Where Social Security, insurance meet

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Where Social Security, insurance meet

Chicago Daily Law Bulletin
August 28, 2006


Almost all group disability insurance policies contain provisions coordinating benefits with Social Security disability payments.

Hence, if an insured under a disability insurance policy qualifies both for long-term disability benefits and Social Security disability insurance, the group insurer may offset the Social Security payment against the indemnity owed under the group plan. This ruling presents a problem that arose in just that situation. Ross v. Pennsylvania Manufacturers Association Insur.Co., 2006 U.S.Dist.LEXIS 33875 (S.D.W.Va. May 5).

The plaintiff, Howard Ross, became disabled due to post-traumatic stress disorder suffered on account of being verbally attacked and physically threatened by the finance manager of a car dealership in West Virginia. He later also experienced complications due to spinal surgery on his neck. Ross qualified for disability benefits under a group policy sponsored by his employer that was insured by Pennsylvania Manufacturers Association.

Benefits were paid for 24 months and then discontinued under a policy provision limiting the duration of payments for mental disorders to two years. Although PMA investigated disability due to the cervical spine disorder, it found that condition was not of sufficient severity to extend the disability payments.

Finding the policy language sufficient to apply an arbitrary and capricious standard of review, under Fourth Circuit precedent the court modified that abuse of discretion standard in consideration of PMA's conflict as both the payor and administrator of benefits. Under that standard, the court nonetheless determined that PMA's conclusions were both principled and reasonable. The court then turned to the most interesting part of the case.

When Ross sued to collect benefits, PMA filed a counterclaim seeking partial reimbursement for benefits previously paid. PMA argued that a Social Security disability award generated retroactive benefits for the same period of time during which it had paid benefits, and that the coordination of benefits provision in its policy entitled it to a reimbursement. The counterclaim was based on the ERISA statute, 29 U.S.C. § 1132(a)(3), which authorizes ''appropriate equitable relief'' to redress violations of plan terms or the ERISA statute. According to Great-West Life & Annuity Co. v. Knudson, 534 U.S. 204 (2002), ''appropriate equitable relief'' only applies to remedies typically available in equity prior to the joinder of the law and equity benches and does not encompass a claim for monetary damages. Therefore, when the funds sought are not specifically identifiable, there is no basis for reimbursement. Ross had received his Social Security payment and deposited it into his general bank account where it became commingled with other assets. Hence, he asserted that PMA had no basis for its claim.

However, the Supreme Court recently issued Sereboff v. Mid-Atlantic Med.Services Inc., 2006 U.S.LEXIS 3954 (May 15, 2006), which ruled that if funds were received based on an equitable lien held by another party, a health insurance policy that allows the insurer to obtain reimbursement of medical expenses paid to an insured who recovers from a third party in a tort claim, may sue for such reimbursement. The equitable lien on the proceeds is sufficient to make the funds identifiable. PMA asserted that it had an equitable lien over Ross's Social Security benefits.

The court disagreed based on a provision contained in the Social Security Act, 42 U.S.C. § 407, which states:

''(a) The right of any person to future payment under this title shall not be transferrable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process....

''(b) No other provision of law, enacted before, on, or after the date of this section, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section....''

The court therefore found that ''while it is clear that a pension plan such as PMA is permitted to reduce payments to persons by a percentage of the amount of Social Security benefits received by them, this section (a) of this statute explicitly prohibits the equitable action PMA now seeks.'' Accordingly, the counterclaim was dismissed.

Unlike personal injury proceeds, Social Security benefits receive special protection that prevents lien rights from attaching.

In Illinois and other states, workers' compensation benefits are similarly protected, although the Supreme Court ruling in Alessi v. Raybestos Manhattan Inc., 451 U.S. 504 (1981) held that the ERISA law would preempt such state statutes and allow for an offset.

Social Security benefits are different, though, because ERISA preemption in accordance with 29 U.S.C. § 1144 applies only to state law, not federal law.

Thus, even after Sereboff, which modifies Great West to the extent that health insurers can receive an equitable lien on a portion of a personal injury recovery, Social Security benefits enjoy a special status and cannot be recovered when the insurer is no longer paying benefits even though it is clear the insurer can offset Social Security payments against future benefits.