This post is actually a long time in coming since Individual Disability Income Replacement and BOE policies often contain very complicated issues. Both types of policies can become insureds’ worst nightmare if caution isn’t taken well in advance of a disability claim to match business expenses, tax reporting and Profit and Loss Statements. Most DI and BOE insurers learned a long time ago how disorganized self-employment professionals are and take full advantage of that fact to delay payments of claims for long periods of time – often 6-8 months beyond dates of application.
Individual Disability Income policies are non-ERISA and are underwritten separately by an insurer who assumes the risk of “replacing” lost income of business professionals with proven disability. Therefore, DI policies are intended to “replace lost income” if the owner, professional or key person is unable to work due to a claimed disability. Calculations of residual disability are contained within the policy and can be generally defined as “proportionate loss formulas” replacing lost income. DI policies are either payable to age 65 or Lifetime.
Business Overhead Expense policies are designed to pay fixed and variable costs of maintaining a business for a limited period of time when the owner or key person is unable to work. These policies allow physicians, dentists, executives and other self-employed professionals the time to “figure out” what to do with their businesses when disability makes it impossible to return to work. BOE policies are limited in the amount of award and also the time period benefits are to be paid. Items to be reimbursed are listed directly in the policy and sources not listed are not reimbursed.
Most professionals who buy DI and BOE insurance consider the coverage essential to the continuation of a going-concern without realizing what will be required in terms of paperwork if a claim is ever filed. Most insurers will request the following information when DI and BOE applications are made.
- Copies of both personal and business tax returns for as much as 5 years, sometimes longer.
- CPT or CDT billing codes broken down by MONTH. (Most software can do sorts of billings by month. This will become a huge issue if the doctor or dentist’s software cannot sort billing code information.)
- Business Profit and Loss Statements by MONTH for at least the 12 months preceding disability and going into the future.
- Lists of cases by MONTH for attorneys with client information redacted.
- Detailed Job Description not only listing material and substantial duties but percentage of time spent in an 8-hour day on each duty.
- Pension and 401(k) contributions received or contributed on your behalf.
- Lists of employees and job descriptions.
Insurers marketing DI policies employ CPA firms to review and audit financial information on the level of an IRS audit. It is expected by these financial wizards that Profit and Loss expenses true-up to what is reported on tax returns. I always found this to be odd since there are valid reasons by P&Ls would not match taxable income such as depreciation expense. However, Unum’s newest tell is to demand reconciliation of taxable income with P&L expenses. Unless the numbers line up perfectly, no benefits under either type of policy will get paid.
Claims can go on for months while professional insureds attempt to provide information demanded by insurers. Even the issue of CPT billing codes can be problematic if procedures are billed by company and not by physician (as in physician medical groups.) To make matters worse, claims handlers begin to request the same information over and over again when it’s not received in the format it asks for. Insurers are really big on comparing “apples to apples.” Since benefits are paid MONTHLY, insurers insist all information must be provided “in monthly format.” This also becomes a problem when businesses do not have their CPAs publish monthly P&Ls.
The latest fiasco was a Principal BOE claim where benefits were not paid for such a long time, its owner had to sell the business. This scenario should never happen because it violates the real intent of BOE insurance which is to keep the business afloat for a period of time so that the owner can decide whether to return to work or let the business go.
Finally, business professionals who are residually employed won’t get paid until MONTHLY P&Ls and/or pay stubs are provided to the insurance company. If the numbers aren’t right…..no benefit.
DI and BOE policy holders should be aware that filing disability claims under these types of policies is no piece of cake. The administrative paperwork can become a nightmare. DCS recommends that changes in financial accounting and company procedures such as preparation of MONTHLY financial statements should be made long before it’s necessary to file a disability claim. DI and BOE policies carry tremendous accountability to provide proof of financial condition.
DI insurers rarely challenge proof of medical disability, but rather concentrate efforts on challenging the amount, format and quality of financial information submitted. If everything doesn’t “true-up” claims can be paid on Reservation of Rights that also carries some risk to insureds. In my experience it can take insurers up to 8 months before paying any benefit under the policy if the requested information is not provided in the format requested.
Insurers have a great deal of money at risk for DI and BOE policies, and as a result their “risk management” rises to levels of high risk and probable millions in benefit payments. It may be a pain to reorganize financial reporting internally, but it will pay off later if and when it becomes necessary to file a disability claim.