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Can my severance agreement eliminate my right to claim disability insurance benefits?

Attorney Jay SymondsAuthor: Attorney Jay Symonds

It is a common occurrence for a disabled employee to be offered a severance agreement when they can no longer work due to a disabling medical condition. An employee must take great caution as the severance agreement may eliminate all future rights to any short or long term disability benefits. Here is an example of a potential client that recently contacted us. Employee began working in the finance department of a local University. For many years he struggled with and was treated for depression and anxiety, which he was able to manage. Recently, however, it began impacting his job performance at the University. The employee had been working with the University for less than 12 months when he filed for disability. He was notified by his supervisor that his work had become “substandard” and the University was evaluating whether to re-assign him to a new position or provide him with a severance package. Although the Employee wanted to explore filing a claim for disability benefits, he: (a) stopped taking his prescribed psychiatric medications more than two (2) years earlier; and (b) had not treated with a mental health professional for nearly two (2) years. In short, he lacked any medical support for his disability. Additionally, because he had been employed at the University for less than one year, the Long Term Disability (LTD) Plan’s Pre-Existing Condition limitation was also a factor. Given these fairly significant obstacles, the Employee determined he would continue to work as best he could while seeking appropriate treatment for his conditions. Once he re-established treatment he would consider filing a disability claim.

Several weeks later the Employee contacted counsel to review an executed Severance Agreement he signed with his now former employer. The Employee wanted to further discuss how he could establish a claim. The Employee was relying on a provision in the Severance Agreement that stated, in relevant part, that the University “agrees to pay [Employee] three months at his current salary…and benefits through May 15, 2016.” In short, the Employee believed that he would be entitled to file a claim for disability benefits through May 15th. However, after reviewing the University’s self-funded STD Plan and fully insured LTD Plan (both administered by the same carrier) it was clear the Employee would be excluded from coverage under both Plans because his coverage ended when he was no longer a “Member” (i.e., Actively at Work) eligible for coverage. In fact, both Plans specifically stated that employees no longer at work as part of a “severance agreement” were no longer eligible for coverage. Had the Employee consulted an attorney prior to signing the Severance Agreement, he would have been alerted to this critical eligibility issue and, quite possibly, could have avoided this harsh result.

This is an unfortunate, but not uncommon, set of circumstances. Employees trust that their Employer understands and considers all the terms and provisions in their employee benefit plans when drafting various employment agreements. Unfortunately, this is not the case. Time and again employees enter into agreements believing they remain eligible and covered only to learn from the insurance carrier that they are not. The simple truth is, regardless of what is said or promised, an Employer is not authorized to alter or amend the specific terms of a Benefit Plan Document (i.e., the Insurance Policy). Here, the University was not authorized to alter or extend the specific “actively at work” eligibility provision of the Plan and, therefore, the Employee’s disability coverage ended once he executed the Severance Agreement. Contact any of our disability insurance lawyers to discuss how we could assist you.

There are 4 opinions so far. Add your comment below.

John J.:

I worked for a private company for 35 years, the largest in the industry and a company who’s reputation was one of social responsibility and concern for employees. However as this company has seen a significant change in the need for it’s products, it has lost that attribute of social responsibility and began a continuous process of employee reduction by buyouts or termination, mostly with employees with 25+ years of service.

Approximately 10 years ago, I was diagnosed with heart disease, sleep apnea, restless leg syndrome, and narcolepsy. For many years I could work and manage my medical conditions but as staff reductions increased and workload for employees increased, I was not able to meet their employee expectations and was put under constant pressure to perform or be fired. All employees were being pushed to their limits.

I was under the care of a highly respected local sleep specialist for 10 years who determined that with the increased work requirements and the fact that the treatments for my narcolepsy were short lived and complicated by my heart disease, I was certifiably disabled.
I filed for short term disability as required by my company and my case was reviewed by the company nurse and a semi-retired company OD doctor who graduated from an one and a half rated medical college. They rejected my claim and I appealed to my company who sent it to their long term disability insurance company where it was reviewed by a doctor who specialized in aviation. That doctor rejected my claim for short term disability.

I filed an appeal for STD through the employee/employers arbitration process but again was rejected any benefits. When I filed another appeal for STD and stated my legal reasons why they must provide me with STD benefits, I learned how they legally stacked the deck against giving STD to any employee if they so chose.

STD benefits are paid out of my company’s general payroll and therefore not controlled by requirements of ERISA and the Federal government. Only the company’s LTD was under ERISA because it was paid out through an insurance provider, however if you were denied STD benefits then you could not apply LTD benefits. To further close the loop, employee/employer arbitration process did not allow any STD appeals to be heard by any outside arbitration judge, just by internal management, although any other employee grievances could be appealed to outside arbitration.

Sadly, these are the lessons that I learned to late; no matter how great a reputation your company has for doing the right thing, it is best to learn about how your company administrates it’s STD and LTD policies before filing for disability. Be aware whether their disability plans fall under ERISA and if they don’t, then buy a private disability insurance policy because the statistics say you are more likely to be disabled then die before you retire.

Attorney Stephen Jessup:

John, you would still arguably have rights to bring suit against the employer for nonpayment of benefits- though it will take some additional analysis to determine the extent of the liabilities. Please feel free to contact our office to discuss your situation in greater detail.

Wendy A.:

Can you file a long term disability claim first and get disability; and then seek a severance package due to harassment?

Attorney Cesar Gavidia:

Wendy, it depends on your disability insurance plan. However, separation / severance agreements often have language expressing that you agree to release and waive any claims for benefits under ERISA and your employee benefits. You should consult with an employment attorney regarding your separation and how to negotiate your severance package.

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