During the litigation, the parties could not agree as to the proper scope of discovery in an ERISA matter.  After the parties presented the dispute the Court, Mr. Evans was permitted to conduct discovery regarding Sun Life’s conflict of interest through written discovery and deposition testimony.

Following the trial, Judge Carney issued a Memorandum of Decision in Mr. Evans’ favor.  While explaining that the Plan’s language mandated that Sun Life’s decision should be reviewed under the more lenient “abuse of discretion” standard of review, the Court found that Mr. Evans presented:

evidence that Sun Life failed to credit Mr. Evans’ reliable evidence, failed to adequately investigate the claim, and failed to ask Mr. Evans for necessary evidence.  As a result, the Court will give considerable weight to Sun Life’s conflict of interest in determining whether it abused its discretion in denying Mr. Evans’ claim.

The Court then explained that despite being presented with medical evidence supporting Mr. Evans’ claim for disability benefits, Sun Life abused its discretion in denying his claim:

In addition to the conflict of interest, the other factors, “the quality and quantity of the medical evidence, whether the plan administrator subjected the claimant to an in-person medical evaluation or relied instead on a paper review of the claimant’s existing medical records, whether the administrator provided its independent experts with all of the relevant evidence, and whether the administrator considered a contrary SSA disability determination, if any,” Montour, 588 F.3d at 630, weigh in favor of a finding that Sun Life abused its discretion.  Specifically, its decisions that Mr. Evans was not disabled until December 13, 2007 and that Mr. Evans was not disabled throughout the elimination period were illogical, implausible, and without support in inferences that could reasonably be drawn from facts in the record because: (1) every doctor who personally examined Mr. Evans concluded that he was disabled and unable to return to his regular work; (2) Sun Life did not subject Mr. Evans to an in-person medical evaluation; (3) Sun Life relied almost exclusively on the deeply flawed assessment by Dr. Himber; (4) and Sun Life failed to engage in a “meaningful dialogue” with Mr. Evans.

In conclusion, the Court ruled that the “evidence in the record overwhelming shows that Mr. Evans was totally disabled prior the date of his termination and throughout the elimination period” and ordered Sun Life “to pay long-term disability benefits to Mr. Evans in accordance with the Policy.”

Robert J. McKennon and Scott E. Calvert litigated the case on behalf of Mr. Evans.

• Rendering a decision without explanation, construing a plan provision in a way that conflicts with the plain language of the plan or relying on clearly erroneous findings of fact. 
• “Hiding the ball” by failing to advise claimants of documents needed to obtain approval of claim and an explanation of why such material or information is necessary, and failing to submit forms to claimant or his doctors that would have elicited the information needed. 
• Overstatement of and excessive reliance upon claimant’s activities in the surveillance videos and conducting a paper review rather than an “in-person medical evaluation.”
• Encouraging participant to file for Social Security Disability Insurance and, when benefits are awarded by Social Security Administration, failing to deal with and distinguish the contrary disability decision.
• Failing to obtain a physician's recommendation and relying on medical reports that are not credible. 
• “Tainting” medical file reviewer in the medical review process by giving the reviewer inaccurate negative information regarding the claimant.
• Failing to consult with a health care professional who has appropriate training and experience in the applicable field of medicine.
• Emphasizing a report that favored a denial of benefits while deemphasizing other reports suggesting a contrary conclusion, and failing to provide its independent experts with all of the relevant evidence.
• Failing to provide all bases for its denial and suggesting alternate reasons for denial after the fact, thereby precluding the claimant from responding to that rationale for denial at the administrative level. 
• Adding new terms to the Plan, particularly when those terms are both imprecise and impose a higher evidentiary burden on a claimant, such as requiring that disability be proved by “compelling objective” evidence.

These are just a select few of the acts that courts have ruled require that the insurer’s decision not be afforded full discretion.  Numerous other actions will also cause a court to review a claim decision with something less than full discretion.  For additional information on this and other insurance matters you can visit the FAQ section of our website:  www.mslawllp.com. 

If you need to consult with an attorney about a possible ERISA or insurance bad faith matter, please contact our office.

Discretionary clauses are provisions typically found in group life, health and disability plans that give the administrator/insurer the sole discretion to interpret the policy and to decide if a plan participant or beneficiary is entitled to plan benefits.  In ERISA cases, federal courts have interpreted these clauses to give administrators/insurers a higher standard of review when courts review their decisions.  This meant that the federal courts were required to give greater deference to decisions denying plan benefits under life, health or disability coverages, rather than weighing all the evidence under a “de novo” standard of review and making their own determination as to whether the insured was entitled to benefits under the policy or employee welfare benefit plan.

In voicing his support for the bill, Commissioner Jones explained:

"Discretionary clauses have been increasingly relied upon by insurers to reject legitimate claims for disability insurance when a consumer becomes disabled - insurers know that many consumers will give up their claim and that those who challenge the claim denial face a very high legal burden to overcome the denial since the discretionary clause vests sole discretion in the insurer to decide if the consumer is disabled.  SB 621 levels the playing field and gives consumers an even chance to prove that they are entitled to disability and other insurance, by eliminating the 'discretionary clauses' that insurers have been putting into their insurance policies."

SB 621 goes into effect on January 1, 2012

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To the Members of the California State Assembly:

I am returning Assembly Bill 1868 without my signature.

This bill would prohibit the Insurance Commissioner from approving any disability or

life insurance policy if it includes a provision that would reserve discretionary authority

to the insurer to determine eligibility for benefits, and voids certain provisions of a policy

or agreement if it provides or funds life insurance or disability insurance coverage.

This bill is unnecessary, as the Insurance Commissioner already has the authority to

prohibit the use of discretionary clauses.

For this reason I cannot sign this bill.

Sincerely,

Arnold Schwarzenegger

California Governor Arnold Schwarzenegger has the opportunity to sign California Assembly Bill 1868 (“AB 1868”) and to prohibit these discretionary clauses.  In the recent case of Standard Insurance Company v. Morrison, the Ninth Circuit Court of Appeals ruled that the California Insurance Commissioner has the authority to disapprove any disability insurance policies that contain discretionary clauses.

WASHINGTON BUREAU -- The long-term disability insurance (LTD) industry took a licking today during a Senate Finance Committee hearing.

Senate Finance Committee Chairman Max Baucus, D-Mont., said LTD insurers have doctors with conflicts of interest review claims.

“Many of these doctors are employed either by the insurance company or by companies that do a lot of business with the insurance company,” Baucus said. “These arrangements make it far too easy for the doctors to deny claims, terminate claims, or reject appeals.”

Ronald Leebove, a rehabilitation counselor who appeared for the American Board of Forensic Counselors, Springfield, Mo., said private group LTD policies fail to provide the protection insurers promise.

“There are many tricks and tactics used by the insurance companies to deny claims,” Leebove said.

Several witnesses talked about employers’ and insurers’ use of Employee Retirement Income Security Act (ERISA) provisions to give plan administrators’ discretion over LTD benefits decisions, and to ward off challenges of benefits determinations.

Mark DeBofsky, a partner at Daley, DeBofsky & Bryant, Chicago, a law firm, said the courts have gone against legislative intent and transformed ERISA into “a shield that protects insurance companies from having to face the consequences of unprincipled benefit denials and other breaches of fiduciary duty.”

In most cases involving LTD claim disputes, there is not even a trial, DeBofsky said.

“Instead,” DeBofsky said, “courts conduct reviews of claim records assembled and shaped by self-serving insurance companies without hearing any testimony whatsoever, under a procedure that gives more deference to the insurance company than a court would give a Social Security administrative law judge in its review of a Social Security disability benefit claim denial.”

Judge William Acker Jr., a senior district court judge in northern Alabama, testified that the “courts have not rescued ERISA” in its handling of long-term disability cases. “If anything, they have dug the ERISA hole deeper,” Acker said. “ERISA jurisprudence will stay as messed up as it is unless Congress reworks it.”

Paul Graham, a senior vice president at the American Council of Life Insurers (ACLI), Washington, defended disability insurers.

Disability insurance can be susceptible to fraud and abuse, and many states have passed regulations that require short-term disability (STD) insurance and long-term disability disability insurance companies to report instances of suspected fraud, Graham said.

“While fulfilling their contractual and regulatory responsibilities, insurers need to remain attentive to potentially fraudulent claims,” Graham said.

Therefore, he said, an eligibility determination, whether made by the insurance carrier or other fiduciary, is only valid for the information at that point in time and must be periodically re-evaluated to account for changes in the claimant’s condition.

Graham said a 2008 industry study that included a majority of group disability carriers found that 79% of submitted claims were approved.

Of those claims not approved, over 25% were not paid because the claimant recovered too quickly to collect benefits, Graham testified.

Sacks v. Standard Ins. Co., __ F. Supp. 2d __, 2009 WL 4307558 (C.D. Cal. 2009) is one of the first cases to address the abuse of discretion standard of review since the Ninth Circuit’s important decision in Montour.  In Sacks, the claimant was a mortgage underwriter for Countrywide Home Loans.  Standard Insurance Company (“Standard”) was the claims administrator and insurer for the Countrywide Home Loans Long Term Disability Plan (the “Plan”).  After her claim for long-term disability benefits was denied, the claimant sued Standard Insurance in federal courts for benefits under the ERISA.

The court recognized that the Plan granted Standard with discretionary authority.   However, since Standard provided the funds and made the decision concerning benefits, it operated under a structural conflict of interest.  At issue was how to apply the standard of review in light of the conflict of interest and the recent Ninth Circuit opinion in Montour.  Here, the court recognized that the “abuse of discretion” standard of review does not change just because there is a conflict of interest.  Instead, the factual circumstances surrounding the conflict of interest is a factor providing weight in the overall analysis of whether an abuse of discretion occurred.  As a result, the court in Sacks gave greater weight to the conflict of interest for a variety of reasons including because Standard used an erroneous occupation criteria to evaluate Plaintiff’s claim, failed to consider the effects of the claimant’s medication on her ability to perform her own occupation, and failed to adequately investigate the claim.  In addition, the court highlighted the fact that Standard failed to conduct follow-up testing as recommended by the IME physician and instead merely accepted the part of the physician’s conclusion that supported its claims decision.  These actions, the court found, warranted greater skepticism of Standard’s claims decision.  Accordingly, the court found that Standard had abused its discretion and reversed the claim decision by awarding the plaintiff benefits.

Expect to see more district courts to focus their analysis on these and other self-interest factors as they assess how much weight to give to an insurer’s conflict of interest.   Also expect to see more district courts applying the Montour analysis to find that administrators have acted in a manner that evidences their self-interest and to award more ERISA participants their benefits under insured benefit plans.