While every Long-Term Disability (LTD) policy includes a definition of total disability, many states (including California, Arizona, and Florida) have their own legal definition of total disability. What happens when these two definitions conflict? The answer is that state law will override the policy definition and will be used instead in the determination of whether a claimant is totally disabled.
For example, the California definition of total disability states that one is disabled when they are unable to perform the substantial and material duties of their occupation in the usual and customary manner and with reasonable continuity. Essentially, what this means is that if, as a result of an injury or illness, you are unable to perform the duties of your occupation in the same way you did before your impairment, you are totally disabled. Under a definition such as this, any additional requirement which might be contained in an insurance policy, such as one requiring that to be totally disabled you may not be gainfully employed, is irrelevant and unenforceable.
We often see instances where a professional will become disabled but will continue to perform some of their duties. In such situations, an insurance company may take the position that the insured is residually disabled because they are continuing to work. However, this position is not correct. Under the definition of total disability set forth above, such a claimant would be totally, not residually, disabled. This is because the claimant is unable to perform their duties normally or on a fulltime basis. For a claimant to be paid under the residual, rather than the total, definition would result in a very substantial underpayment that could amount to hundreds of thousands or even millions of dollars over the remaining life of the policy.
In order to understand how residual disability can short-change a claimant, one must first understand how both residual and total disability benefits are calculated. Benefits for total disability are usually a fixed dollar amount or a percentage of the claimant’s income. Residual disability benefits, on the other hand, are usually calculated on the basis of a formula which compares current to prior earned income. The residual benefit would come to only a fraction of the total disability benefits. Over time, the residual benefits would diminish as billings for services would increase. That would mean that payment under a residual provision would decrease with the passage of time to the point of being worth only a fraction of the total disability benefit.
In addition, residual benefits are usually cut off at age 65 whereas total disability benefits can often continue for the insured’s lifetime.
Having reliable guidance in understanding the issue of total versus residual disability can make a very substantial difference in calculating the benefits owed but is only one of many topics to be aware of when navigating the field of LTD insurance.