McKennon Law Group, Author at McKennon Law Group

On April 25, 2011, California Insurance Commissioner Dave Jones and California State Controller John Chiang announced that they are investigating Metropolitan Life Insurance Company (“MetLife”) for a failure to pay out life insurance benefits after learning of an insured’s death. It appears that while MetLife learned of its insured’s deaths through a database prepared by the Social Security Administration called “Death Master,” which lists all Americans who die, MetLife failed to use this information to pay legitimate claims.

As noted in the California Department of Insurance’s Press Release:

The Commissioner and the Controller are responding to preliminary findings from an audit the Controller launched in 2008, indicating that for two decades, MetLife failed to pay life insurance policy benefits to named beneficiaries or the State even after learning that an insured had died. The company has a huge number of so-called Industrial Policies, valued at an estimated $1.2 billion, which were primarily sold in the 1940s and 1950s to working-class people. The payments, which were collected weekly, typically were higher than the final death benefit. The Controller’s unclaimed property audit indicates that MetLife did not take steps to determine whether policy owners of dormant accounts are still alive, and if not, pay the beneficiaries, or the State if they cannot be located.

In addition, the preliminary findings revealed that MetLife may have similarly failed to contact the owners of annuity contracts:

Simultaneously, the preliminary findings show, when MetLife knew that an owner of an annuity contract – which generates income for the policy owner at the time the annuity matures – had died, or the annuity had matured, the company did not contact the policy holder or beneficiary, even though it subscribed to the “Death Master” database. Furthermore, MetLife continued making premium payments from the policy holder’s account until the cash reserves were used up, and then cancelled the contract.

While Monday’s press release was limited to the State’s investigation of MetLife, both the “Commissioner and Controller believe that these practices are not isolated, but are systemic in the insurance industry.”

If you believe you have a life insurance policy or annuity issued by MetLife, or any other insurer, for which you have failed to properly receive life insurance benefits, contact McKennon Law Group PC for a free consultation.

Terrance Burnett was eligible for short-term disability (“STD”) benefits and long-term disability (“LTD”) benefits through employee welfare benefit plans funded by his employer, The Raytheon Company, and administered by Metropolitan Life Insurance Company (“MetLife”). After his doctors stated that Burnett’s psychiatric condition prevented him from performing his job duties, he filed a claim for STD benefits. While, MetLife denied his claim for STD benefits, in Burnett v. Raytheon Co. Short Term Disability Basic Benefit Plan, 2011 U.S. Dist. LEXIS 40725 (C.D. Cal. Apr. 14, 2011), Judge Dolly Gee ruled that MetLife abused its discretion when it denied Burnett’s claim, and awarded him the STD benefits he sought. In addition, the court held that Burnett was eligible for some LTD benefits, even though he had yet to file an LTD claim.

In ruling that the medical records supported Burnett’s claim, the court Gee criticized the findings of MetLife’s so-called “independent” expert Dr. Mark Schroeder, a psychiatrist. Specifically, the court determined that “Dr. Schroeder arbitrarily discounted the opinion of Dr. Friedman, the treating physician whom Burnett saw weekly, and distorted the importance of the progress reports submitted by Dr. Anderson. Further, the court held that Dr. Schroeder “overemphasized the significance of Dr. Anderson’s February 20 and March 19 progress reports to the exclusion of the overwhelming weight of the evidence in the record, including the characteristics of the job that Burnett previously occupied and the corroborating results of the MMPI-2.”

Overall, the court classified Dr. Schroeder’s findings as “unreasonable” and awarded Burnett “STD benefits for the maximum 10-week period—from February 15 through April 25—because the evidence clearly shows that Burnett qualified as fully disabled during that time period.”

In addition, the court held that Burnett was entitled to LTD benefits, despite the fact that because he had yet to file a claim for LTD benefits, he could not have met ERISA’s requirement that a claimant exhaust his administrative remedies. The court ruled that requiring Burnett to exhaust his administrative remedies with respect to his LTD claim would have been futile:

17. The general exhaustion rule covering ERISA claims requires a claimant to “avail himself or herself of a plan’s own internal review procedures before bringing suit in federal court.” Diaz v. United Agr. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995) (citing Amato v. Bernard, 618 F.2d 559, 566-68 (9th Cir. 1980)). The general rule of exhaustion, however, is not a statutory requirement, and a court “may waive the exhaustion requirement, and should do so when exhaustion would be futile.” Horan v. Kaiser Steel Ret. Plan, 947 F.2d 1412, 1416 (9th Cir. 1991) (citing Amato, 618 F.2d at 568).

18. The Court finds that, under the facts of this case, Burnett’s exhaustion of the LTD administrative remedies would have been futile for the following reasons. First, the definitions for “fully disabled” for purposes of STD benefits and LTD benefits are substantially the same. (A.R. 7, 39.) Second, the STD and LTD plans are integrated, such that they rely on and refer to each other. (A.R. 40.) MetLife’s termination of Burnett’s STD Plan benefits essentially doomed any claim he might have to LTD Plan benefits. Finally, because MetLife is the designated Claim Administrator under both the STD and LTD plans (A.R. 6, 38.), the plans are administered by the same entity. In light of the foregoing—considered together with MetLife’s unwavering denial of Burnett’s post-March 13 STD benefits—MetLife likely would have denied any LTD benefits claim Burnett submitted for the same reasons it terminated his STD benefits claim.

19. Finally, the Court considers the policy implications of the exhaustion doctrine, which include “the reduction of frivolous litigation, the promotion of consistent treatment of claims, the provision of a nonadversarial method of claims settlement, the minimization of costs of claim settlements and a proper reliance on administrative expertise.” Diaz, 50 F.3d at 1483. None of these policy considerations preclude the Court from applying the futility exception to the facts of this case. To require Burnett to submit a written claim for LTD benefits—which would be subject to a denial similar to that of his STD benefits claim—only then to require him to exhaust his administrative appeals and then possibly return to this Court, would exalt form over substance and defeat the fair and efficient administration of justice.

The court therefore awarded Burnett LTD benefits through July 1, 2008, the date of the more recent medical record in the Administrative Record.

Finally, the court’s ruling in also interesting for its analysis of MetLife’s conflict of interest. Previously, courts generally held that if a plan was self-funded – that is, benefits were paid by the employer, not the insurer/claims administrator – then there was little danger that the administrator’s claim decision was improperly impacted by an interest in reducing the amount of claims it paid out. Here, however, the Court noted that:

Although no structural conflict of interest exists, MetLife does maintain a contract with Raytheon to provide claim administration services under Raytheon’s disability benefit plans. Thus, MetLife has an incentive to maintain that contract by keeping the cost of Raytheon’s disability benefit program low. This is but one factor the Court weighs in determining whether MetLife abused its discretion in terminating Burnett’s STD benefits beyond March 13. See Abatie, 458 F.3d. at 967 (noting that the Court’s abuse of discretion review is to be informed by the nature, extent, and effect on the decision-making process of any conflicts of interest).

Thus, claimants must always be aware that a claims administrator’s decision could be improperly influenced, not only by a desire to pay our less in claims, but also to keep the employers as a customer.

It will not be surprising to many readers of this blog that insurance companies often deny life insurance, health insurance and disability insurance claims. Many times, insurance companies are wrong in their decisions. And, sometimes they acknowledge their mistakes. The question becomes: what are the odds of an insurance company changing its mind and reversing the decision? Our firm knows firsthand that the odds are extremely good when a reputable and respected law firm is involved in representing the policyholder’s interests. But that is just our experience. What is the overall experience when a health insurance claim is denied and a subsequent appeal is filed? We now have our answer.

In his article entitled “Don’t take a health insurer’s rejection as the final word on your medical claim,” Tom Murphy of the Associated Press cites a recent report from the Government Accountability Office which found that overall, appeals have an approximately 50% success rate. The article lists a number of actions policyholders can take to increase the likelihood of success on appeal. Murphy mentions obtaining and submitting copies of the entire medical file, enlisting a treating doctor to write letters explaining the policyholder’s relevant medical history, understanding policy language, writing a detailed letter with supporting records and information and complying with all deadlines.

The article does not mention that the Employee Retirement Income Security Act (“ERISA”) covers most health insurance appeals. ERISA requires that a plan participant meet certain deadlines in order to qualify for benefits, and also requires that a plan participant appeal a claim denial before he or she may sue. Often times, a plan participant will want to “pad” the administrative record with records and information in support of the appeal and which will be helpful in a later lawsuit, should one be filed. It is often critical that a plan participant hire an attorney to help with this process, as knowing and citing to pertinent federal ERISA law can be the difference between winning and losing an appeal.

Here is Murphy’s article verbatim:

FIGHTING AN INSURANCE CLAIM DENIAL CAN PAY OFF

By Tom Murphy, The Associated Press
Published Friday, April 8, 2011

INDIANAPOLIS — Don’t take a health insurer’s rejection as the final word on your medical claim.

Appeals can have a surprising success rate if patients shape a good argument with help from their doctor, some research and a healthy dose of persistence. Insurers always offer at least one chance to appeal when they deny a claim. Here’s how to make your case.

For starters, what are the odds of success?

A recent report from the Government Accountability Office found a 50 percent success rate of appeals to insurers in some states.

Insurance companies often make the initial decision to deny a claim based limited information like a diagnosis or procedure code from a claim form the doctor submits. They rarely see a patient’s file for that first decision, said Jennifer Jaff, executive director of Advocacy for Patients with Chronic Illness Inc., a non-profit that helps patients with claim denials.

“When you provide them with additional clinical information … it may turn out to be a very easy decision for them,” she said.

What are the first steps to take after receiving a rejection?

Learn as much as you can about the reason. Get the policy language and any information the insurer used to make its decision. Patients are entitled to this, so persist if the insurer moves slowly.

It’s also important to know the insurer’s appeal process. This should be laid out in the letter you receive telling you about the rejection. Understand the deadlines for appealing.

“These deadlines are serious,” Jaff said. “I’ve never seen an insurance company grant an extension.”

How do you build your case?

Write a detailed argument with records backing up your claims. Enlist your doctor’s help.

If the insurer says it doesn’t have to pay because your condition existed before your coverage began, a doctor may be able to argue otherwise.

The insurer may say the treatment isn’t medically necessary. Your doctor can illustrate how all alternatives were exhausted before you started receiving the treatment in question.

Rely on more than just a doctor’s statement.

“Insurance companies do not assume everything a doctor says in a letter is 100 percent true and accurate,” Jaff said. “What they really want to see are the medical records.”

Patients should be prepared to send their insurer any of those confidential records that would support their case.

If the insurer deems a treatment experimental, some additional research may be needed, and your doctor can help there as well. Medical journal articles can show an insurer that your treatment is a widely accepted practice.

If the doctor is unwilling or unavailable for help, Jaff recommends for research the National Institutes of Health website www.pubmed.gov . Patients can use it to search medical journals around the world for articles on their treatment.

Abstracts, summaries and some articles are free. Those that are not can be pricey, costing between $30 and $50 to buy online. But patients also can check with a medical library near them for copies.

Asking for a compassionate allowance can be another strategy for patients. Some insurance policies will make exceptions to cover something if it could be lifesaving.

An employer that offers a self-funded plan also might be persuaded to overrule the insurer and permit coverage, but Jaff said this is rare. Self-funded plans are generally used by big employers. In those cases, they provide the actual insurance and the managed care company just administers the plan.

Ask your human resources department if your company plan is self-funded.

What are the keys to a successful appeal?

Keep your emotions out of the argument and give the insurer something new to consider. Avoid rehashing information the company already has.

“It’s a business decision, it’s not personal on the insurer’s side,” said Pat Jolley of the Patient Advocate Foundation, another non-profit that helps people handle payment problems.

Know your insurer’s appeal process. Some may offer a couple rounds of internal reviews and provide a specialist to examine your claim. That means you can have an oncologist review your claim for cancer treatment.

Keep detailed notes of your contact with the insurer, including which representative you spoke to and when.

Send appeals by certified mail to document when an insurer receives them in case the company later claims you missed a deadline.

Communicate in writing whenever possible. This keeps you from having multiple phone conversations with different insurance representatives who provide different answers.

Stranger Originated Life Insurance, also known as a “STOLI,” is a life insurance policy financed or held by a person who has no relationship to the person insured under the policy. In the typical STOLI transaction, an investor encourages an elderly person to purchase a life insurance policy and name the investor, who pays the premiums, as the policy beneficiary. Normally, the elderly insured is also paid a sum of money to entice them to enter into the transaction.

In late 2010, the Central District of California issued two rulings, a few weeks apart that help explain the propriety of STOLI transactions in California. They were: SEC v. Private Equity Mgmt. Group, LLC, 2010 U.S. Dist. LEXIS 126337 (C.D. Cal. Nov. 18, 2010) and Ohio Nat’l Life Assur. Corp. v. Davis, 2010 U.S. Dist. LEXIS 130510 (C.D. Cal. Dec. 1, 2010).

In Private Equity Management Group, the SEC, after the appointment of a permanent receiver, obtained an August 2009 preliminary injunction preventing any suit against PEM without leave from the court. In September 2010, Principal Life Insurance Company (“Principal Life”) sought leave to file an action against the receiver of PEM in order to challenge “the validity of an insurance policy issued on the life of Barbara Doricott … which was among PEM’s investment life insurance policies.” Principal Life sought to void the policy on the grounds of fraud and “a lack of insurable interest.”

In determining whether or not to lift the stay, the court applied a three-factor test from SEC v. Wencke, 622 F.2d 1363 (9th Cir. 1980): “(1) Whether refusing to lift the stay genuinely preserves the status quo or whether the moving party will suffer substantial injury if not permitted to proceed; (2) the time in the course of the receivership at which the motion for relief from the stay is made; and (3) the merit of the moving party’s underlying claim.”

In applying the last of the Wencke factors, the court found that Principal Life had a “colorable claim” justifying a lifting of the stay. The court placed credence in Principal Life’s contention that the life insurance policy was void because it lacked an insurable interest:

Likewise, although it is unclear whether the Policy would ultimately be deemed void for lack of an insurable interest, the Court finds that Principal Life has alleged a colorable claim to that effect. In opposing Principal Life’s motion, the Receiver relies on Lincoln Nat. Life Ins. Co. v. Gordon R.A. Fishman Irrevocable Life Trust, in which the court held that life insurance policies were not void for having been procured by STOLI practices where the trust, its settlor, and its beneficiaries had insurable interests in settlor’s life at time of inception. 638 F. Supp. 2d 1170, 1177 (C. D. Cal., 2009) (“an interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs.”).

* * *

Ms. Dorricott’s daughter allegedly sold 1% of the interest in the policy less than three weeks after the policy was issued. Thus, while further factual development is necessary to establish whether the Policy is actually void for lack of insurable interest, based on the forgoing, the Court finds that Principal Life’s claim has sufficient potential merit to satisfy the third Wencke factor.

In Davis, supra, the defendant, an attorney, allegedly obtained two life insurance policies (“the Policies”) for two insureds (Smith and Griffin) with each life insurance policy providing a death benefit of $1,000,000.00. Davis also set up two irrevocable life insurance trusts (collectively, “the Trusts”). The owners were the Trusts, Davis was the trustee, and the insureds’ wives were the beneficiaries. Ohio National filed a Motion for Preliminary Injunction, seeking an order to enjoin any policy changes. The Court, in ruling on the preliminary injunction, had to consider the “likelihood of success on the merits.”

In evaluating whether Ohio National met this test, the court first noted that under California law (specifically California Insurance Code section 280), “no life insurance contract is valid unless the insured has an ‘insurable interest.’” The court explained that the critical question was whether the Trusts had an insurable interest in the insureds because it was the Trusts that obtained the life insurance policies. The court determined that the Trusts used to apply for the Policies presumably had insurable interests in the lives of the Insureds because the beneficiaries of the Trusts were the insureds’ wives. See Cal. Ins. Code § 10110.1(a). However, the court aptly explained that under California Insurance Code section 10110.1(e) “[a]ny device, scheme, or artifice designed to give the appearance of any insurable interest where there is no legitimate insurable interest violates the insurable interest laws.” Specifically, any arrangement by which a life insurance policy is initiated for the benefit of a “third party investor” who has no insurable interest in the insured’s life at the time the policy is issued is deemed a STOLI, which is a prohibited “fraudulent life settlement act.” See Cal. Ins. Code §§ 10113.1(w), 10113.2, 10113.3(s). The Court further explained:

Ohio National presents allegations that strongly support inferences that the Policies were indeed STOLIs.

To begin, Ohio National alleges that Davis solicited and induced Griffin and Smith to apply for life insurance policies promising no premium payment obligations yet receiving payments for their participation. In the process, Griffin and Smith were convinced to sign irrevocable trusts naming Davis as the trustee and the Trusts as owners of the Policies. Morady seemingly rubber stamped the life insurance applications without ever seeing the proposed Insureds or examining their financial records. In addition, Davis, as trustee, was given unfettered discretion to purchase life insurance policies and to borrow money for the same. Further, Davis was given the power to assign the Policies and the proceeds of the Policies to any lender. Accordingly, it seems highly likely that Ohio National would succeed in establishing that the procurement of the Policies were STOLI transactions. Specifically, Ohio National has demonstrated that Davis and Morady did not have insurable interests in the lives of the Insureds yet the Policies were initiated for their benefit. Therefore, based on the unopposed papers and other submissions, Ohio National has established a likelihood of success on the merits.

The court therefore granted Ohio National’s motion for a preliminary injunction.

The State of California’s requirement that a life insurance policy is invalid without an insurable interest at the time of the policy issuance is a very basic and fundamental requirement that is not to be overlooked or underestimated when dealing with STOLI or STOLI-like transactions.

This article will be the first in a series of articles addressing and answering basic questions concerning insurance law. “Bad faith” will be the first concept addressed.

When an insurance company denies a claim, that denial decision might not only be incorrect under the terms of the insurance policy, but also might be in “bad faith.” As a matter of law, every insurance contract contains a covenant of good faith and fair dealing. If this covenant is violated, the insurance company is said to have acted in “bad faith.” A tortious breach of this implied covenant involves something beyond breach of the specific contractual duties or mistaken judgment. To establish a bad faith claim in first party cases (such as those involving life insurance, health insurance, disability insurance, property and casualty insurance, auto liability insurance, and homeowner’s insurance), it must be shown that an insurer’s delay or withholding of benefits under the policy was unreasonable or without proper cause.

In general, policies involving health insurance, life insurance, or disability insurance that are paid for and provided by an employer are governed by the Employee Retirement Income Security Act of 1974 (ERISA), which precludes recovery for insurance bad faith.

When an insurance company acts in bad faith (that is, when an insurance company violates the covenant of good faith and fair dealing), the policyholder or insured can sue the insurance company for both breach of contract and the tort claim of bad faith. In addition to contract damages, damages available under a tort claim for bad faith can include foreseeable financial losses, emotional distress, and attorney’s fees incurred by the insured to force the insurance company to pay the policy benefits (Brandt fees). If the insurance company acted with malice, oppression or fraud, the insured may also recover punitive damages. Punitive damages are meant to punish the insurer, and are not available in a breach of contract lawsuit.

When determining whether or not an insurer acted in bad faith, a court will use the “reasonable” standard. This means the court will evaluate the actions of the insurers and determine if they were reasonable under the circumstances. If the insurer did not act reasonably, then the insurer has acted in bad faith in dealing with the insured.

Some examples of bad faith are:

interpreting the language of the policy in an unreasonable manner;
unreasonably failing to reimburse the insured for the entire amount of the loss;
unreasonably failing to settle the lawsuit;
unreasonable refusal to defend a lawsuit;
unreasonable delay in paying benefits; and
unreasonable delay in investigating the claim or improper valuation of the claim.

If an insurer does not act reasonably in complying with the terms of the insurance policy, then they have breached the covenant of good faith and fair dealing (a.k.a. bad faith) and will be held accountable by the court. 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 insurance bad faith or ERISA matter, please contact our office.

Under standard homeowner insurance policies the insurer is typically required to pay only the “actual cash value” of a loss—i.e., the fair (depreciated) market value—unless and until the insured actually incurs repair costs in excess of the actual cash value to repair the home. In Kelly Minich, et al. v. Allstate Insurance Company, __ Cal.App.4^th __, 2011 Cal.App. LEXIS 270 (March 11, 2011) (Minich), a California appellate court recently rejected a homeowner’s creative interpretation of its Allstate homeowner’s insurance policy to get extended repair or replacement cost policy limits without regard to actually repairing or replacing the fire-damaged home.

In Minich Allstate issues a homeowner’s insurance policy to Kelly and Debbie Minich. A fire destroys the Minichs’ home. The policy requires Allstate to pay the Minichs the “actual cash value” of their home up to the $129,840 policy limit. An extended policy limits endorsement requires Allstate to pay up to 150% of the policy limit in excess of the actual cash value if the Minichs actually repair or replace the home.

Allstate pays the $129,840 policy limit, less the $250 deductible, within 2 weeks of the fire. Allstate refuses to pay the $64,920 extended limit until the Minichs demonstrate to Allstate 15 months after the fire that they in fact are rebuilding the home.

The Minichs sue Allstate for breach of contract and bad faith, claiming that Allstate should have paid them the $64,920 immediately after the fire. The Minichs contend that Insurance Code §2051 and §2051.5 2 require that an insurer pay the “policy limit” of a homeowner’s policy whenever the house is destroyed, irrespective of whether the insured rebuilds the house, and that the “policy limit” includes the $64,920 provided for in the endorsement.

Allstate files a motion for summary judgment and argues that it timely paid the Minichs the full “policy limit” under §2051(b)(1), and that the additional $64,920 represents an amount above the policy limit. Allstate maintains that it is not required to pay the additional $64,920 unless and until the Minichs rebuild their home.

The Minichs oppose Allstate’s motion and argue that §2051 and §2051.5 require that an insurer pay the “policy limit or the fair market value of the structure, whichever is less” (§2051(b)(1)), without regard to whether the insured repairs the structure. The Minichs maintain that the “policy limit” of their policy includes the $64,920 provided for in the extended limits endorsement.

The trial court grants Allstate’s motion, and enters judgment in its favor. The Minichs appeal.

The appellate court concludes that the Minichs’ interpretation of the policy is flawed, and that neither the statutes nor the policy require Allstate to pay the extended limits under the endorsement without regard to repair or replacement. The appellate court interprets the endorsement to refer to an amount in excess of the policy limit, and not to extend or increase the policy limit.

The appellate court also notes that public policy supports its interpretation; otherwise the homeowner would be “bettered” by receiving replacement cost benefits above the actual cash value of the home without ever having to actually replace the home—a benefit not bargained for in the insurance contract. And a benefit that the California legislature could easily have mandated in the statutes, if it had so intended.

Since the appellate court determined that Allstate timely paid the Minichs all benefits owed under the policy, it also affirmed summary judgment and dismissal of the Minichs’ bad faith claims. The Minich decision reaffirms that a homeowner must actually start repairs of its damaged home in order to collect policy benefits under an extended repair or replacement cost limits endorsement over and above the actual cash value of the loss.

California Announces Investigation of MetLife for Failure to Pay Life Insurance Benefits

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