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Financial Disclosures in LTD

Social Security Disability Lawyers OC, Riverside & San Bernardino Counties

Financial Disclosures and Tax Returns in LTD

Disclosure of Tax Returns and Other Financial Documents

To fully investigate a disability claim, it's not uncommon for a disability insurer to request disclosure of state and federal income tax returns and other related financial documents (income statements, balance sheets, etc.) Are you required to disclose them?

What Are Your Rights?

There is no absolute constitutional right against the disclosure of either federal or state tax returns. Couch v. U.S. 322, 336-337 (1973). However, there are strong federal and state statutory provisions that legislatures have enacted to protect against disclosure. Under the Federal Rules of Civil Procedure, Rule 26(b)(1) and under California Code of Civil Procedure § 2017.010, federal and state tax returns are privileged and protected from discovery by third parties. G-K Props. v. Redevelopment Agency of San Jose, 409 F. Supp. 955, 956-96 (N.D. Cal. 1976).

Discovery of Relevant and Non-Privileged Documents

On the other hand, the law allows discovery of information that is “relevant to the claim or defense of any party.” Fed. R. Civ. P. 26(b)(1). A document is “relevant” if it is “reasonably calculated to lead to the discovery of admissible evidence.” Surfvivor Media Inc., v. Survivor Prods., 406 F. 3d 625, 635 (9th Cir. 2005).

Tax returns and other financial documents are clearly “relevant” under circumstances where a claimant is receiving disability benefits from an insurer, and the insurer wants to determine whether the claimant is performing any other work and is therefore not disabled. Or, the insurer wants to determine if the claimant has received any other income, such as Social Security Disability (SSDI) benefits or worker's compensation payments, that qualifies as an “off set.”

An insurer may require tax returns in order to determine benefits under a residual income policy. Or, to investigate corporations in which the insured has an ownership interest.

Tax returns are therefore “relevant” for many legitimate purposes as to a claimant's sources of income, earnings, salary, wages from any form of employment, ownership interests in businesses, and business assets. 

However, while “relevant,” tax returns and other financial documents are also “privileged” under both federal and state law. So, when do they need to be disclosed?

When Privilege Does Not Apply?

The privilege that protects disclosure of tax returns does not apply when (1) there is a voluntary and intentional waiver of the privilege by the insured; (2) the disability claimant places his/her income and financial circumstances “at issue”; or (3) there are strong public policy interests that require disclosure.

In many instances, disclosure of tax returns is required and not privileged because the insured has placed his/her income “at issue” by filing a disability claim and receiving benefits.  

Look at the Language of the Policy

Many disability policies provide for discovery of tax returns and similar financial documents in the “Proof of Claim” section of the policy. The “proof of claim” is the paperwork that must be submitted to the insurer to give notice of a disability claim and begin the administrative process of evaluating that claim.

In the Proof of Claim section, there is usually specific language as to what financial documents you are required to disclose. It is important to carefully review this section of the policy. When an insurer asks for tax returns and other financial documents, these requests may be overly broad and beyond the scope of what the policy provisions authorize. If that is the case, you may not have to provide this information.

While disability insurers are mostly interested in your monthly income, some insurers may ask for more than that and for a period that may be 5 years or more.  Some insurers have been known to request financial audits.

In general, you have an obligation to cooperate with an insurer who is requesting tax returns and other records, but if the request is overly broad or unreasonable, you may be able to limit the scope of the request to what is more reasonable.

Release of Information

An insurer may ask you to authorize the release of the medical information contained in your medical records, which is routine. However,  some insurers may ask you to sign an authorization that releases your personal and financial information, which may allow your insurance company the right to get not only your medical records but also your financial records and to call your doctors or other third persons to snoop into your affairs.

Therefore, it's important to review the scope of any “authorization” that you sign or have signed to release your medical, psychiatric, financial, or personal information. While you want to be cooperative, you don't want your insurance carrier to unreasonably intrude into your private affairs. What documents you are obligated to produce will depend on the specific language in your insurance policy, and in any authorizations that you sign.

Conclusion

For a variety of legitimate reasons and as part of their due diligence, insurance carriers are entitled to look at your tax returns and related financial records, when paying disability benefits. They will not simply take your word for it and will require proof. While you should be compliant with an insurer's reasonable requests for information, you do not need to comply with a request that is overly broad, not relevant, or an unreasonable invasion of your privacy rights.

At Law Med, we are knowledgeable and experienced in dealing with long-term disability (LTD) insurers.

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