ERISA is the Employee Retirement Income Security Act. Back in the 1970s, pension plans were falling apart. The government became involved to fix up the pension plans, but in the process they wanted employers to offer their employees benefits. So, Congress came up with a plan that says if you make a mistake in offering employee benefits, and get sued, you can only get sued for very narrow damages.
Basically, in the ERISA long-term disability framework. This means the disability insurance company is only liable for damages for the breach of contract, that is, for the amount of damages they would have had to pay had they not improperly denied the employee’s claim.
For example, if a disabled claimant had been denied benefits for two years, under ERISA, there is no disincentive to deny claims because their liability is limited to what they would have had to pay if they initially accepted the claim. So, the disability insurance company denies claims and take their chances.
It’s similar to a funnel. At the top of the funnel, the disability insurance company denies most claims. As the process goes forward with the first appeal, second appeal, and lawsuit, people give up and get funneled out. The fewer people who persist and make it to the bottom of the funnel, the less the disability insurance company will have to pay out as benefits.
Some claimants don’t even apply for the first appeal. Some people get discouraged after the second appeal. Then, you are at the narrow part of the funnel for just the lawsuits, and some insurance companies prevail at the bottom of the funnel. Of the hundreds of claims they deny, only a small fraction of claims make it successfully through the funnel.
The only disincentive for disability insurance companies that may come into play is that under ERISA, the judge may award the prevailing party attorneys’ fees and costs, but at the top of the funnel, you would have to prove that the denial of your claim was arbitrary and capricious.