Disability insurers frequently attempt to recover overpayments from their insureds. It is common, for example, for the policy to provide that disability benefits under the policy will be reduced to the extent that the insured qualifies for Social Security disability benefits; that the insurer will go ahead and pay as if the insured did not qualify for Social Security disability benefits; and that if and when the insured does qualify for Social Security disability benefits, she will repay the insurance company, to the extent of any resulting overpayment.
Enter ERISA. So often the insurance company’s shield – preempting State-law bad faith claims, and otherwise protecting the insurance company’s claims decisions – ERISA is, in this area, the insured’s shield. Or so said the Ninth Circuit in Bilyeu v. Morgan Stanley Long Term Disability Plan. Even though the policy contains the insured’s promise to repay, ERISA permits the insurance company to enforce this promise only to the extent that it could have done so “in Equity.” As a practical matter this meant, according to the Ninth Circuit, that the insurance company could force Ms. Bilyeu to repay if, but only if, it could show that she still had in her possession the very funds that had been overpaid. In fact she had spent them. And so the insurance company, even though it proved an overpayment, and a promise to repay any overpayment, and even though (presumably) Ms. Bilyeu had other assets, including her Social Security benefits — despite these facts, the insurance company got nothing.
The Bilyeu case was handed down last year; the U.S. Supreme Court just denied the insurance company’s cert petition. It did so despite the fact that, as the Ninth Circuit acknowledged, there is a split in the Circuits on this issue, and despite the predictions of nationwide disaster made in one insurance company’s amicus brief. Look for the insurers to modify their policies, and to continue filing cert petitions. And look for well-counseled insureds living in the Ninth Circuit to spend, rather than bank, whatever benefit checks they receive from the disability insurance company.