After examining the UNUM/Provident scandal involving denials of meritorious disability claims, John Langbein concludes that, in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), the U.S. Supreme Court erred by allowing ERISA plan sponsors to place deferential language in policies in order to restrict judicial review. Langbein suggests that the Supreme Court correct its mistake in order to prevent wrongful denial of legitimate disability claims. Langbein finds that the trust law concepts in ERISA are used in order to restrict the employer’s autonomy over employee benefits plans; thus, the law should not allow an ERISA plan sponsor to alter the standard of judicial review.
When processing a disability claim, insurers look at how impaired or how employable an insured is. The policy defines whether an employee is able to resume employment. There are moral hazard dangers that an insured may falsify his condition to receive the benefits, increasing costs to the insurer.
Most disability plans are governed by ERISA, which preempts state law and does not allow recovery of punitive damages.
In Bruch, the Supreme Court found that the default standard of review for ERISA cases is a de novo standard of review. However, the Court found that an ERISA plan drafter could insert a term that required courts to give deference to the plan administrator’s decision. Finally, the Court noted that where there was a conflict of interest, such a conflict must also be weighed.
Beginning in the 1990s, Unum/Provident Corp. employed cost-containment measures that were eventually investigated by news programs. The measures involved pressuring claims-processing employees to deny valid claims. In the news programs, Unum employees revealed that the claims that were most often denied were those involving illnesses such as chronic pain, migraines or Parkinson’s because they were not discoverable by X-rays or MRIs.
Further, many employees who did not comply with Unum’s practices brought wrongful dismissal suits. For example, Dr. Patrick McSharry, an Unum staff physician, claimed that Unum forced him to review so many claims that he could not analyze them properly and instructed him to use language that would support denials. Unum also did not allow McSharry to request further information about an insured or suggest additional tests.
Many state insurance commissions began to investigate Unum’s practices. The investigations revealed that Unum engaged in systematic irregularities in obtaining and evaluating the medical evidence of a disability. Unum agreed to pay $15 million in fines to a group of several states, reopen several years’ worth of denied claims, and make changes in its claims review process. Unum settled separately with the California Department of Insurance for $8 million.
Many federal courts have noted Unum’s claims denial practices, even opining that Unum’s practices were almost fraudulent. Such courts have found that Unum’s pattern of aggressive claims denial was made in bad faith. In one non-ERISA case against Unum for bad faith claims denial, a jury awarded the plaintiff $5 million in punitive damages.
Discovery in various proceedings against Unum revealed that an Unum executive wrote a memorandum exulting the enormous advantages of ERISA, namely the deferential standard of review allowed under Bruch. The memorandum also cited the advantages of preemption of state law, no jury trials, no compensatory or punitive damages under ERISA.
The author suggests that the Supreme Court erred by allowing plan drafters to defeat the de novo standard of review in ERISA-governed benefits cases, noting that the trust law upon which the Court relied was unsound because ERISA was created to regulate and limit private autonomy, not to increase autonomy as in trust law. The author suggests that the Court correct its mistake in Bruch by adopting a burden-shifting rule that would require the fiduciary to prove that its interpretation of a plan was not prompted by self-interest.
Source: Insurance Law and Litigation Week, 01/07/2008
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