Signing a Separation Agreement Can Bar Your Claim for Long-Term Disability Benefits

Employees in Chicago and the rest of Illinois with long-term disability claims pending frequently sever their employment from their former employer while the long-term disability claim is pending. Often the employer terminates employment after Family Medical Leave Act job protection expires, and sometimes offers a separation agreement. Few people ever anticipate how that separation agreement may affect their long-term disability claims against an insurer that issued the group long-term disability insurance policy to the employer. But the consequences can be devastating if you are not careful in modifying the language of the separation agreement, as demonstrated in a recent case.

In Schuyler v. Sun Life Assurance Co. of Canada, No. 20 CIVIL 10905, 2023 WL 2388757 (S.D.N.Y. Mar. 7, 2023), Schuyler worked for Benco Dental and applied for long-term disability benefits from Sun Life, which issued the group long-term disability insurance policy to Benco Dental. Sun Life denied Schuyler’s claim. While requesting review of the denial under 29 C.F.R. § 2560.503-1(h), Schuyler signed a separation agreement that paid her $25,000 in severance in exchange for a broad release of claims. Schuyler asked Benco Dental if it would impact her long-term disability claim, and Benco assured Schuyler it would not. But Benco Dental was wrong. The agreement stated Schuyler released “any and all known and unknown actions . . . arising out of or limited to, any alleged violation of . . . the Employee Retirement Income Security Act of 1974 (‘ERISA’).” After Sun Life denied Schuyler’s appeal, she sued under ERISA § 502(a).

The United States District Court for the Southern District of New York granted summary judgment for Sun Life. The court explained the broad release Schuyler signed with Benco Dental released all claims under ERISA. That Schuyler’s long-term disability claim was worth over $1.2 million, compared to the $25,000 settlement she received, was immaterial to the decision because Schuyler voluntarily released all her claims. Instead of merely asking Benco Dental if the release would affect her long-term disability claim, Schuyler should have negotiated a modification to the language of the release to expressly state she does not release the long-term disability claim. Alternatively, if the employer refused to modify the language, Schuyler could have declined the settlement altogether.

If you have a claim for long-term disability benefits and your employer offers you a separation or severance agreement, speak to an experienced ERISA long-term disability attorney before you sign the agreement. Doing so could save you from releasing your long-term disability claim.