Prudential Denies Disability Benefits Based On Severance Agreement

The case Thomas v. The Prudential Insurance Company of America, 2018 WL 211 118020, US Dist. Ct. E.D. Pennsylvania, is a reminder of how important it is to understand the implication and consequences of all terms in a severance agreement. When drafting a severance agreement to be signed by a departing employee, employers include broad language designed to protect them as well as their agents, affiliates, fiduciaries, etc. from any future claims or liabilities, whether known or unknown. The result is that by signing the agreement and taking the severance payment, an employee may forever waive their right to legitimate claims or benefits which arose prior to their termination date.

In the Thomas case, Michael Thomas was employed by the East Texas Medical Center Regional Healthcare system and participated in in long term disability benefits plan (“the Plan”). The Plan is an employee benefits plan which falls under the Employee Retirement Income Security Act of 1974 (ERISA). At the time Mr. Thomas signed a Separation Agreement and General Release (“the Agreement”) with East Texas Medical Center, he was ill and admitted that his disability was the reason he was leaving. In exchange for $177,580 severance pay, Mr. Thomas signed the Agreement which released all “Claims” against East Texas Medical Center and other “Released Parties”. Released Parties was defined to include insurers, fiduciaries, employee and welfare benefit plans, plan sponsors, plan administrators, plan fiduciaries and all others in privity with them.

Mr. Thomas applied for disability benefits based on a medical condition that preceded his termination date and which was the cause of his decision to stop working. When Prudential refused to admit coverage or pay benefits, Mr. Thomas filed a lawsuit. In response, Prudential filed a Counterclaim asserting it was not obligated to cover Mr. Thomas under the LTD Plan or pay benefits based on the language of the Agreement. Mr. Thomas filed a Motion to Dismiss Prudential’s’ Counterclaim. In its Counterclaim, Prudential asserted that as a “plan fiduciary” and “insurer” of East Texas Medical Center it is a Released Party under the Agreement and therefore released from any and all claims that may be owed to Mr. Thomas under the Prudential LTD policy provided to him as an employee. Mr. Thomas argued that Prudential’s own Plan terms obligated it to cover Mr. Thomas and that Prudential is not actually a party to or a direct third party beneficiary of the Agreement and thus does not have standing to enforce the Agreement. The Court disagreed with Mr. Thomas and denied Mr. Thomas’s Motion to Dismiss Prudential’s counterclaim.

Severance agreements are designed to protect the interest of the Employer, not the Employee. The attorneys who draft these agreements use all-encompassing language that contemplates any potential claim an employee may raise against an employer. However, the goal of most Severance Agreements is not necessarily to protect the insurance companies which provide insurance policies to the employees or prevent an employee from obtaining insurance benefits to which they became entitled prior to leaving the employer. At Disability Insurance Law Group we have successfully worked with employers to modify severance agreements to protect an employee’s right to seek short term and/or long term disability benefits or stay on claim if they are terminated after their established date of disability. If you have any questions about a severance agreement you are being asked to sign, please feel free to contact us for a free consultation at www.dilawgroup.com or 954-989-9000.