Insurance - the evolution of total disability

Col Fullagar looks at the past 30 years and how the insurance definition of total disability as we know it now has evolved throughout the years.

Act three, scene one. Hamlet enters: “TD or not TD? That is the question…”.

To answer the question, Hamlet would of course go to his policy document where, irrespective of whether it was written in Shakespearian English or plain English, he would find the definition of total disability.

Today, financial advisers, claimants and even claims managers might ponder the same question and similarly go to the policy document.

There Hamlet and the rest would read the requisite definition.

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Irrespective of whether its meaning did or did not appear clear, an assessment of how well it would perform can in part be made by seeking out various key components of the definition that should be present behind the scenes; subtly enhancing clarity, contractual certainty and equity. Of course, their absence would do the opposite.

In order to identify these components it is necessary to not only look at the principal player on the income protection stage, but also its supporting cast of partial disability and the waiting period.

Also, rather than consider contracts present there is merit in visiting contracts past in order to gain an understanding of what was done and why during the various stages of the definitions development.

Time and space dictate that assumptions and generalisations are made; however, these will not be material to the context.

The lights dim and the curtain rises …

Act 1, scene 1 – the early 1980s

The income protection market was dominated by three players who have since morphed into one; AMP, National Mutual and Australian Casualty & Life (AC&L).

To assess the impact a sickness or injury had on the ability to generate income, reference was made to the insured’s occupational “duties”:

“Total Disablement means the continuous  inability of the life insured by reason solely of injury or sickness … to perform each and every normal duty of his usual occupation.”

(National Mutual, Disablement Insurance Policy, February 1981.)

Setting aside National Mutual’s assertion that only men needed insurance, the insured was left in little doubt – ie, the sickness or injury must render them incapable of performing every aspect of their occupation, irrespective of how minor it was and inconsequential to the generation of revenue.

There was no distinction between what subsequently became known as important and non-important duties.

Also, to be eligible for a benefit, the insured had to be “continuously totally disabled” for the entire waiting period.

Complementing total disability was partial disability:

“If, immediately following a period in respect of which the insured has been entitled to receive a benefit, the insured engages in any profession or occupation but … his earnings are … less than his pre-disability earnings … a partial disability benefit is payable.”

The eligibility criteria for partial disability were identical to that of total disability – ie, the insured had to be totally disabled for the waiting period. If the insured returned to work or in fact was able to return to work in any capacity, even for a day, the waiting period would restart.

Key components identified:

• Total and partial must be separate and distinct; the insured can be one or the other or neither – but not both.

If total and partial disability overlap, the untenable situation can arise where the insured seeks to claim under total disability but the insurer assesses under partial disability.

• The eligibility criteria during the waiting period must be identical.

If eligibility differs, an insured might be eligible for a total disability benefit at the end of the qualifying period, while another with an equivalent waiting period experience might be ineligible for a partial disability.

Act 1, scene 2 – the mid to late 1980s

After many years of little change, the contractual position started to evolve during the second half of the 1980s.

Associated National Life, later Tyndall Life, introduced a definition of total disability that distinguished between those duties responsible for the generation of income and those that were inconsequential to it.

“Total disability means that solely because of injury or sickness … you are unable to perform the important duties of your regular occupation.”

(Associated National Life, Income Reserve Plan, 1989.)

While there was an understanding that “important duties” were those that led to the generation of earnings, the phrase was not yet encapsulated in a policy definition.

The waiting period retained the qualification that it was “… the number of days … that total disability must continue before disability benefits begin to accrue”, no return to work was permitted.

The criteria for partial disability eligibility remained identical to total disability:

“immediately following a period of total disability that lasts at least as long as the waiting period.”

And for the first time, a capability clause appeared recognising that an insured that would otherwise satisfy the criteria for partial disability but for whom work was not available, should be contractually guaranteed a benefit.

“You are engaged in one or more important duties or able to engage in one or more important duties of your regular occupation.”

While the dominant basis of assessment remained duties-based, by the end of the 1980s an alternative gained increasing attention – ie, hours-based.

“Totally disabled means that you are unable to work in your usual occupation for more than ten hours a week.”

(Sun Alliance, Income Protection Insurance, 1992.)

The insured; however, still had to be totally disabled for the entire waiting period as benefits only applied until, “You return to work in any occupation”.

Key components identified:

• Capability clauses may be required

Provided the distinction between total and partial disability is retained, provision should be made for those who are partially disabled, but for whom work is not available.

• Revenue v non-revenue generating activities

The insured’s involvement in non-revenue generating activities should not preclude a benefit payment.

Act 2, scene 1 – the early 1990s

The 1990s saw the introduction of further contractual changes. Some of these were positive, while others arguably less so.

Clarity was improved when the phrase “important duties” was defined within the policy:

“Important duties means the duties of your regular occupation which could reasonably be considered primarily essential to producing monthly earnings.”

(Tyndall Life, Risk Insurance Policy, 1990.)

It was also recognised that the insured should be encouraged to attempt a return to work (if medically approved) so provision was made for a return to work for “up to 5 days”; in effect, there could be up to 5 days of “partial disability” during the waiting period.

Duties and hours-based definitions were challenged by a new player, income-based:

“You are not capable of earning … two-thirds or more of your average monthly income.”

(FAI, Disability Income Benefit, 1990.)

While the exponents of their respective definitions claimed theirs to “be the best”, in reality, each was a satisfactory way to assess the impact of a sickness or injury on the ability to work and earn, but while each had its strengths, each also had unique weaknesses.

Key components identified:

• Terminology

Terms must be succinctly and consistently defined.

• Policy purpose

The policy should have a central aim, and this purpose should be reflected in the content of its clauses.

Act 2, scene 2 – the mid to late 1990s

In the mid-1990s the market stepped over a line; the requirement to be unable to perform “all important duties” disappeared.

“The person insured is totally disabled if, because of an injury or sickness, he or she is … unable to perform at least one duty of his or her occupation which is necessary to produce income.” (Australian Casualty & Like, Premier Income Protector Plan, 1995.)

The ‘one important duty’ definition had arrived.

Almost immediately, hours-based allowed the insured to be totally disabled while working up to 10 hours a week.

These liberalisations were applauded, but they brought a complication that remains; it was now possible to be paid a total disability benefit while at the same time being able to earn or even actually earning an income; the distinction between total and partial disability was being compromised and made more complex.

Other changes followed:

The need to be ‘totally disabled’ for the entire waiting period was replaced with a need to be totally disabled for a set number of days, after which the insured could be partially disabled for the remainder of the waiting period.

This change made redundant the facility to return to work for “up to 5 days” during the waiting period as the insured could in fact return to work for any number of days after the initial set period.

Unfortunately, some insurers created contractual ambiguity by retaining a reference to the return to work facility.

Key component identified:

• Avoid redundant wording

Those changing policies should be vigilant, thinking through the implications for new wording rather than simply assuming that which currently exists should be retained.

Act 3, scene 1 – the early 2000s

In 2002 a new style of definition was released, the so-called three-tiered definition.

“Total disability means that solely because of a sickness or injury the life insured…has suffered a reduction of 80 per cent or more in the ability to:

• Generate monthly earnings;
• Perform the income producing duties; or
• Maintain the same number of hours worked,

in the insured’s usual occupation.”

(TOWER Protection Policy, Disability Protection Plan, 2002.)

The logic was compellingly simple; each of hours, duties and income work in the vast majority of situations as a means of equitably assessing the impact of a sickness or injury on the insured’s ability to work; however, none of them is without technical shortcomings, for example:

• Hours-based; the extent of disability required to claim is proportionally different, depending on the pre-disability hours worked;
• Duties-based; contractual certainty is compromised if an insured can perform “all” duties, but less effectively;
• Income-based; a reducing income caused by a poor economic climate can affect benefit eligibility.

Optimal opportunity for the insured to demonstrate total disability requires a choice at the time of claim. The pragmatic edge in regards to likelihood of claim with a three-tier definition over a single tier was, however, marginal.

Two more subtle changes were made by TOWER.

First, was the removal of the ambiguity that existed with wording such as “incapable of earning two-thirds” – ie, “does this mean a reduction of two-thirds or only one-third”. Phrasing was altered to simply “a reduction of ”.

Second was the replacement of a numeric assessment with a proportional one, thus avoiding disproportionate levels of disability being required to achieve claim eligibility, for example:

• With a one important duty definition, an insured with one duty must be 100% disabled, whereas an insured with two important duties is only required to be 50% disabled; and
• With a 10 hour definition, an insured working 40 hours a week must be 25% disabled, whereas an insured working 50 hours a week is only required to be 20% disabled.

With a proportional measure, irrespective of the number of duties or the number of hours, the same proportional reduction in ability was required.

Key components identified:

• - Gaps in cover should be avoided;
• - Equity should be maintained; and
• - Ambiguity should be removed.

Act 3, scene 2 – the present

The past 30 years has seen many changes to the definitions of total disability, but by studying these changes and the reasons for them it is possible to develop a script of some things to look for behind the scenes in the definitions of today:

• Total and partial should remain separate and distinct;
• Eligibility criteria during the waiting period should be identical;
• Insured’s who can work but for whom work is not available should be protected;
• Undertaking non-revenue producing duties should not preclude a claim payment;
• Terminology should be succinctly and consistently defined;
• The purpose of the policy should be reflected in its content;
• Redundant wording should be removed;
• Gaps in cover should be filled;
• Measurement criteria should be equitable; and
• Ambiguity should be avoided.

The claims of policy drafters about achieving the above appear to vary.

Some loudly proclaim their success but “They doth protest too much, methinks”.  (Hamlet, Act 3, Scene 2.)

Some are more humble, “True it is, that we have seen better days”. (As You Like It, Act 2, Scene 7.)

Advisers and clients would perhaps be the better judges and the former on behalf of the latter are no doubt best placed to rate the insurers’ performance and how well they achieve clarity, contractual certainty and equity.

Col Fullagar is national manager for risk insurance at RI Advice Group.