Group disability benefits are typically offset by both Social Security disability benefits and by awards of workers’ compensation.
In Alloway v. ReliaStar Life Ins.Co., 2008 U.S.Dist.LEXIS 34853 (C.D.Cal. April 28, 2008), the district court took a fresh look at workers’ compensation offsets, and the result proved beneficial to claimants.
Alloway was a class action consisting of California residents insured by ReliaStar whose disability benefits were reduced by amounts received for workers’ compensation ”permanent disability” benefits. As is typical of group disability insurance policies, the plan under which the representative plaintiff was insured allowed for offsets of ”other income,” which the policy defined as income received for ”the same or related disability for which you are eligible to receive benefits under the group policy,” and is further defined to include workers’ compensation benefits. The policy also reserved to the insurer the discretion to determine benefit eligibility and to interpret the policy.
The basis of the plaintiffs’ claim was the argument that ”other income” refers solely to wage replacement, and that ”permanent disability” benefits are not paid for lost wages. The plaintiffs maintained that pursuant to Livitsanos v. Superior Ct., 2 Cal.4th 744, 753 (1992), while temporary disability benefits substitute for lost wages, ”permanent disability” benefits ”are provided for permanent bodily impairment, to indemnify for impaired future earning capacity or decreased ability to compete in an open labor market.” ReliaStar responded that its policy entitles it to deduct all workers’ compensation benefits regardless of whether they are denominated as wage replacement.
The court rejected the plaintiffs’ first argument that any ambiguity in the insurance policy had to be construed in favor of the policyholders pursuant to the doctrine of contra proferentem. The court ruled the doctrine was inapplicable because the administrator has discretion to interpret the policy. Indeed, in Morton v. Smith, 91 F.3d 867, 871 n.1 (1996), the 7th U.S. Circuit Court of Appeals explained that the rule of contra proferentem applies only when courts undertake de novo review of an administrator’s interpretation of an ERISA plan. However, in University Hospitals of Cleveland v. Emerson Electric Co., 202 F.3d 839 (6th Cir. 2000), the opposite conclusion was reached.
Because the insurer’s structural conflict of interest was a factor, however, the court concluded that ReliaStar’s interpretation was flawed. Since ReliaStar acknowledged that it did not offset the entire workers ‘ compensation award, and did not deduct for medical expense, death benefits, or attorneys’ fees, the court found that only wage replacement was offset table.
The court also considered a July 2006 settlement between the California Department of Insurance (CDI) and insurance trade associations that permitted the CDI to issue regulations as to whether insurers could estimate and deduct for, among other things, workers’ compensation permanent disability benefits. However, no regulations were ever issued, and it was not evident to the court that the CDI permitted deduction of permanent disability workers’ compensation benefits. Moreover, the court pointed out, ”the question is whether ReliaStar was entitled to deduct for such benefits under the terms of the Policy.” Since the answer to that question was not free from doubt, ReliaStar’s motion for summary judgment was denied.
This is another significant ruling that joins Carstens v. United States Shoe Corporation’s Long-Term Benefits Disability Plan , 520 F.Supp.2d 1165 (N.D.Cal. 2007), in taking a fresh look at an issue that insurers and claimants have too often taken for granted. So many of the offset provisions are ambiguous that a closer examination of whether benefits from third-party sources constitute ”wage replacement” is warranted in nearly every case where the issue is potentially contestable.
Nor is this issue limited to California. For example, just as in the California Supreme Court ruling cited in this opinion, the Illinois Supreme Court has also ruled ”a primary purpose of the benefits paid under section 8(e)(18) [820 ILCS 305/8(e)(18)-permanent total disability] is to compensate the employee for the pain and inconvenience represented by the loss of both feet, both legs, both arms or both eyes, while the benefits payable for temporary total disability are calculated to replace his lost current earnings.” Freeman United Coal Mining Co. v. Industrial Com., 99 Ill.2d 487, 496, 459 N.E.2d 1368 (1984).
Because there is a distinction between compensation for disability and wage replacement, which is the sole purpose and basis of disability income benefits, it is questionable whether offsets of permanent disability are appropriate.
There are also broader implications to this ruling. Many disability insurance policies also offset recoveries of damages for personal injuries; and the policy language providing for such offsets is often ambiguous. When a settlement fails to allocate the recovery and separately denominate wage loss, under the reasoning of Alloway, it would be improper to offset such recoveries. By analogy to Section 104 of the Internal Revenue Code as explained by Rev. Ruling 61-1 which would deem the entire amount payable to constitute damages on account of bodily injury, without specification of wage loss, there should be no offset at all.
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This article was initially published in the Chicago Daily Law Bulletin.