The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog that deal with frequently asked questions in the insurance bad faith and ERISA area of the law.  This is another such article in that series.

If an insurance company has unfairly denied an insured’s disability benefits or has otherwise committed bad faith, an insured may be entitled to substantial compensation for harm that the insured has suffered.  In fact, not only may an insured seek payment of all the unpaid benefits, but the insured can also sue for future policy benefits, among other damages.

Under a breach of contract theory, an insured generally can only recover accrued unpaid benefits where payments under the policy are made periodically.  However, under California law, insurers are subject to an implied covenant of good faith and fair dealing.  If an insurer acts in bad faith in handling an insured’s disability insurance claim, the insured can sue to recover future disability benefits.  See Hangarter v. Provident Life & Acc. Ins. Co., 373 F.3d 998, 1012-1013 (9th Cir. 2004).  Furthermore, if the insured can establish bad faith by the insurer, the insured can also recover reasonable attorneys’ fees incurred in proving the benefits owed in a lawsuit.  See Brandt v. Sup.Ct. (Standard Ins. Co.), 37 Cal. 3d 813, 817 (1985).  Generally, an insured can establish bad faith by showing that an insurer’s delay or withholding of benefits under the disability insurance policy was unreasonable or without proper cause.  For a detailed discussion of what constitutes insurance bad faith, see the article on our California Litigation Blog.

If the insured’s insurance disability plan is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), then the remedies available under California law for breach of the implied covenant of good faith are not available.  This means that, under ERISA, the insured/participant will not be able to recover future disability benefits.  However, pursuant to ERISA, section 502(a)(1)(B), an insured/participant may sue for benefits due under the terms of an ERISA plan and also a declaration of the insured’s/participant’s rights to future benefits under the disability insurance plan.  Furthermore, as under California law, ERISA allows the judge to exercise discretion to award the prevailing party attorneys’ fees and costs incurred during court proceedings.  See 29 U.S.C. §1132(g)(1).

Being denied disability benefits during an insured’s/participant’s time of physical and emotional hardship is extremely upsetting.  However, both California and federal law provide insureds with considerable remedies where their benefits have been wrongfully denied by insurers.  It is crucial for insureds/participants to understand that they have a right to their disability benefits and that they can take action to protect them.  If you have a dispute with an insurance company and would like to discuss your matter with an attorney, please contact us for a free consultation.