Can A Disability Insurance Company Sue To Recover An Overpayment?

If you receive long-term disability (LTD) benefits and have been approved for SSDI, you likely have questions. You may wonder if your insurance company can sue to recover the overpayment. The answer is: it depends.

How Do Long-Term Disability Overpayments Happen?

Long-term disabilityinsurance is designed to replace a portion of your income if a serious illness or injury prevents you from working. Most LTD policies pay between 50% and 70% of your pre-disability earnings.

Many LTD policies also include offset provisions, which allow the insurance company to reduce your LTD benefits by certain other income you receive—most commonly Social Security Disability Insurance (SSDI).

Overpayments usually occur because SSDI benefits take time to be approved. While your SSDI claim is pending, the LTD insurer often pays your full gross benefit. Once Social Security approves your claim, it may issue a lump-sum back payment covering months when you were already receiving LTD benefits. When those periods overlap, the insurer considers the duplicate payments an overpayment.

Most LTD policies require you to reimburse the insurer for that overlapping amount. The insurer typically relies on your Social Security Notice of Award to calculate what it believes you owe. It is critical to review those calculations carefully, because errors are common.

What Are Long-Term Disability Insurance Benefits and How Do They Work?

Long-term disability insurance is intended to protect your income if a disabling medical condition prevents you from working for an extended period.

Coverage is often provided through an employer-sponsored group plan, although individual policies are also available. If your doctor determines you cannot work due to illness or injury, you file a claim with your insurer. If approved, the insurer pays monthly benefits according to your policy terms, sometimes for years or until retirement.

Most policies require proof that you meet the policy’s definition of disability and coordinate benefits with other income sources, including Social Security disability benefits.

What Is a Social Security Reimbursement Agreement?

When you apply for long-term disability benefits, insurers often require you to sign a Social Security Reimbursement Agreement.

By signing this agreement, you promise to repay the insurer if you later receive retroactive Social Security disability benefits for the same period covered by LTD payments. This is a legally binding contract, not a courtesy request.

If you fail to reimburse the insurer after receiving Social Security back pay, the company may rely on this agreement as the legal basis to demand repayment—or, in some cases, to file a lawsuit.

Can a Disability Insurance Company Sue to Recover an Overpayment?

Yes, under certain circumstances, a disability insurance company may sue to recover an overpayment—particularly if you signed a reimbursement agreement and did not repay the amount owed.

Although lawsuits are not the most common recovery method, insurers do have the legal right to pursue repayment through civil court. If they prevail, you could be required to repay the overpayment and potentially additional legal costs.

That said, there may be defenses available. In some situations, insurers face challenges if the Social Security funds were already spent, mixed with other assets, or if the statute of limitations has expired. It may also be possible to negotiate a repayment plan or seek a waiver.

Before signing any settlement or repayment agreement, you should have an attorney review it to ensure it is accurate and fair.

Can a Disability Insurance Company Garnish Your Social Security Benefits?

No. Disability insurance companies cannot garnish your Social Security benefits directly.

Federal law protects Social Security payments from private creditors. Insurers recover overpayments by reducing or offsetting LTD benefits—not by intercepting Social Security checks.

While this distinction can feel confusing, your Social Security payments themselves remain protected.

What Types of Income Can Be Offset by Long-Term Disability Insurance?

In addition to SSDI or SSI, many LTD policies allow insurers to offset benefits based on other income sources, including:

• Short-term disability benefits
• Workers’ compensation payments
• Certain state disability benefits
• Some third-party personal injury settlements

These offsets allow the insurance company to reduce the amount they pay you by the value of other benefits you are receiving, so it’s a good idea to review your policy and keep track of any outside payments during your claim.

How Attorney Fees and Dependent Benefits Affect LTD Offsets

Attorney Fees: If you hired an attorney to help with your Social Security disability claim, attorney fees are typically paid directly from your SSDI back pay. Most LTD insurers do not include attorney fees in the offset calculation, meaning they should offset only the amount you actually received. Always review the calculation to confirm this was handled correctly.

Dependent (Auxiliary) Benefits: Many LTD policies allow insurers to offset dependent benefits paid to your spouse or children through SSDI. Unless your policy states otherwise, those auxiliary benefits may reduce your LTD payments as well.

How to Make Sure Your LTD Offset Is Calculated Correctly

Insurers make mistakes. Always review the insurer’s offset calculation by comparing it to your Social Security award letter.

Check for:

• The correct SSDI start date
• Whether dependent benefits were properly included or excluded
• That attorney fees were not improperly offset
• Proper calculation of your gross LTD benefit

If you spot a discrepancy, reach out to the insurance company and request a written explanation of their calculations. If you’re unsure or the paperwork gets confusing, don’t hesitate to consult an attorney or financial advisor experienced with disability benefits. That extra review can help ensure you aren’t unnecessarily losing benefits due to mistakes in the offset process.

What Types of Income Cannot Be Offset by LTD Insurance Providers?

Generally, LTD insurers cannot offset the following income sources:

• Severance pay received from a previous employer
• Stock option income
• Personal retirement benefits (such as 401(k) distributions)
• Profit-sharing payments from your former employer

In other words, receiving these types of income should not reduce the amount you receive from your long-term disability insurance policy. Always review your specific policy language for details, but these categories are typically protected.

Bottom Line

Overpayments are common in long-term disability claims involving Social Security benefits, but insurers do not always calculate them correctly—and lawsuits are not automatic.

Understanding how overpayments occur, what insurers can offset, and when legal action is possible helps you protect your benefits and avoid unnecessary financial harm.

If an insurer is demanding repayment or threatening legal action, speak with a disability attorney before responding.