May 19, 2008


Under certain circumstances, disability income benefits are not paid even if an employee satisfies the definition of disability. Common exclusions under both short-term and long-term disability income contracts specify that no benefits will be paid under the following circumstances:

- For any period during which the employee is not under the care of a physician.

- For any disability caused by an intentionally self-inflicted injury.

- Unless the period of disability commenced while the employee was covered under the contract. (For example, an employee who previously elected not to participate under a contributory plan cannot obtain coverage for an existing disability by deciding to pay the required premium.)

- If the employee is engaged in any occupation for remuneration. This exclusion applies in those situations when an employee is totally disabled with respect to his or her regular job but is engaged in other employment that can be performed despite the employee's condition.

Until the Pregnancy Discrimination Act, it was common for disabilities resulting from pregnancy to be excluded. Such an exclusion is now illegal under federal law if an employer has 15 or more employees. Employers with fewer than 15 employees may still exclude pregnancy disabilities unless they are subject to state laws to the contrary.

Additional exclusions are often found in long-term contracts. These commonly deny benefits for disabilities resulting from the following:

- War, whether declared or undeclared.

- Participation in an assault or felony. Note that some insurers have recently expanded this exclusion to include the commission of any crime.

- Mental disease, alcoholism, or drug addiction. However, some contracts provide benefits if an employee is confined in a hospital or institution specializing in the care and treatment of such disorders; other contracts provide benefits but limit their duration (such as for 24 months per disability).

- Preexisting conditions.

The exclusion for preexisting conditions is designed to counter the adverse selection and potentially large claims that could occur if an employer established a group disability income plan or if an employee elected to participate in the plan because of some known condition that is likely to result in disability. While variations exist, a common provision for preexisting conditions excludes coverage for any disability that commences during the first 12 months an employee is covered under the contract if the employee received treatment or medical advice for the disabling condition both (1) prior to the date the employee became eligible for coverage and (2) within 90 consecutive days prior to the commencement of the disability.

When coverage is transferred from one insurance company to another, it is not unusual, particularly in the case of large employers, for the new insurance company to waive the limitation for preexisting conditions for those employees who were insured under the previous contract. This is often referred to as prior coverage credit or a no-loss, no-gain provision. In some instances, the provision is modified so that benefits are limited to those that would have been provided under the previous contract, possibly for a specified duration, such as one year. Note that a transfer of coverage has no effect on the responsibility of the prior insurance company to continue paying benefits for claims that have already occurred, except in rare cases where some arrangement is made for the new contract to provide benefits.


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