My Insurance Company is Claiming an Overpayment; Do I Have to Pay Them Back?

Our law firm receives many inquiries from long-term disability claimants whose insurance companies claim that they overpaid them benefits and insist that the claimants pay them back.  Often, these claimants do not have the money to pay the companies back and want to know their legal rights.

First, it’s important to know the common situations in which these overpayment issues arise.  Group disability insurance companies that fund employer-provided disability benefits draft their policies to include “offsets.”  An offset is a type of other income you might receive (or are eligible to receive) which reduces what the insurance carrier is obligated to pay you.  If you receive other income which applies retroactively, the insurance company will require you to pay back the benefits it paid you during the relevant time period.  As an example, below is language from a Lincoln National Life Insurance Company group disability policy.

RIGHT OF RECOVERY.  If benefits have been overpaid on any claim; then full reimbursement to the Company is required within 60 days.  If reimbursement is not made; then the Company has the right to:

  1. reduce future benefits until full reimbursement is made; and
  2. recover such overpaymetns from the Insured Employee or his or her estate.

Such reimbursement is required whether the overpayment is due to:

  1. the Company’s error in processing a claim;
  2. the insurance Employee’s receipt of Other Income Benefits;
  3. fraud or any other reason.

OTHER INCOME BENEFITS means those benefits shown below:

. . . .

  1. Benefits under the United States Social Security Act, the Canada Pension Plan, the Quebec Pension Plan or any similar plan or act as follows:
  • disability or unreduced retirement benefits for which the Insured Employee and any spouse or child receives, because of the Insured Employee’s Disability; or
  • reduced retirement benefits received by the Insured Employee and any spouse or child because of the Insured Employee’s receipt of reduced retirement benefits.

Let’s say your gross long-term disability benefit is $5,000/month and it becomes payable on January 1, 2019.  Let’s also say you later apply for Social Security Disability Insurance (SSDI) benefits and your claim gets approved on December 1, 2019. The Social Security Administration then retroactively pays you from January 1, 2019 to the present in the amount of $2,500/month.  That will cause an overpayment on your long-term disability claim from January 1, 2019 through December 1, 2019 since the insurance company paid you a benefit that was not reduced for your $2,500/month SSDI award.  Also, going forward, the insurance carrier will reduce your monthly long-term disability benefit by $2,500/month so that between both sources (LTD and SSDI), you will not receive more than $5,000/month.  The insurance company or the disability plan will also insist that you pay back the overpaid long-term disability benefits.  Many claimants will hand over most of their retroactive SSDI money to the insurance carrier to repay the overpayment and then receive a reduced LTD benefit going forward.

But what if you already spent the money and have nothing to pay back?

An insurer may not be able to win any legal action against you if you already spent the overpaid money on things such as food or travel.  When it comes to overpayment claims, there are a couple of key cases to be aware of.  In 2016, the U.S. Supreme Court decided Montanile v. Bd. of Trustees of Nat. Elevator Indus. Health Benefit Plan, 136 S. Ct. 651, 193 L. Ed. 2d 556 (2016), a matter involving an ERISA health benefit plan’s attempt to enforce an equitable lien against a participant’s third-party settlement. The court held that when an ERISA plan participant completely spends a third-party settlement on nontraceable items (i.e., food, travel), the plan fiduciary may not bring suit under ERISA Section 502(a)(3) to attach the participant’s separate assets. The Supreme Court reversed and remanded the case to the district court to determine whether Montanile kept his settlement fund separate from his general assets and whether he dissipated the entire fund on nontraceable assets. Montanile resolved a conflict among the Courts of Appeals over whether an ERISA fiduciary can enforce an equitable lien against a defendant’s assets when the participant dissipates the specifically identified fund. Under its precedent, the court found that the basis of the plan’s claim is equitable, but the remedy the plan seeks—enforcement of an equitable lien by agreement against the participant’s general assets—is not.   The Supreme Court explained that the plan’s underlying remedy would have been equitable had it immediately sued to enforce the lien against the settlement fund then in Montanile’s possession.

For claimants within the Ninth Circuit’s jurisdiction, there is the case of Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (2012), cert den. 81 U.S.L.W. 3251 (Feb. 19, 2013). In Bilyeu, the Ninth Circuit held that an ERISA LTD insurer could not recoup an alleged overpayment from a participant where the funds sought had been dissipated and not maintained in a segregated account. This was because under ERISA §502(a)(3), an equitable lien by agreement can be imposed only over “particular funds or property in the defendant’s possession. CIGNA Corp. v. Amara, 131 S. Ct. 1866, 1879 (2011) (quoting Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 213, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002)).

If you are still receiving an ongoing long-term disability benefit, an insurance company may engage in some self-help.  That is, they may recoup the overpayment by withholding part or all of your future long-term disability benefits until the overpayment is satisfied.  In most circumstances, when there is a valid overpayment, a court will find this to be an enforceable type of self-help.  For example, in Key v. UniCare, No. 3:15-CV-00851-TBR, 2017 WL 2609043 (W.D. Ky. June 15, 2017), Key received Social Security benefits and was required to repay the Plan temporary disability retirement benefits that it extended to her while her SSDI appeal was pending.  After she received a retroactive payment from the SSA, Key filed a hardship appeal with the Retirement Board to avoid repayment but it denied the appeal.  The Plan started offsetting part of Key’s benefit in order to recoup the overpayment and the court found that this was permissible.

However, it is not always so cut and dry.  For example, in Fine v. Sun Life Assur. Co. of Canada, 97 F. Supp. 3d 799 (E.D. Va. 2015), the court held that Sun Life could not impose rescission or an equitable lien on most of overpaid disability benefits.  In this case, Sun Life counterclaimed against Fine to recover benefits paid to him after January 1, 2012, the date by when it contends he became ineligible for benefits because of the amount of his disability earnings.  The court found that Sun Life did not abuse its discretion in terminating Fine’s benefits but that equitable considerations now prevent Sun Life from recouping most of the amount previously paid in error.  The court was not convinced that Sun Life is entitled to rescission of each of its monthly payments to Fine after January 1, 2012.  The court explained that rescinding payments and holding Fine liable for the entire rescinded amount, without regard to what became of the payments after they were received, would have the effect of imposing personal liability on Fine (which is not permissible).  Further, the disability policy does not state that it permits rescission to recover overpayments.  The court also rejected Sun Life’s argument that it is entitled to restitution through an equitable lien on the present value of one of Fine’s bank accounts and on a portion of the proceeds from the eventual sale of Fine’s apartment.  The court found that Sun Life failed to meet its burden of tracing the spent overpayments to a product in Fine’s possession, except for $9,943.61, which was the balance of the bank account (where he deposited benefit payments) as of the date Sun Life stopped payment of benefits.

Finally, if you dispute the validity of the overpayment, you might also have rights under the California and federal Fair Debt Collection Practices Acts (“FDCPA”), the Fair Credit Reporting Act (“FCRA”) and California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 (“UCA”).

If you have a denied long-term disability claim or an overpayment dispute, it is important to consult with a knowledgeable and experienced ERISA attorney. Please call Kantor & Kantor for a free consultation at 888-569-6013 or use our online contact form.

This information is designed for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.



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