If You Can Afford It, Then You Should Only Buy An Individual Disability Insurance Policy

In the case of Fleisher v. The Standard Insurance Company filed in New Jersey Federal Court, the court recently rendered a decision which can have a negative impact for numerous physicians and other business professional that have Group Association Policies and also have an ERISA governed group policy from their employer. Numerous medical, dental, legal, accounting, nursing and other professional associations across the country offer a group disability insurance policy to all of their members. These policies are almost always exempt from ERISA, which is a great, but these association disability policies according to a recent New Jersey Federal Court opinion are not considered individual disability policies and can be considered a deductible source of income against other disability policies. Whenever possible a person looking for disability coverage should buy an individual policy from a licensed insurance agent. The price may be higher, but you always get what you pay for. Disability insurance policies sold by associations can still be good, but the case I will discuss below is a limitation that must be considered when buying disability coverage.

This article summarizes a disability Case where the court was asked to determine whether a “franchise insurance” policy can be considered “group insurance” and thus be used as an offset by the insurance company. Court agreed with Standard that the plaintiff’s other policy can be deducted.

Case Facts

Plaintiff alleges that Standard improperly reduced disability benefits by subtracting benefits he received under a separate policy issued by North American Insurance. Standard claims the deduction was proper b/c the policy provides for the subtraction of benefits received under “other group insurance coverage,” and the North American policy qualifies as “group insurance.”

Standard’s Policy provides that Standard has “full and exclusive authority to control and manage the Policy, to administer claims, and to interpret the Policy and resolve all questions arising in the administration, interpretation, and application of the Policy.” In that regard, Standard’s “authority includes, but is not limited to,… the right to determine: …eligibility for insurance; …entitlement to benefits; …the amount of benefits payable; and… the sufficiency and the amount of information Standard may reasonably require to make those determinations.”

Plaintiff argues that the North American policy, which was issued through the American Association of Endodontics, is most appropriately characterized as “individual insurance,” b/c (1) it was individually underwritten for Plaintiff; (2) Plaintiff paid the premiums directly; (3) Plaintiff “enrolled directly”; (4) Plaintiff submits claims directly to North America; (5) North American issues Plaintiff individual billing statements; and (6) the policy automatically renews at the end of each term.

Plaintiff asserts individual and class claims for breach of contract and breach of fiduciary duty under ERISA.

Insurers have developed two subsets of collective insurance products: (1) Group Insurance: an arrangement by which a single insurance policy is issued to a central entity-commonly an employer, association, or union-for coverage of the individual members of the group; and (2) Franchise Insurance: where all members of the group receive individual policies.

Holding: Because the North American policy bears the characteristics of a kind of collective insurance called “franchise insurance,” and because the phrase “group insurance coverage” can reasonably include franchise insurance, the Court finds no basis to disturb Standard’s interpretation or application of the Standard policy.

The North American policy is certainly not a pure individual policy because it plainly states that it was issued pursuant to a group policy held by AAE. Thus, it was not unreasonable for Standard to conclude the North American policy was not an “individual policy” exempt from deduction.

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