What is the difference between Group Disability and Private Disability Insurance Coverage?
If you are like most people, you have disability insurance as a benefit through your employer’s group disability plan. You may not even have to pay for your disability coverage, since many employers provide it at no cost to employees. However, many people do not know that buying an individual private disability insurance policy typically gets you better coverage in case you become disabled. Private disability insurance is more expensive, but remember the old adage “you get what you pay for,” because it really applies when it comes to disability insurance. This article explains some of the differences between group disability and private disability coverage.
Two Types of Disability Insurance Available – Different Laws Apply to Each
The key to understanding the differences between disability insurance bought through your employer’s group or a individual policy bought from your local insurance agent is knowing that different laws apply to each.
Group disability plans offered by employers are covered by a federal law called ERISA – the Employee Retirement Income Security Act. If your employer gives you coverage under their plan or if you pay for disability coverage (usually through a payroll deduction), you are participating in an ERISA plan. This type of disability benefit is often called ERISA disability, ERISA Short Term Disability (“STD”), or ERISA Long Term Disability (“LTD”).
By contrast, private disability insurance is bought through an insurance agent who is not connected with your employer. Often, these disability policies are just called Disability Insurance or “DI” for short (as opposed to Long Term Disability); and they may also be referred to as Individual Disability or Individual Disability Insurance (“ID” or “IDI” for short) or private disability insurance. This category includes Business Overhead Expense disability insurance for business owners too. These policies are covered by your state’s insurance code or statutes.
Although the group ERISA LTD coverage you buy at work is often very cheap, it rarely offers the same level of coverage that a good individual disability policy may provide. “Good” coverage means the features in a disability insurance policy that work to your advantage as the insured, not the exclusions and limitations that help the disability insurance company deny or limit your disability benefits. Private disability insurance is more expensive for a reason, you have more rights and a better chance at being paid a better benefit (or even extra damages if the disability insurer acts in bad faith). The graphic above provides a quick view of some of the major differences, but more detail is listed below.
Individual / Private Disability Insurance Coverage
Some of the advantages which private disability insurance has over the disability coverage you can get through a private employer are:
- You get the protection of your state’s insurance laws.
- A private insurer must act in good faith. In many states, a private disability insurer that acts in bad faith exposes itself to bad faith damages, including punitive damages.
- In many states, private disability insurers have shorter deadlines to make claim decision after you submit a claim that a group insurer has under ERISA.
- In most states, if your individual private disability insurance claim is denied, you can file a lawsuit without having to jump through any more hoops. That means you do to have to send an appeal to the disability insurance company that just denied or terminated your disability benefits.
- If your disability claim is denied and you have to sue your private disability insurance company, you get a jury trial in front of 6 people just like you. Those 6 people will decide whether your disability insurance company breached the insurance contract. Under an ERISA plan, a judge decides your case, usually on written motions without a trial. Even if there is a trial, you do not get a jury.
- In most states, breach of an insurance contract is a lawsuit conducted in state court. However, most ERISA Disability cases are handled in federal court. Larger private disability cases go to federal court, but you still get a jury.
- The legal standards that apply to juries are much more in your favor. A jury just has to decide whether you are disabled under the definitions and terms in your disability insurance policy after they hear the evidence. Think of this as a 50% plus one standard. However, in an ERISA case, the judge not only has to decide two things: 1) whether you are disabled, and 2) whether the ERISA plan administrator was so wrong, that there was no reasonable evidence to support its decision. Think of this as having to prove your case is a slam dunk or almost like a criminal case where you have to show beyond a shadow of any reasonable doubt.
- In most states, if you beat your disability insurance company in court, you will get your attorney fees awarded to you. Under your employer’s group plan, if you win the case under ERISA, the law makes that an option for the judge to award, but it is not mandatory.
The primary disadvantages of private disability coverage are 1) cost, and 2) you must go through underwriting to get coverage. Because disability insurance companies pay more out and face more exposure under a private disability policy, the coverage costs more. However, to offset their risk, disability insurance companies make you prove you are in good health before they let you buy an individual policy.
ERISA Group Disability Insurance Coverage
If you have disability coverage through your employer, it does not mean that you have bad coverage. Instead, it usually means that you you have “the Chevy, not the Ferrari” coverage. There are some good things about ERISA disability coverage, as well as some differences that are crucial for you to know, such as:
- The federal ERISA law applies. Some state insurance law continues to apply, but not bad faith laws or other state laws that allow you to sue for damages that are not spelled out in the ERISA statute.
- Group disability is usually much less expensive that private disability insurance, often by a factor of 200% or more. We have seen clients literally pay $5 per month for LTD coverage through work and also have a private policy that cost them over $300 per month. If your employer bought a group disability insurance policy to fund its group plan, it gets the benefits of multiple people paying premiums, so premiums can stay lower. However, group disability plans often have more limitations and exclusions, so you the old adage, “you get what you pay for” applies.
- You cannot be denied coverage for pre-existing conditions….sort of. You typically do not have to go through any medical underwriting to get into your employer’s group plan. However, you may have to be insured for a certain period of time (usually 1 or 2 years) before you can make a claim for a pre-existing condition. Once you get through the pre-existing condition period, you can make a claim based on that condition and it will not be denied.
- Under ERISA, you have a the legal right to ask for the plan documents from your employer, and they must give them to you within 30 days of receiving your request. You should sent that request in writing, because your employer may have to pay a penalty of up to $110 per day for every day after the 30th day if they do not give you the documents.
- ERISA’s federal regulations spell out specific time deadlines for ERISA disability plan administrators to make decisions. Many states do not have time deadlines that apply to private disability plans.
- If you have to file a lawsuit over an ERISA denial, the litigation costs are thousands (sometimes, tens of thousands) of dollars less than pursuing a private disability case to trial. That is because ERISA cases go to the judge on the paper that was in the claim file before you filed suit. Cases are typically decided on written briefs, and there is no trial with witnesses explaining why you are disabled. This saves you money, but it creates a legal landmine for you (see next bullet – very important).
- Because an ERISA court case is based on the the disability insurer’s claim file, you must be sure to submit all of the evidence you would ever want in your claim file during the pre-suit appeal. If you do not get all of your expert opinions, lay witness evidence, medical proof, vocational proof, or other evidence of your disability into the ERISA disability insurance company before it decides your appeal, you could lose your case in court.
- Unlike a private disability insurer, ERISA regulations requires a group disability insurance administrator to give you every document it had in its possession about your claim. By law, you have a right to see all of the information it used in deciding your claim. Typically, that is not the same under state law and private disability insurance companies can withhold documents from you before a lawsuit.
- Nearly all group disability plans offset (or reduce) the benefit you receive by benefits from “Other Income” sources like Social Security Disability. More and more private disability policies are including these types of provisions. As with everything, you must read your plan or policy.
The primary disadvantages of ERISA group disability coverage are 1) the peculiar laws that require you to submit all of your evidence before a lawsuit, and 2) ERISA plans usually have more limitations and exclusions than private disability policies.
You Can Have Both Private Disability and ERISA Disability Coverage
No law prohibits you from having both an individual disability insurance policy (or even more than one), as well as group disability coverage through work. You may decide that to include both in your financial plan. Keep in mind that some ERISA disability plans will deduct money you get from a private disability policy if your become disabled, so read your policy and ERISA plan before you become disabled to know how your different coverages will work together.
If you have questions about your private disability insurance or ERISA disability coverage, call Disability Attorney John V. Tucker at (866) 282-5260 to schedule a consultation.