If you have income protection insurance and you can’t do your normal job because of injury and illness, you can claim on that insurance which usually pays a monthly benefit. But what if you’ve received a lump sum for your injury or illness, like TPD or worker’s compensation? Will your income protection insurance still be paid after you receive that lump sum payment?
The most direct answer to the above question is, it depends! Specifically, it depends on the nature of the lump sum payment that you receive and whether it is considered income.
When can lump sum payments offset income protection payments?
Every income protection policy which we have ever seen has a section that says your income protection payments will be reduced (or stopped) if you are paid a lump sum payment from another source and that payment is for loss of income. In most cases, lump sum payments that are not for loss of income will not cause an offset.
This means that any lump sum payment for TPD will not usually cause an offset. However, common law settlements from WorkCover, a road accident claim (TAC) or medical negligence claim can sometimes cause issues if the payment (or some part of it) is a payment for lost income.
For the avoidance of doubt, WorkCover and other similar payments that are calculated without references to a loss of income (ie. pain and suffering damages or an impairment benefit) will not usually offset income protection payments. However, in most cases, common law settlements are paid as one large lump sum benefit that includes compensation for:
- past and future economic loss;
- your impairment benefit entitlement; and
- pain and suffering.
Because the above three components are paid as one lump sum in a common law claim, it is not possible to work out which part of the benefit is economic loss (or income). In other words, the settlement is a bit like a large sausage and asking which part of the settlement represents income or past/future economic loss is a bit like asking what part of a sausage is rump-meat.
What are common law damages?
If you make a claim for compensation because of personal injury, and depending what state you are in, there are broadly two types of compensation claim. Firstly, there are claims for statutory benefits (like WorkCover and TAC), which you may get paid if you were injured, even if nobody was negligent.
Secondly, there are claims for common law damages, which are claims made when someone’s or some entity’s negligence caused you to be injured. A payment you receive for common law damages may be made under a WorkCover or road accident (TAC/CTP) scheme (in addition to the statutory benefits available under those schemes) or for medical negligence or public liability (injuries in a public place like supermarket falls or playground accidents, and in other potential claims.
A common law claim usually claims damages for;
- pain and suffering (not income); and
- future medical expenses and future care needs;
- economic loss damages for loss of past and/or future earning capacity (sometimes income).
Technically, your entitlement to claim common law damages arises from case law (court-made negligence-related laws) and does not directly arise from any legislative scheme.
When can common law damages offset income protection payments?
Insurers will often seek to reduce or completely offset income protection (‘IP’) benefits if you have been awarded common law damages. However, they are not always entitled to do so, and they often try to apply an offset when (or in a way) that they are not allowed to.
Before deciding to offset an IP payment (ie. reduce the rate of payment), the insurer may ask for a breakdown of the common law settlement sum, showing the portions relating to pain and suffering damages and economic loss damages. This is because the insurer will usually only offset economic loss damages.
However, as outlined above, a common law settlement will usually not contain a breakdown of the compensation payment, and if no breakdown is included and the settlement cannot be broken down between income damages and pain and suffering damages, the insurer may just break the settlement up in a way that is convenient for them.
This is not always supported by the policy and the law. Depending on the terms of the IP insurance policy, it may be possible to dispute the insurer’s position that an offset applies.
What does the law say?
The leading case in this area is Buswell v TAL Life Limited [2018] NSWSC 1507
Background:
- Ms Buswell was injured and unable to do her normal job. She claimed IP benefits. At the same time, she made a claim against her employer seeking damages for the injuries sustained because of her employment.
- Ms Buswell was paid common law damages as a lump sum in the amount of $350,000. Because of this, the insurer applied an offset to their IP benefits.
- Ms Buswell issued court proceedings against the insurer, disputing that the offset should be applied.
- The court agreed with Ms Buswell and found that no offset should be applied. This meant that the insurer must pay the IP benefits under the policy.
The relevant policy was a TAL policy, and the offset provision said:
1.9.1. The amount of any Benefit payable in respect of an Insured Person for a month will be reduced by any Other Disability Income which accrues to that person during that month.…
Other Disability Income means any income (other than Return To Employment Income) which an Insured Person may derive during a month for which the Benefit is payable and includes;
- any benefit payable under other income protection insurance policies; and
- any benefit under any workers compensation, statutory compensation, pension, social security or similar schemes or other similar State, Federal or Territory legislation; and
- any benefit paid under state or federal legislation such as the Department of Veteran Affairs; and
- any other income payments including Employer funded sick leave entitlements.
Any Other Disability Income which is in the form of a lump sum or is commuted for a lump sum, has a monthly equivalent of one sixtieth (1/60) of the lump sum over a period of sixty (60) months. If it can be shown that a portion of the lump sum represents compensation for pain and suffering; or the loss of use of a part of the body, we will not take that portion into account as Other Disability Income.
The court’s considerations that led to a successful result for the injured person
In finding in Ms Buswell’s favour, the New South Wales Supreme Court held that:
- The word ‘income’ in the ‘Other Disability Income’ definition is to be given its ordinary meaning.
- A common law damages payment for personal injury is not ‘income’, but rather capital (a damages payment is not treated like ordinary income, eg. no tax is paid).
- The common law payment did not fall within one of the paragraphs (a)-(d) because it was not a payment made under a worker’s compensation or similar scheme because it was a common law payment (ie. it was an entitlement that was founded in court made law, not under the WorkCover scheme, which is based in legislation).
- However, the court did agree that a common law settlement could still be an offsetable amount under an IP policy if it fell within one of the paragraphs of the offset clause.
Therefore, an insurer’s ability to offset a common law damages payment will depend on the wording of the income protection insurance policy.
Recently, insurers have changed their offset definitions to capture common law settlements and allow them to break down lump sum benefits that are for both income (economic loss) and pain and suffering, even if the proportions of any breakdown are not clear from the facts and matters at hand. But mistakes are often made, and it's always worth getting advice.
If an offset is applied, how will it be applied?
In most cases, if an insurer is entitled to offset or reduce the amount of the IP benefit payable, the insurer will not try to reduce the amount of the benefits paid in past (ie, they will not seek a repayment) but will look to offset future IP payments.
They usually do this by converting the lump sum payment into a monthly payment and reducing or offsetting future payments for 5 years. They convert the lump sum by dividing the benefit by 60 (ie, 5 times 12 months).
Get help from an income protection insurance lawyer
If you are receiving income protection benefits and the insurer is asking for information relevant to past or upcoming WorkCover or other lump sum payments, you should get in touch for some free advice.
We can check your common law payment (or other lump sum payment) documents and your IP insurance policy and let you know if the insurer’s enquiries or proposed offset of your income protection benefit is legitimate.
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