The Short Answer:
I get this question a lot because most long-term disability benefit denial letters contain the following statement (or something close to it):
“Please note that you have exhausted your administrative appeals. You have a right to bring a legal action for benefits under the Employee Retirement Income Security Act of 1974 (ERISA).”
In a nutshell, this means, “you can sue us now (but you couldn’t before you got this letter), and your case is governed by a federal law that was never meant to cover long-term disability insurance claims, but now it does.”
It also means:
• You have to sue the long-term disability insurance company in federal court;
• Your case will be decided by a judge, not a jury;
• You probably can’t submit any evidence to the judge that you haven’t already given to the insurance company;
• You probably won’t get to testify in your case, like you did at your Social Security Disability hearing; and
• The insurance company really, really hopes you won’t be able to find an attorney who handles ERISA cases.
The good news is if you’re reading this you’ve already found a lawyer who handles ERISA cases and one who has sued most insurance companies that write disability insurance policies.
The bad news is, ironically, ERISA makes it more difficult on the disabled employee to win his or her case in court, than it would be if the case was governed by state law.
This is why it is really, really important to call a long-term disability insurance attorney as soon as you receive your first denial letter, if not sooner. (See my blog, “Four Signs You Need a Long-term Disability (LTD) Insurance Lawyer”.)
I may have already answered your question. If so, that’s great. If not, and you’re interested in learning a little more about ERISA, keep reading.
The Long Answer:
OK, here is how it all started, and why I said it’s ironic that ERISA makes it tough for disabled workers to win in court. First, you’re probably wondering why a federal law with the word “retirement” in it governs your long-term disability insurance case. The idea behind ERISA is to protect employees’ pension plans so there would be enough money in them to retire. So, it’s ironic that when it’s applied to long-term disability insurance cases, it usually makes it more difficult for the disabled worker to collect benefits.
Also, it’s because your long-term disability insurance is part of an employer-sponsored welfare benefit plan, just like a pension plan is.
Allow me explain: There are two broad categories of employer-sponsored benefit plans. The first is the pension plan, and we all know what that is. The second category is “welfare” benefit plans. These plans include everything that’s not a pension plan (e.g., health insurance, and long-term disability insurance plans).
Before ERISA was signed into law, employer-sponsored benefit plans were governed by the Internal Revenue Code (because employers got tax deductions for these plans). Since the Internal Revenue Code didn’t have many rules about how the folks who manage pension plans could do their job, problems arose with how pension funds were being managed, which led to serious problems, like the one that occurred with the Studebaker Corporation’s pension plan.
Studebaker was an automobile manufacturer that went out of business in 1963. Its pension plan was so poorly funded that Studebaker couldn’t afford to pay all of its employees’ pensions. So, Studebaker came up with a plan in which 3,600 workers who had reached the retirement age of 60 received full pension benefits, 4,000 workers aged 40–59 who had ten years with Studebaker received lump sum payments valued at roughly 15% of the actuarial value of their pension benefits, and the remaining 2,900 workers received no pensions.
This debacle started a groundswell of public support for pension law reform and led to President John F. Kennedy creating the President’s Committee on Corporate Pension Plans.
The Studebaker pension plan failure was an example of a single-employer plan running into problems because it was either under-funded, mismanaged, or both. There are also multi-employer plans, and these had their problems too. Multi-employer plans are for employees who whose employer, for one reason or another, doesn’t offer a pension or health and welfare plan. This is common is some professions, like the building and construction trades, and people who work on movie sets making the sets, doing the makeup, etc. In these situations, sometimes the employees’ unions sponsor pension plans so that they have a retirement to look forward to even though they haven’t worked for the same employer over the years.
In the 1960s, problems with these multi-employer sponsored plans came to light because the union leaders who managed some of them were mismanaging the funds and putting the pension plan money into questionable investments. In 1963, Senator John L. McClellan (D) of Arkansas began an investigation through the Permanent Investigations Senate Subcommittee into labor union leader George Barasch, alleging misuse and diversion of $4,000,000 of union benefit funds. After three years the investigation failed to find any wrongdoing, but it did result in several proposed laws, including McClellan’s October 12, 1965 bill setting new fiduciary standards for plan trustees. In addition, due much in part to his “dismay” over Barasch’s sole control over union benefit plan funds, Senator Jacob K. Javits (R) of New York also introduced bills in 1965 and 1967 increasing regulation on welfare and pension funds to limit the control of plan trustees and administrators and to address the funding, vesting, reporting, and disclosure issues identified by the presidential committee. His bills were opposed by business groups and labor unions, which sought to retain the flexibility they enjoyed under pre-ERISA law. Provisions from all three bills eventually evolved into the guidelines enacted in ERISA.
Ultimately ERISA was enacted in 1974 and signed into law by President Gerald Ford on September 2, 1974.
The idea behind ERISA was to protect workers’ pension plans so they would not have to worry about whether there was enough money in them to allow them to retire.
After ERISA was signed into law there a set of laws and regulations in place that controlled how the people who managed employee benefit plans could use and invest the money in those plans. Those regulations apply whether the employee benefit plan is a pension or health and welfare plan, the latter of which includes long-term disability insurance plans. As the law developed the people who controlled the benefit plans, called trustees, fiduciaries or plan administrators, became entitled to deference by the courts when a plan participant or beneficiary disagreed with something they had done with respect to the benefit plan, and filed a lawsuit under ERISA. It was assumed in the law that the plan administrator had acted in the best interests of all plan beneficiaries, as well as he single plan beneficiary who was contesting what had been done, and the beneficiary bringing the lawsuit had to prove otherwise. In other words, if such a dispute arose, courts would give the plan fiduciaries and administrators the benefit of the doubt because they had to take into account the interests of the individual beneficiary suing the plan, as well as the best interest of all other plan participants and beneficiaries.
When all this started, welfare plans, including long-term disability plans, were funded with contributions from the employer and employees. So, it made perfect sense that plan administrators had to consider everyone’s best interests in making a decision whether to pay a claim.
Now, fast-forward to present day when long-term disability plans are no longer funded by employer and employee contributions, but are instead underwritten by insurance companies. We no longer have a scenario where a plan fiduciary is managing the plan funds to make sure everything is done in the best interest of individual beneficiaries and the whole group of beneficiaries. Now we have an insurance company who gets to decide if and when it pays claims, even though the claims are being paid out of the insurance company’s money, and not contributions made by employees and employers.
This is what I mean by the irony of ERISA’s intent to protect the best interests of the workers.
Now, because of this deference that’s granted to plan fiduciaries, which was not initially intended to apply to long-term disability insurance companies, when an insurance company decides to deny a long-term disability benefit claim, it is entitled to the same benefit of the doubt as a pension plan fiduciary or administrator, even though the decision to deny the long-term disability claim may have been motivated by the insurance company’s interest in protecting its own assets.
There is much, much more to ERISA, but as it pertains to long-term disability insurance claims, this is it in a nutshell.