Disability Benefit Reimbursement Claims: What Every Plaintiff Attorney Needs to Know
***NEWSLETTER***
Personal injury attorneys are accustomed to resolving medical liens at settlement. Disability benefit reimbursement claims, however, are often less familiar and frequently more complicated. When a client receives short-term or long-term disability benefits, the disability carrier may later assert lien/reimbursement rights against any settlement or attempt to offset future benefit payments.
The bad news: Too often STD/LTD liens are simply missed until after a case is resolved and funds disbursed. At that point, when the plan comes looking to get paid back or starts reducing benefits payment to “offset/recoup” its claims lien, the client may rightfully ask, “how did we get here?”
The good news: STD/LTD recovery claims are commonly vulnerable to various complete and partial defenses. Disability policies and plans are often poorly written, and applying established lien reduction/resolution tools can lead to waivers or significant reductions.
As always, the devil is in the details. Like some medical liens, disability reimbursement claims are highly dependent upon the language of the governing Plan and the law that applies to that Plan. Two disability carriers may assert nearly identical claims, yet one may possess strong recovery rights while the other has little or no recoverable interest.
Accordingly, among the first questions every plaintiff attorney should ask when confronting any STD/LTD lien is "What type of Plan is this?" and “What law applies?”
Understanding the answer to these questions can dramatically affect settlement strategy, available defenses, and ultimately your client's net recovery.
Start With the Plan Documents
As with virtually every reimbursement claim, successful analysis begins with obtaining the governing documents.
Before evaluating any asserted reimbursement claim, counsel should determine:
- What type of disability benefit paid the client?
- Is the Plan employer-sponsored?
- Is the Plan insured or self-funded?
- Is the claim governed by ERISA, state law, or another statutory scheme?
- Does the Plan actually contain an enforceable reimbursement provision?
These questions often dictate the remainder of the analysis. A reimbursement claim cannot be properly evaluated without first reviewing the controlling Plan language.
Not All Disability Benefits Are the Same
The phrase "disability benefits" encompasses several entirely different benefit systems, each governed by different laws.
For example, California's State Disability Insurance (SDI) program operates under California statutory law. Other states have their own state disability programs/statutes. Whether the benefits are affected by a liability recovery is determined by the applicable statutes. Federal disability programs present another layer of complexity. Social Security Disability Insurance (SSDI), for example, generally is not reduced because an injured person later recovers damages in a personal injury action, whereas Supplemental Security Income (SSI) is a needs-based benefit that may be affected by a recovery.
This article focuses primarily on the disability reimbursement claims plaintiff attorneys most frequently encounter in personal injury litigation: those arising from employer-sponsored short-term disability (STD) and long-term disability (LTD) plans.
Insured vs. Self-Funded Plans Matters
One of the most important distinctions is whether an employer-sponsored disability Plan is insured or self-funded.
If the Plan is insured, state law frequently plays a significant role. Depending upon the jurisdiction and the Plan language, traditional defenses such as the Made Whole Doctrine, the Common Fund Doctrine, and ordinary contract defenses may all become relevant.
If the Plan is self-funded and governed by ERISA, however, federal law may preempt many of those state-law defenses. The governing reimbursement provision—and the federal case law interpreting it—often become the central focus of the dispute.
For that reason, determining whether the Plan is insured or self-funded should occur early in every case.
Reimbursement Rights Are Defined by the Plan
Many disability Plans contain separate reimbursement provisions ("TP") that require repayment when an insured later receives compensation for the same wage loss the Plan previously covered.
Those provisions often incorporate the Plan's definition of "other income" or similar terminology. Workers' compensation benefits, Social Security Disability benefits, retirement benefits, unemployment compensation, and other income sources are commonly included. Whether a personal injury recovery qualifies as reimbursable income, however, depends entirely upon the Plan language.
Many Plans contain drafting issues, ambiguous reimbursement provisions, or incomplete waivers of equitable defenses. Others attempt to define reimbursement rights broadly while failing to clearly explain how settlement proceeds should be allocated. Careful review of the actual contract is therefore essential before assuming the carrier's reimbursement demand is valid.
Settlement Allocation Should Begin Before Settlement
Perhaps the most overlooked aspect of disability reimbursement claims is settlement allocation.
Many personal injury settlements are resolved through broad general releases without allocating damages among medical expenses, wage loss, pain and suffering, or future damages. Disability carriers frequently argue that, absent an allocation, the entire recovery should be treated as compensation for the wage-loss benefits they previously paid.
For that reason, allocation should not become an afterthought drafted into the settlement agreement at the last minute.
Instead, plaintiff attorneys should consider allocation during settlement negotiations themselves. Where appropriate, allocation may be supported through settlement correspondence, motions for good-faith settlement, judicial allocation orders, or other procedures available under applicable law. A contemporaneous allocation developed during settlement generally carries greater credibility than language first appearing in a final release.
Looking Ahead
Disability reimbursement claims present a unique intersection of Federal and state law, contract interpretation, and settlement planning. Identifying the governing Plan, obtaining the Plan documents, and evaluating reimbursement language before settlement can significantly affect both negotiation strategy and your client's ultimate recovery.
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