What is a Disability Insurer’s Duties or Obligations to a Disabled Insured?

When an employee becomes disabled and begins the process of seeking benefits, it quickly becomes clear that the employee has several obligations they must satisfy.  One such obligation is to complete and apply for benefits, while another obligation is to cooperate with the insurer during its investigation of the claim.

Fortunately, the employee is not the only one who has obligations during the process of obtaining disability coverage. Employees seek disability coverage pursuant to an insurance policy, which is a contract. These contracts impose obligations on both the employee and the insurer.  Further, federal statutory and common law impose obligations that the insurer must satisfy when administering an employee's disability claim.

One significant obligation of the insurer is its fiduciary duty to the employee who is insured under the disability policy.  Although the term “fiduciary duty” may sound complex, the principle behind it is rather simple. To satisfy its fiduciary duty, a disability insurer owes a duty of loyalty to the employee.  A duty of loyalty requires that insurers, as fiduciaries, act in the interest of the employee.  This means the administrator who runs the disability plan must do so solely in the interests of participants and employee beneficiaries.

To satisfy its fiduciary duties, the disability plan administrator must follow the terms of the disability plan.  Further, the insurer as plan administrator cannot engage in conflicts of interest.  This prevents plan administrators from engaging in conduct that benefits the plan sponsor, etc.

When a court reviews an insurer’s denial of benefits, it often does so under an “abuse of discretion” standard.  This is a rather deferential standard to the insurer; however, the court remains mindful of the insurer’s fiduciary obligations to employee/insureds under the plan.  When considering whether an insurer has abused its discretion, courts can take several factors into consideration. These include (1) the language within the policy; (2) the purpose and goals of the benefit plan; (3) the adequacy of the information that are provided for the court to make a decision; (4) whether the insurer, as fiduciary, properly interpreted the disability plan language; (5) whether the insurer used a reasoned and principled decision-making process; (6) whether the insurer’s determination of coverage was consistent with the principles of ERISA; and (7) what the insurer’s motives were in making a decision, including whether any conflict of interest arises.

The above illustrates the many ways an employee who is denied benefits can challenge the insurer’s decision.