In re Unisys Corp. Long Term Disability ERISA Litigation, 97 F.3d 710, 715 (3rd Cir. 1996). Offsets serve an important purpose. As the one court stated:
" .Clauses of this kind not only reduce the employer's outlay for disability coverage (and thus enable the employer to provide additional fringe benefits from a given budget) but also control the moral hazard of insurance-that is, the chance that the existence of insurance will increase the likelihood of the insured event. People who know that their full income will continue after they stop working may take more risks in their daily lives and will not try as hard to return to work after injury or illness; some insureds will fake the existence of a disability or exaggerate its severity. The closer the disability benefit to 100% of earned income, the greater the moral hazard. As a practical matter even 80% may fully replace lost wages, for persons who no longer work do not incur commuting and related costs, and they enjoy certain tax advantages." Hall v. Life Ins. Co., 317 F.3d 773, 778 (7th Cir. 2003).
Offset clauses are usually incorporated into an ERISA plan document several ways. First, there may be a provision specifying what "other income" sources are offsets to LTD benefits. Usually, the monthly LTD benefit is a fixed percentage of the insured's earnings minus the specified other income benefits. Workers' Compensation (WC) and Social Security Disability Income (SSDI) are almost universally listed as LTD plan offsets. Some plans also have provisions specifying what is not an offset. Some plans explain how a lump sum award, such as with a settled WC claim, will be prorated for the purposes of calculating the offset. The details of these provisions vary widely amongst plans. Finally, most plans will provide a subrogation like clause that specifies that if LTD benefits are overpaid due to the insured's subsequent receipt of "other income," then the insurer has a legal...