Our firm receives many questions regarding the type of damages an insured can seek from a disability insurance company. Whether the insured is applying for disability benefits or has already been denied benefits, the insurance company's liability is important and many clients and potential clients call to discuss the types of damages that can be obtained for a disability insurance company's failure to properly pay a claim. The answer depends on whether or not that client has a policy that was issued and administered through his or her employer (an ERISA Policy) or whether his/her policy was procured by that insured's own agent and is paid for directly by the insured (a private policy). A policy issued and administered through an insured's employer is usually a group disability policy and is subject to the Rules of ERISA (the Employee Retirement Income Security Act of 1974) which strictly limits the types of damages available to an insured. Today's focus is on the three types of damages persons with private disability policies may recover against disability insurance companies.
The first is damages for breach of contract. Where an insured has been wrongfully denied past, present or future disability benefits, he or she may sue the disability insurance carrier for failure to perform one or more of the terms of the disability contract. The measure of damages is the amount of benefits due under the contract. Because disability policies call for periodic payments, the insured may recover only those benefits that have accrued. No recovery for future benefits is allowed when suing on a breach of contract theory.
In Florida and many other states, insureds are also entitled to interest on contractual damages. Under Florida Statutes, prejudgment interest is usually calculated on the date the insurer became legally obligated to pay, i.e., the day after the first periodic payment was due. Post judgment interest is calculated at the time of judgment, which could be years after the initial breach.
In cases where the action is based on the breach of the implied covenant of good faith and fair dealing, or "bad faith", an insured is typically allowed to recover punitive damages proximately caused by the insurer's tortious conduct. However, under Florida law, such damages cannot be sought until after a judgment in favor of the insured has been rendered on the breach of contract issue and a Notice of Bad Faith has been filed with the carrier and Department of Insurance. It should be further noted that, under Florida law, no action shall lie if, within 60 days after filing notice (of bad faith), the damages are paid or the circumstances giving rise to the violation are corrected. Additionally, under Florida Statutes, the insured must prove that the bad faith actions committed by the insurance company are performed with such frequency as to indicate a general business practice and that these acts are willful, wanton, and malicious or in reckless disregard for the rights of any insured.
Having stated the above, it should be noted that bad faith actions against disability insurance companies have been successful in Florida. In a fairly recent case a jury awarded $36.7 million in punitive damages to an ophthalmologist in a bad faith action against his disability insurer Paul Revere Life Insurance Company. The doctor purchased an "own occupation" disability policy from in 1992 which basically stated that he would be considered totally disabled if he was unable to perform the substantial and material duties of his own occupation at the time of disability. Approximately five years after he purchased his disability policy, Dr. X began having back pain and was later diagnosed with a herniated disc and low back and neck disease. He also began to have problems with hand tremors. As a result, he was forced to close his practice.
The doctor filed a claim for disability benefits, but his claim for benefits was denied. He then hired an attorney who sought reconsideration of the decision to deny benefits. The disability insurance company paid him five months of disability benefits and then terminated benefits. A lawsuit was filed and ultimately Dr. X prevailed on the both the breach of contract and bad faith claims. It should be further noted that under Florida law, upon adverse adjudication at trial or upon appeal, the authorized insurer shall be liable for damages, together with court costs and reasonable attorney's fees incurred by the plaintiff. §
As for attorney's fees in a breach of contract action, most disability insurance policies do not contain provisions that specifically provide for attorneys fees in the event of a lawsuit. While some states adhere to the "American Rule", which states that parties seeking to enforce a contract must pay their own legal fees unless the contract specifically provides for fees, Florida law, like the law of many states, permits a judge to award costs and attorneys fees to the prevailing party.
In summary, the law does protect an insured's right to seek damages if wrongfully denied disability benefits pursuant to the terms of his or her disability contract. While punitive damages are more difficult to obtain, the law certainly does not shield an insurance company from having to pay such damages. In my experience, the assistance of an attorney forces the insurance company to carefully review the claim before making an unreasonable or unfavorable determination.