Many of our Long Term Disability clients want to know how long term disability cases settle. By this question, what they are really asking is how do they as the client, get paid.
Is it a lump sum payment?
Is it a monthly benefit that the client will receive for the rest of their life?
Are there additional damages for pain, suffering, punitive damages, or damages for mental distress?
Does the client have to pay any tax on the settlement amount? If so, then how much?
All of these are valid questions because there are so many ways which a long term disability settlement can be structured outside of Court.
For starters, in order to achieve any sort of award in a long term disability case, the Plaintiff needs to be disabled. This seems so simple, but for so many clients, it’s hard to understand.
Granted; each policy of insurance carries a different definition of disability. But at the end of the day, if the Plaintiff does not meet the definition of disability under the long term policy, there is a very good chance that the insurance company won’t want to pay out any award.
Under most policies, the definition of disability is loosely defined as over the first two years, the Plaintiff is so injured/sick that s/he cannot perform the regular duties of his/her “own occupation“. This first two years is commonly known as the “own occupation” or “own occ” period.
After the first two years, the definition of disability generally changes to the Plaintiff cannot perform the regular duties of “any occupation” commensurate with their education, training and experience. The availability of work is irrelevant. It doesn’t matter that there aren’t any jobs out there for you. If you can do any job for which you have the education, training and experience, then you won’t meet the test for disability. This is commonly known as the “any occupation” period.
If your long term disability case went to trial before a Judge, the only thing which the Judge can award is that the insurer pay the long term disability benefits which are owing to you in the past (known as arrears), and then order that the insurance company pay your benefits on a month to month basis (known as a re-reinstatement of benefits).
The Judge can also order that the insurance company pay punitive damages, aggravated damages, and/or damages for mental distress. But, those cases are few and far between. There must be some real egregious behaviour on behalf of the insurance company in order to establish this.
Regardless, the Judge cannot order that the insurance company pay the Plaintiff his/her arrears, plus an additional lump sum of 15 years worth of benefits in to the future.
What happens if the Plaintiff dies in a year?
What happens if the Plaintiff returns to work in a year?
Both of those scenarios are not fair to the insurer to be compelled to pay long term disability benefits to a person who is either no longer living, or who has returned to work. That’s not what long term disability benefits are for.
In addition, just because you may win at trial, does not necessarily mean that you win in the long run. For starters, insurance companies have unlimited resources and it’s not uncommon for them to appeal decisions which they’ve lost. At appeal, you could lose, you could win, or the Judge can order a re-trial of the whole case again; which brings you back to square #1.
If the insurer does not appeal the trial decision and you are re-instated long term disability benefits, there is nothing stopping the insurer from conducting surveillance on you, or sending you to one of their quack doctors to justify yet another termination of benefits. In the event that benefits are terminated once again; you are back at square #1 fighting the insurance company like it’s a never ending battle.
There are many ways that a long term disability can be settled outside of the Courtroom.
The insurer may agree to pay out the arrears, and re-instate the Plaintiff’s long term disability benefits. This gives security for some Plaintiffs because if everything goes well and the insurer does not terminate benefits; they will receive benefits for the duration of the policy (generally up to the age of 65 depending on the wording of the policy). Other Plaintiffs don’t like this type of settlement because they remain attached and dependent on the insurance company to treat them right. It means they have to continue jumping through the insurer’s hoops in order to qualify for benefits. It means that they remained tied down in a bad relationship with the insurer whereby they feel uncomfortable.
Another way which long term disability cases can settle is whereby both parties agree to a lump sum payout which represents an award for the arrears and future benefits. The lump sum is what it is; one lump sum payout. The benefit is that the Plaintiff is no longer tied down to in a relationship with the insurer. It represents freedom and a clean divorce for both parties to go their own separate ways. In the event there are no carve out provisions, the Plaintiff is also free to do what s/he wants to do. If this means volunteering, travelling or even working; it doesn’t matter. Once the case is settled, that’s it and they can lead their lives. The concern is that this lump sum must represent sufficient money in order to provide for the Plaintiff’s earnings up to the age of 65 (taking in to consideration any set offs which have been discussed in other blog entries).
When a lump sum settlement is entered in to, only the arrears are taxable. Future benefits are not taxable. In the event that benefits are not taxable under the policy, then this is a mute point. Nonetheless; the settlement can be structured in such a way that majority of the benefits are assigned as future benefits instead of past benefits in order to minimize the Plaintiff’s tax burden.
A Plaintiff will always seek that benefits be paid for as long as possible. A Defendant will always seek to pay the lowest amount possible. Where the case settles depends on a variety of factors which are unique to each case and set of circumstances. Through understanding how long term disability benefits work, your personal injury lawyer should be able to structure a settlement which is best fit for you.