A disability insurance policy is a contract. This type of contract can be summarized in very basic terms: you pay in, and under certain conditions, the insurance company pays out. However, sometimes insurance companies fail to live up to their end of a contract. Trying to avoid contractual obligations is called “bad faith,” and can sometimes be remedied by filing a bad faith insurance lawsuit.

Disability Insurance

Disability insurance is a type of insurance designed to protect people when they lose their employability. It is typically divided into short- and long-term disability protection. If someone gets injured too badly to work, disability insurance is supposed to pay them a set percentage of their previous income. If the injury or illness is short-term, short term disability insurance kicks in. If the disability is permanent, or at least longer-term, long-term disability insurance coverage is initiated.

However, this type of arrangement can be very costly for insurance companies. In theory, only a relatively small percentage of policyholders will ever need these benefits. This means that insurance companies have steady income from working, non-disabled policyholders. But when someone files a claim, this is money out of their pocket. And disability insurance companies can only increase their profit margins by either bringing in more money from policyholders (which potentially makes it harder to sell policies), or by denying claims.

Disability Insurance Regulations

In the United States, disability insurance is regulated by the U.S. Department Labor, under the authority of a law called the Employee Retirement Income Security Act of 1974 (ERISA). This federal law prevents insurance companies from denying a legitimate insurance claim from a policyholder. In legal terms, it is called “bad faith” when someone intentionally tries to subvert the terms of a contract they have signed.

Bad faith insurance lawsuits have been filed against companies alleging that they have intentionally denied legitimate disability insurance claims. These “bad faith denials” allegedly represent attempts by insurance companies to cut financial corners and avoid paying out.

ERISA allows for policyholders to pursue legal action against insurance companies when they fail to live up to the terms of a disability insurance policy. However, a person can only pursue a civil remedy after exhausting any internal appeals process with the insurance company. Pursuing legal action can compel insurance companies to live up to the terms of an insurance policy. Under some circumstances, bad faith insurance lawsuits can also recoup legal fees and interest on the insurance payout.