Disability
How to Complete a Non-Can
Disability Application to Avoid or
Minimize a Potential Lawsuit
Don’t Let A Client’s Benefits Expire at 65

 

by Art Fries

Most of you dread the day you might receive a summons & complaint from a process server. When the process server gives you the summons, your heart starts to beat faster and you know it’s time to contact your E&O liability insurance company -- that is if you’re smart enough to have E&O coverage.

I’ve worked as disability claim consultant almost 15 years and served many more years as an expert witness related to disability claims. I have seen many errors made by those who have sold disability insurance. I have done thousands of audits on individual disability policies. They all included an application that asked many questions including those related to medical history. Sometimes, the claimant doesn’t collect on a disability policy because of a fraud clause included in the contract. The two-year incontestability clause becomes meaningless even if the contract has been in force for 10, 15, or 25 years or more. And when the policy does not provide coverage, the claimant looks for anyone else who might provide deep enough pockets to provide money in lieu of the intended disability contract. That deep pocket could be you. Suppose you have an agency relationship (rather than that of a broker). The insurance company could be a further, deeper pocket if you placed the policy with the same insurance company for which you had the agency relationship.
In their article, I will be discussing the proper way to complete a non-can individual disability application to present your prospect in the best possible light to the home office underwriter. Before I get into the overall process involved relating to the important areas of a disability application, I want to bring to your attention some of the problem areas that cause agents and brokers to be sued. Here are some examples:

• The agent never explained how much personal disability insurance the claimant was eligible for and how it relates to the applicant’s income.
• The agent never asked the applicant if they were a corporation, never asked if they were putting any money into a profit sharing plan, pension-type plan, or SEP IRA and never discussed overhead disability when the exposure was clearly there.
• The agent recommended a five-year payout or benefit period without showing the premium for a longer benefit (age 65).
• The agent put down no unearned income on the application for an applicant earning $200,000 per year after overhead. Could your applicant have even a tiny savings account? Wouldn’t you question your applicant further?
• The agent doesn’t keep a copy of the proposal related to the application submitted and doesn’t keep notes related to the case.
• The agent tells the applicant they will get a refund if they cancel an existing disability policy when the insurance company does not provide a refund, which is the case with most insurance companies.
• The agent doesn’t tell the insured how to cancel a disability policy properly with over-insurance being the result.
• In a deposition, the agent tells the opposing attorney that they don’t remember why the insured received a rating or modification in coverage. Since the agent doesn’t keep notes in the client file, the agent has nothing to refresh their memory.
• The agent never made it clear to the applicant what binding meant.
• The agent doesn’t know if the insurance company they submitted the application to goes age last birthday or age closest birthday.
• The agent leaves the “Net Worth” question blank.
• In a deposition, the opposing attorney asks the agent what income was needed to quote the cost of the disability insurance and why the agent recommended the amount that was issued. The agent responded, “That’s what the client wanted.”
• The agent never dates any letters to the client nor does the agent even reference the subject matter.
• After reviewing the application, the applicant tells the agent that not all the questions have been completed and the agent responds, “If the insurance company needs any further information, they will request it and any blanks not filled in I’ll take care of.”
• On Part II, all the medical questions completed by the paramedical service are answered “No.” I suggest you make note of the fact that a Part II is included in the actual insurance policy when issued. The agent did complete medical information when the agent completed their part of the application. Some of the medical questions were answered “yes” and that also becomes part of the actual policy. You should review the photocopy of the application and Part II included in the policy to make sure there was consistency in the medical information you completed and that of the paramedic who performed the exam.
• The agent doesn’t ask how much disability insurance is in force and thus doesn’t show all the policies on the application. In turn, the agent applies for more insurance than the applicant is eligible for.
• In a deposition, the attorney on the other side asks the agent if a large amount of unearned income would make the applicant ineligible for a disability policy. The agent responds, “I can’t answer that it would be based upon the underwriting at the insurance company. They would make that determination not me.”
• In a deposition the agent states, “To get a proposal we don’t need a lot.” Well, I guess if you’re an order taker you don’t need a lot, but if your letterhead says you handle insurance for professionals or a financial planner, you would want to ask a lot more questions to make sure your applicant was provided a complete proposal with the appropriate alternatives.
• The application is submitted for a monthly benefit that’s different from the proposal or has lesser benefits than what’s shown in the proposal. If there is a difference, make sure you indicate, on your copy of the proposal and the applicants copy, the change in monthly benefit or the benefit that is not included. Initial it accordingly.

There are dual or more occupations. Your applicant may say they are a surgeon and you assume that’s the occupation. I have seen where the applicant had two or more occupations. In one such case, the claimant was a pulmonary surgeon as well as medical director at a local hospital and he ran a sleep apnea clinic. He had a large in office practice in addition to his usual surgery duties and emergency visits to the hospital. Suppose you said the following to the client without asking the proper questions, “Doctor, if you can’t perform surgery. Since you have the ‘your occupation’ definition in your policy, you will be considered totally disabled.” You better pray you have enough E&O liability insurance. In that particular claim, the doctor was eligible for residual (partial) disability as a result of reducing their hours and eliminating some duties, but was not eligible for total disability. Many older policies have been issued with a lifetime benefit. Almost all companies provide a residual (partial) benefit only to age 65. It is not a happy time when a policyholder claimant expects to get paid for life, but finds out they will only be paid to age 65. q
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Art Fries is a disability consultant with over 40 years of experience. For further information, go to www.afries.com.