By Mark F. Seltzer, Esq.
Do you have group long-term disability coverage that pays you if you become disabled? If you get sick or hurt, are you relying on that group LTD policy to pay you benefits? If you do, don’t count on it. There are three primary reasons for this: (1) inferior contract language, (2) ERISA, and (3) relevant court decisions. If you become disabled, you may be in for the fight of your life. But unfortunately, while disabled, when you are most vulnerable, is the worst time to mount a fight against the big insurance company. As you read this article, think how you may become better prepared to deal with this potential problem.
There is no question that one of the hottest topics in disability insurance law is ERISA, and the application of ERISA, to group long-term disability policies. ERISA, which stands for the Employee Retirement Income Security Act, was passed in 1974 by the legislature and enacted for the purpose of protecting employee benefits for plan participants. Unfortunately, this has not been the case. Generally, group policies are subject to the ERISA regulations.
Each policy from each insurer is very specific as to its provisions that need to be satisfied in order to obligate the insurer to pay you benefits. Therefore, it is extremely important that you become familiar with the policy and have a strong understanding of the contract language. There is a reason that LTD policies cost on average about one-sixth of the premium for a quality individual insurance policy: group policies are designed to limit coverage and the amount of benefits payable. This is done in many ways, including limited definitions of disability, offsets against benefits, as well as significant limitations and exclusions in the policy. Group coverage is inherently inferior to individual disability coverage.
In effect, the ERISA procedures set up an “administrative process,” which must be satisfied before you have the right to file suit in court. Each policy will provide you with the specific procedure to be followed during the claims process. There are specific time periods within which to submit claims and information in support of claims, as well as when the insurance company (or claims administrator) must decide your claim. Both sides are bound to this procedure. In addition, there is an internal appeals process, in the event of a continued “adverse decision,” relative to your claim. Again, this appeals process is established by ERISA and must be adhered to by both sides. If, after you have gone through the internal appeals process, the claims administrator still maintains its “adverse decision,” and in effect, you have “exhausted your administrative remedies,” you will then have the right to file a lawsuit in court.
What is absolutely critical in considering LTD cases is that the burden of proof that must be met by the insured physician establishes that the claims determination made by the claims administrator after considering the information of record was “arbitrary and capricious.” This is a difficult standard to meet. Sometimes, under certain circumstances, this standard is “heightened.” However, usually, the Court simply reviews the administrative record and determines whether or not there has been an “abuse of discretion” relative to the claims determination.
Important Recent Decisions
Treating Physician Rule. The “treating physician rule” was originally borrowed from social security law, as used in social security disability cases. The rule was arrived at on the basis that the “treating physician,” having a physician-patient relationship, providing hands-on medical care, and having first-hand knowledge of the claimant, is in a better and more informed position to render opinions that need to be considered in a disability determination. Therefore, “deference” was given to the treating physician’s opinions in making a disability determination. Many of the US Circuit Courts followed the treating physician rule and applied it to ERISA cases. However, concurrently many Circuit Courts did not. This inconsistency, as it applied to the federal statute, was – unfortunately – ultimately clarified on appeal to the US Supreme Court by Justice Ginsburg on May 27, 2003. In Black & Decker Disability Plan v. Nord, the Supreme Court of the United States held that “ERISA does not require plan administrators to accord special deference to the opinions of treating physicians,” therefore, effectively ending the use of the treating physician rule in ERISA-governed claims.
Bad Faith. Black’s Law Dictionary defines bad faith as, “the opposite of good faith, generally implying or involving actual or constructive fraud, or a design to mislead or deceive another, or neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive.” In 1990, Pennsylvania enacted a bad faith statute relating to insurance carriers. Prior to 1990, there was no such codified statute in Pennsylvania.
However, notwithstanding the legislative-created cause of action, the question has always remained as to whether or not ERISA, a federal statute, “pre-empts” and therefore excludes the state bad faith cause of action. In addition, the statutory language also posed the issue in a state court in Pennsylvania as to whether or not a plaintiff, with a bad faith cause of action, has the right to a jury trial. This issue was recently decided by the Pennsylvania Supreme Court, in the case of Mishoe v. Erie Insurance, where the Court held that there was no such right to a jury trial.
The pre-emption issue as to state bad faith has created a major problem for both those attempting to bring bad faith causes of action as well as those defending same. Decisions have been rendered by different District Courts throughout the country concluding totally different positions on virtually the same given set of facts. There is no question that the trend in most District Courts was in favor of pre-emption. To say the least, the issue has been the source of much argument and confusion. In Pennsylvania, one District Court Judge in a 2002 decision, Rosenbaum v. UNUM, ruled that the Pennsylvania bad faith statute was not pre-empted by ERISA and varied from the traditional criteria upon which pre-emption was determined. However, other Eastern District Court decisions, following Rosenbaum, with virtually the same issue, found in favor of pre-emption applying the traditional criteria.
On April 2, 2003, the United States Supreme Court, in the case of Kentucky Association of Health Plans, Inc., et al. v. Miller, considering the issue of ERISA pre-emption of state law – albeit, not specifically dealing with the issue of state bad faith – effectively changed the criteria upon which pre-emption is based. This decision then paved the way to revisiting the issue which had never been definitively determined. It appeared to this writer that the door had effectively been unlocked to allow a state bad faith cause of action in an ERISA-governed disability claim. However, in the case of Morales-Cevallos v. First UNUM Life Insurance Company of America, decided on May 28, 2003 by the US District Court for the Eastern District of Pennsylvania, it was held that the Pennsylvania bad faith statue was pre-empted by ERISA, notwithstanding the Supreme Court decision of Kentucky v. Miller.
More recently, on August 1, 2003, the 9th Circuit Court of Appeals ruled that a state bad faith cause of action, stemming out of an LTD claim, is pre-empted by ERISA in Elliot v. Fortis Benefits Insurance Company.
In addition, in view of Kentucky v. Miller, reconsideration of Rosenbaum v. UNUM was requested. On September 8, 2003, upon reconsideration, the District Court Judge upheld his decision. He found that ERISA, and ERISA’s “savings clause,” meant all along that state laws, including the Pennsylvania bad faith law, which “regulate insurance” are not subject to pre-emption and that his decision was consistent with that of Kentucky. Unfortunately, within a week after the Judge’s decision, and prior to the anticipated appeal to the Court of Appeals, which decision would have trumped the District Court decisions, the case was settled. This, in effect, perpetuated the confusion as to ERISA pre-emption of state bad faith law in ERISA-governed disability claims.
However, concurrently, in Oklahoma, in the case of Conover v. Aetna US Health Care, a case that was decided prior to Kentucky, a petition for writ of certiorari has been filed to the US Supreme Court. In Conover, the 10th Circuit US Court of Appeals held that ERISA pre-empts Oklahoma’s bad faith law. Hopefully, this issue will once and for all be decided by US Supreme Court, and the confusion will be resolved.
There is one more important issue relative to bad faith that needs to be discussed. In State Farm v. Campbell, another US Supreme Court decision, which was decided on April 7, 2003, the Supreme Court struck down a large jury award for bad faith damages stemming from State Farm’s actions in its handling of a motor vehicle accident matter. The Supreme Court has mandated the application of three rules in considering punitive damage awards. The court also has apparently established a ceiling of a single digit ratio of punitive damages to compensatory damages. This case, when taken in conjunction with the Mishoe case, largely nullifies jury participation in considering bad faith issues.
The Bottom Line
It’s now time for you, the insured physician, to understand the hard, cold reality of prosecuting a group LTD claim.
There is no question that the current trend in the sales of disability insurance, as well as the high growth area in disability insurance, is group policies. On the surface, this seems to make sense. After all, most group policies are offered by employers (usually hospitals) as an employee benefit. The “policy” is usually part of a greater employee benefit plan, which is part of a benefit package that most physicians are quite happy to have. The “policy,” per capita, is cheaper, easier to sell, easier to administrate, and in every way more profitable for the insurance company, as opposed to individual disability insurance policies.
However, what you may not realize is that the benefits, especially in view of the policy provisions, are far inferior to the benefits in an individual policy, especially those sold in the 1980s and early 1990s.
But wait, it gets worse. Not only are the group benefits inferior, but the very same ERISA procedures enacted as a built-in safeguard for plan participants have been used to sabotage claims. The ERISA procedures in concept were sound and made sense. The insured had the ability to perfect a submitted otherwise defective claim because, under ERISA, the carrier upon arriving at an adverse decision is required to provide the insured with an explanation for its decision as well as any documentation upon which it relied in making its determination. This gave the insured physician multiple opportunities to perfect his/her disability claim by curing the defect.
However, this very same procedure has been used by the carrier for the exact opposite purpose in order to defeat that same claim. Because of the fact that the Court, upon appeal, will most often only review the administrative file, and further, because the standard of review is usually that of arbitrary and capricious, the insured is forced to produce all evidentiary documentation at the administrative level and during the administrative appeals procedure. This allows the insurance company to simply take a defensive posture in “sitting back” and picking apart the insured physician’s completed claim.
And, even worse, in view of the fact that there is no longer the use of the treating physician rule in order to “level the playing field,” as long as the insurance carrier follows the “yellow brick road” map by having its team of internal medical consultants and “experts” properly address the claimant’s medical documentation, it could be virtually impossible to overturn the group carrier’s decision to deny or terminate a claim.
And now, the final coffin nail. The bottom line here is profit and an unpoliced profit motive. If the Supreme Court rules in favor of pre-emption and therefore holds that there is no right to a state bad faith claim under ERISA, it will continue to allow the “icing on the cake.” Therefore, not only does (and will) the insured-physician have an untenable burden in prosecuting and prevailing on these claims, with virtually every tool at the insurance company’s disposal but, in addition, the Courts will in effect be condoning the use of any claims practice to defeat the claim. And, what is the worst case scenario for the insurance carrier? Most likely, holding on to the insured’s money for an additional year or two.
If you have a group LTD policy, if you become disabled, and if you expect to collect benefits under that policy, you need to know your policy and the application of ERISA like the “back of your hand.” You will have to anticipate every company strategy that will be employed to defeat your claim. You will have to proceed in the face of a “mine field” of unfavorable court-decisions. And, you will have to “paper the file” with the “sun, moon and stars”.
The essence of an arms-length good faith business transaction is to get what you bargain for. The problem with ERISA-governed disability policies is that the insured physician most often does not know or understand the bargain. There is an old maxim that says “you get what you pay for.” But, between the group LTD policy language, the internal ERISA claims process, the insured’s burden of proof in a lawsuit, the flurry of insurance company-favorable court decisions, and the trend towards (and possibly permanent) pre-emption of state bad faith, it will be extremely difficult to get anything that is paid for. That little “lamb” can’t wait to sink its “teeth” into your claim. I think this will give you food for thought.
Mark F. Seltzer, Esq., is an attorney practicing in Philadelphia, Pennsylvania, representing physicians and professionals in disability insurance claims.