Figure In The Tax, Too

A recent 3rd Circuit Court of Appeals ruling got us to thinking about the effect of lengthy litigation on an award in disability income cases.

In Eshelman v. Agere Systems, Inc., 554 F. 3rd 426, the appellate court upheld a District Court decision awarding additional damages to the plaintiff’s jury award of $200,000, to cover the added taxes she would have to pay because she received a lump sum award rather than having been paid her salary over a period of years as she would have if she had not been discriminated against.

Well, we reasoned, shouldn’t the same thinking be applied to disability income insurance cases which many insurers cause to be dragged on for years and years when it is apparent to any disinterested observer that the claim should have been paid early on. The insurance company’s reluctance (almost a reflex action when it comes to paying claims) should not cause the disabled policyholder more grief by adding to his or her tax burden.

The circumstances are very similar. When a person loses a position because of the wrongful action of the employer, the person loses the benefit of being paid weekly or monthly and paying income taxes periodically through withholding and annual tax returns.

When an insurer wrongfully drags out the award of benefits to a disabled person, the claimant loses the benefit of being paid these insurance monies weekly or monthly and paying income taxes (if the benefits are taxable) annually. (Generally, disability income benefits are taxable if an employer pays the policy premium and non-taxable if the insured pays the policy premium).

If a disability income case drags on for awhile (some are known to have gone 10 years or more), and results in a lump sum award to make up for the years during which no monies were paid, that lump sum is taxed in the year it is received by the claimant. Many times this puts the recipient in a much higher tax bracket, meaning that a much larger percentage of the award will have to be paid than the claimant would have paid if benefits were received and taxes paid each year.

As a result, the claimant is not made whole, receiving less money in his or her pocket than he or she would have received if paid monthly for the period

We believe it fair that a District Court judge have the discretion to make an additional financial award to make up for the tax difference so as to make the plaintiff whole when appropriate evidence has been elicited to support such a tax award.