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It often takes a serious struggle to get a disability insurance provider to start paying benefits on a claim, and when they do, the claimants often wrongly assume the struggle is over.

But sometimes, it’s only just beginning.

When an insurance company has sent a reservation of rights letter, it may be possible for the company to change its decision. Not only will they deny the claim and stop paying benefits—but they may also demand that you pay back benefits you’ve already received. This can amount to many thousands of dollars.

It is vitally important for disability insurance policyholders to:

• Understand what a reservation of rights letter means
• Know when insurers will expect repayment of benefits
• Be aware of when repayment is allowed legally and when a demand may be wrongful
• Know what to do when an insurance company requests reimbursement

Being prepared with this knowledge and an understanding of your rights can prevent serious financial hardship.

What Does “Reservation of Rights “ Mean in Disability Insurance?

When an insurance company sends a reservation of rights letter, it is notifying the person who filed a claim that the insurance company agrees to act on the claim initially but may later decide to deny it. The company is reserving the right to change its corporate mind. Essentially, the company is putting off making a final decision.

Why Do Insurance Companies Reserve Their Rights?

Under traditional legal doctrines of waiver and estoppel, once an insurance company starts acting as if they accepted the claim, they cannot later deny it. This can be particularly important for insurance companies that defend liability claims. They need to act quickly on legal defense before they’ve had time to fully review the details of the claim to ensure that it is covered under the terms of the policy.

A reservation of rights letter buys time for the insurance company to complete further analysis on a claim before determining what to do about it. Any actions the company takes—including paying benefits—are temporary.

How Can You Tell If the Insurance Company Has Reserved Its Rights?

It is important to look for keywords or phrases in correspondence from the insurance company to know whether they are reserving their rights, because they do not always make it obvious to those who are not enmeshed full-time in the complex world of insurance provisions. Some signs that an insurance company is reserving its rights include:

• Sending benefit payments without a notice that the claim has been approved
• Correspondence that contains the words “reservation of rights” or “provisional payment” anywhere in the fine print
• Continuing to request that a claimant provide additional medical records or consent to independent medical exams even though benefit payments have already started
• Terms in the policy that specify that investigations will continue before a final approval is issued

At Seltzer & Associates, we focus our practice entirely on helping claimants receive appropriate benefits under their disability insurance policies, so we’ve seen the devious ways insurance companies mask their legal efforts to reserve their right to decline coverage. We provide free consultations where we can review your documents to determine whether the insurance company is trying to reserve its right to decline your coverage.

Why Would the Insurance Company Later Decide to Deny Your Claim?

Companies that issue disability insurance policies might reserve the right to deny a claim for many reasons such as:

• They have questions regarding your eligibility for benefits
• They’re waiting to see if you’re going to receive disability benefits through the Social Security Administration
• They need additional medical evidence
• They’re trying to determine whether your situation fits a policy exclusion
• There are potential offsets from workers’ compensation

Can the Insurance Company Really Demand That I Return the Money They’ve Paid Me?

In some situations, the insurance company can legitimately seek reimbursement for benefits they’ve paid, but they don’t have that right in every situation. It is important to understand when the insurance company is acting within their rights and when their demand is not legal or enforceable.

Even without issuing a reservation of rights letter, language in the disability policy probably allows the company to seek repayment of benefits if you return to work without reporting your employment, you win compensation through a personal injury lawsuit, or you receive a lump sum payment of retroactive benefits from the Social Security Administration. In addition, if the insurance company overpaid benefits because of a mistake made by either the company or the claimant, that also might provide grounds to seek reimbursement from the claimant.

When the insurance company has issued a reservation of rights letter, it can demand repayment of benefits paid out if it completes its investigation and officially denies the claim. However, it is important to be aware that the denial is often improper. We see situations every day where insurance companies wrongfully deny claims that clearly qualify for coverage, but it takes intense legal arguments and additional evidence to achieve the right outcome. Sometimes we can get the insurance company to see reason through negotiation, but other times, we have to take the claim to court to get the appropriate determination from the judge.

When Can You Challenge a Demand for Repayment?

Attorneys who focus on disability insurance claims know there are several types of situations where you can successfully challenge the request for reimbursement of payments made by the insurance company.

Does the Policy Language Authorize Repayment?

The first place to look when determining whether the insurance company has the legal right to seek reimbursement is the language of the policy itself. Within the four corners of the document, the insurer must be given explicit authority to seek repayment. There is no implied right to reimbursement, so if the language is missing or ambiguous, the insurance company lacks the legal grounds to request reimbursement.

Who Made the Mistake?

If the reason that the company initially decided you should receive benefits and later denied your claim is that you neglected to send in vital information, then the company is probably justified in asking you to pay back the money. You made a mistake, and they won’t be held liable for it.

But what happens when it is the insurance company who makes a mistake? The answer is not as clear. The policy may include a provision that specifically authorizes recovery of mistaken or excessive payments. Or the insurance company may be able to argue that you know you were not entitled to the money and allowing you to keep it would be unjust enrichment.

In this type of situation, an insurance attorney may be able to negotiate a compromise settlement.

How Much Time Has Passed?

The timeframe matters when it comes to an insurance company’s right to reimbursement of payments. Many states have laws that limit how far back an insurance company can look back when seeking reimbursement. In Pennsylvania, for instance, state guidelines generally limit the amount of time an insurance company has to “claw back” money to 24 months. The insurance policy also might have contractual time limitations.  

FAQs About Recapture of Disability Benefits

It is frightening to contemplate having to pay back benefits at a time when you’re relying on the income under your policy, so we receive many questions about reimbursement of disability payments. We’ve answered some of the most common questions here, but feel free to contact us with your own questions.

What is a clawback provision?

A clawback provision is a stipulation in a contract that allows one party to take back money that has been paid out. In a disability insurance policy, a clawback provision enables the insurance company to recapture money it has paid out under the terms of the policy.

What should I do if I get a demand for repayment from the insurance company?

To protect yourself if your insurance company seeks reimbursement for benefits paid under your policy, you should:

• Read the entire policy
• Review the reservation of rights letter in detail
• Ask the insurance company to provide a detailed calculation explaining what amounts were overpaid and why
• Review potential offsets in your situation such as Social Security or workers’ comp payments
• Compile all the correspondence you have from the disability insurance provider and others regarding payments for the disability

While you may want to make preparations in your financial affairs to begin making repayments if necessary, you should consult an experienced disability insurance attorney before actually sending any money. The company may not be justified in seeking reimbursement. If they denied your claim for benefits, that may be unjustified as well.

Remember that insurance companies are always focused on profit margins, and they frequently keep those high by denying and undervaluing claims on very flimsy pretexts. We know how to challenge those actions, which sometimes amount to actionable bad faith claims.

What happens if I refuse to pay back the money?

The insurance company could take a number of different actions if you ignore or refute a request for repayment of benefits. They may suspend or terminate benefit payments. This is not an issue if they’ve denied your claim, but if they are paying benefits but insist that they’ve overpaid or you need to make up for an offset, then withholding benefits can hurt you in the long run.

The insurance company may undertake collection efforts, so failure to repay can damage your credit. They may also sue you for repayment. Rather than ignoring the situation, it is better to work with an attorney to negotiate a beneficial solution.

If You Receive a Reservation of Rights Notice, Talk to an Attorney at Seltzer & Associates

There is so much at stake in a long-term disability insurance claim. With potentially hundreds of thousands of dollars in benefits on the line, insurance companies want to explore every possible avenue they can to deny or reduce the value of a claim. If you receive a reservation of rights letter, it puts you on notice that they are trying to find ways to avoid payments, and if they made payments, they may try to get them back.

Sometimes they are within their legal rights in doing so, but often they are not. At Seltzer & Associates, we can analyze your policy and the specifics of your circumstances to determine whether the insurance company is acting lawfully. We can advise you of your legal rights and your best options to recover full benefits. To learn more about the assistance our team can provide with a disability insurance claim, schedule a free consultation with us today.