How Accepting Benefits Payments Subject to a Reservation of Rights Can Harm a Claimant
By Ray Bourhis and Alexander MacDougall
A Long-Term Disability (LTD) claimant should never accept a Reservation of Rights from their insurance company. Many laypeople are unfamiliar with the term “Reservation of Rights” when they see it in the context of their LTD insurance claims and agree to it without understanding its implications.
So, what does it mean when an insurance company issues benefit payments to a disabled claimant accompanied by a Reservation of Rights? Further, how will the claimant be affected if they accept the payment along with the Reservation of Rights? The answer to the first question is that a Reservation of Rights allows an insurance company to issue benefits to a claimant, all the while preserving the insurance company’s ability to change their mind at a later time and reclaim all of the money that they have paid out on the claim. The answer to the second question is that if the claimant accepts the Reservation of Rights, because it gives the insurance carrier the ability to reclaim benefits already paid, the carrier thus possesses substantial leverage in deciding how to administer the claim for its duration.
One scenario where this leverage can manifest is when the claimant, after receiving benefits for a few years under a Reservation of Rights has their benefits terminated. If the claimant even threatens to file suit against the carrier for the wrongful termination or underpayment of benefits, the carrier may in turn threaten to file an action against the claimant to recover all of the benefits already paid. This places the claimant in a very precarious position: they either win their suit and get their benefits or lose and have to pay back all of the benefits out of their savings. For many people, paying back the benefits would be almost impossible and they feel that they cannot risk bringing suit when losing would cost them so dearly.
It’s this kind of leverage that an insurance company is looking to create when they offer benefits accompanied by a Reservation of Rights. This can be avoided if the claimant does not accept benefits payments under a Reservation of Rights. Unfortunately, many claimants receive bad advice on this topic from attorneys, insurance agents, financial advisrs, or others who do not understand the potentially disastrous implications that a Reservation of Rights can have on the claimant down the road. What a claimant should do when their insurer offers to pay benefits with a Reservation of Rights is to refuse to accept any payment that is conditional and to tell their insurer that unless the Reservation of Rights is removed they will not accept any benefit payments. As usual, the claimant should confirm all conversations with insurance company representatives in writing.