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LA Times Report: Pervasive Problem of Improper Health Insurance Denials

After using a diabetes insulin pump for nine years, David Lazarus suddenly received a denial letter from his insurer, Blue Cross Blue Shield of Illinois. The denial letter notified Lazarus that his employer’s health plan would no longer cover the cost of his diabetes insulin pump. He was now responsible for the cost of the pump: $8,703. The reason cited for his insurer’s sudden change of heart? Lack of medical necessity. His medical insurance claim was denied.

An insurer may deny a medical insurance claim before or after the medical service sought to be covered, either through the denial of preauthorization requests or denial of claims for payment after the medical service is provided. Some insurers require preauthorization requests before treatment, which may result in insurance denials where the policyholder is deemed ineligible for the service or the insurer determines the treatment inappropriate. Claims, on the other hand, may be denied for a variety of reasons: billing issues, documentation issues, duplication issues and various other reasons related to eligibility. One of the most litigated areas of medical insurance coverage denials is the insurer’s denial because the treatment is deemed experimental or not medically necessary.

In a recent column published by the Los Angeles Times, Lazarus shared his personal struggle with an improperly denied health insurance claim as part of a larger discussion of the widespread problem: when a health insurer denies a valid, legitimate claim. To some, including the attorneys of the McKennon Law Group PC, this story may sound all too familiar. Sadly, the fact that health insurers deny valid claims for a variety of reasons, including lack of medical necessity, is not surprising. This problem can be alarming based upon its sheer scale, which as Lazarus noted, is a problem that “applies to millions of people.”

Chuck Idelson, a spokesman for the California Nurses Association, described this conduct as “immoral and unconscionable.” Lazarus likewise expressed his outrage:

[I]t’s unacceptable for patients to have to do battle with monolithic corporations that are seemingly determined not to use common sense (or simple decency) in deciding what treatments to cover.

However, the reality is that health insurers, as do long-term disability insurers, life insurers and accidental death and dismemberment insurers, employ a small army of ‘claims specialists’ to closely scrutinize each claim for potential reasons for denial. While insurers may view this claims handling process as the “rigorous process of evaluating the medical need for a prescribed drug or treatment,” many describe it differently. As Idelson said of the claims handling process:

Insurers employ warehouses full of claims adjusters who, as a primary function, scrutinize claims for pretexts to deny care, saying it is ‘experimental’ or ‘not medically necessary’ even where the medical treatment, prescription medication, diagnostic procedure or referral to a specialist is recommended by doctors.

The column also notes that a significant portion of these claims are denied for reasons unrelated to the claim’s validity. In other words, there was a mishap in processing, such as billing errors, duplicate claims for the same underlying service, or just missing information, as found in a 2011 study done by the Government Accountability Office (“GAO”).

In Private Health Insurance: Data on Application and Coverage Denials, the GAO reviewed nationwide data collected by the Department of Health and Human Services. It covered 459 insurers providing individual and group insurance in all fifty states, including the District of Columbia. Because the data only included application denials for a three-month period from January through March 2010, only one quarter, GAO also supplemented the nationwide data with available data from six states: California, Connecticut, Florida, Maryland, New York and Ohio.

The GAO noted that coverage denials often occur as the result of billing errors and eligibility issues, and less often for reasons about the appropriateness of a service. For six of the largest managed care organizations licensed in the State of California, each with enrollment in 2009 of over 400,000, the rate of claims denials came in at 24% for the year of 2009. But, the data varied widely depending on the managed care organization. Specifically, California’s reported denial rates covered a wide range of 6% to 40% across the six managed care organizations.

As Lazarus discusses in his column, getting health insurance coverage is only half the problem. The other half is the quality of coverage you have once you are lucky enough to get it. Fighting with your insurer over a legitimate claim for health, life, long-term disability, or other insurance benefits can be a daunting task and while Lazarus managed his claims handling problem (after numerous calls and emails), many insureds’ coverage disputes are not so easily resolved.

Department of Labor Announces April 1, 2018 as Final Date For ERISA Claims Procedures Related to New ERISA Disability Insurance Regulations

The good news is that they are now finalized and will go into effect on April 1, 2018 without further delay. They will apply to disability benefits claims filed after April 1, 2018. As previously advised, the DOL published “final” regulations on December 19, 2016 revising the existing claims and appeals procedures regulations under ERISA for employee benefit plans providing disability benefits (“Final Regulations”). According to the DOL, the intent of the Final Regulations is to strengthen the current procedures by adopting some of the additional procedural safeguards and protections for disability plan claims that are already in place for group health plan benefits pursuant to the Patient Protection and Affordable Care Act.

The DOL’s January 2018 news release confirms that the substantive provisions of the Final Regulations will be retained:

The Department received approximately 200 comment letters from the insurance industry, employer groups, consumer advocates, and lawyers representing disability benefit claimants, all of which are posted on the Department’s website. Only a few comments responded substantively to the Department’s request for quantitative data to support assertions that the final rule would drive up disability benefit plan costs by more than the Department had predicted, cause an increase in litigation, and consequently reduce workers’ access to disability insurance protections. The information provided in the comments did not establish that the final rule imposes unnecessary regulatory burdens or significantly impairs workers’ access to disability insurance benefits.” Accordingly, the substantive provisions of the Final Regulations will apply to disability benefits for claims filed “after April 1, 2018.

With these Regulations, the DOL has attempted to protect disability insurance claimants from wrongful denials of long-term and short-term disability claims by attempting to minimize conflicts of interest, promote an open and robust discussion of the claim and ensure that administrators strictly comply with procedural protections for disability insurance claimants.

The Final Rule Delaying the Applicability Date (published 11/29/17) can be found at: https://www.federalregister.gov/documents/2017/11/29/2017-25729/claims-procedure-for-plans-providing-disability-benefits-90-day-delay-of-applicability-date
The Final Rule for Claims Procedures for Plans Providing Disability Benefits (published 12/19/16) can be found at: https://www.federalregister.gov/documents/2016/12/19/2016-30070/claims-procedure-for-plans-providing-disability-benefits

Department of Labor Announces Ninety-Day Delay in Implementing New ERISA Disability Insurance Regulations

Long-term and Short-Term Disability insurance cases dominate ERISA benefits litigation. According to the U.S. Department of Labor (“DOL”), the administrative agency given the authority to regulate employee benefits under, and to enforce the statutory provisions of, the Employee Retirement Income Security Act of 1974 (“ERISA”), disability insurance benefits claims account for almost two thirds of all benefits-related ERISA lawsuits and, based on rough estimates, these disability benefits claims are often denied. To protect disability claimants from having their benefits claims improperly denied, the DOL enforces and promulgates regulations to strengthen the employee protections found in ERISA. As a part of that process, the DOL recently issued a new set of regulations that greatly enhance the protections provided to disability claimants, codified at 29 C.F.R. Section 2560.503-1 and discussed at 81 Fed. Reg. 92316 (“Regulations”). We wrote an article about these Regulations, which you can read here. Importantly, the Regulations give teeth to existing protections, enhancing requirements for independent claims administration, information disclosure and consequences for administrators who fail to comply. Unfortunately, on November 24, 2017, the DOL announced a ninety-day delay in the effective date of the Regulations. Now, instead of applying to disability claims filed on or after January 1, 2018, the Regulations will not take effect until April 1, 2018, unless they are delayed again.

The DOL said that the decision to delay the effective date for the Regulations arose as a result of an executive order issued by President Trump on February 24, 2017 that directed federal agencies to do a regulatory review, and make recommendations, regarding regulations that could be repealed, replaced, or modified in a way that would make them less burdensome. Since then, the DOL said that it received comments from various stakeholders and members of Congress that implementation of the Regulations would increase the costs of administering disability benefit plans by, among other things, imposing new requirements when adjudicating claims, result in more litigation of claims for disability benefits, and make it more difficult for employers to prevail in such litigation and increase the costs of premiums for disability insurance plans.

The DOL’s decision to delay implementation is unfortunate for disability claimants because the Regulations do so much to strengthen the ERISA-provided protections. For example, they inject a regulatory mandate for impartiality and independence of all persons involved in the claims handling process. Often, we see purportedly “independent” medical experts give biased, poorly reasoned opinions in support of a predetermined goal: denial of the claim. While there is already a substantial body of case law that allows claimants to push back on these not-so-independent medical reviews, with these new Regulations, decisions regarding hiring, compensation, termination and promotion cannot be made on the likelihood that someone will support a disability benefits denial.

These new ERISA Regulations also fortify preexisting information disclosure requirements. In an ERISA disability case, the claims administrator gathers the information necessary to evaluate the initial claim. This may involve interviews with the claimants, retrieval of medical records and the “independent” medical reviews described above. The administrator then compiles this information in a claim file, which per ERISA, must be provided to disability claimants free of charge upon request. These new Regulations strengthen this requirement by making claims administrators provide any new evidence gathered during the review on appeal, as it is considered. This allows the claimant an opportunity to challenge additional information as part of the appeal process and build an equally compelling administrative record that fairly considers both sides.

As for information disclosure in denial letters, the Regulations also require that an ERISA disability claims administrator sufficiently state its denial and expressly address opinions to the contrary. Through these enhanced protections, an administrator may no longer ignore or dismiss conflicting findings of disability, including those from its own experts. For example, if the claims administrator disagrees with a finding of disability by the Social Security Administration or the plan participant’s treating physician, then it must rationally explain and support its opposite conclusion.

Finally, the Regulations incentivize compliance with these important procedural protections by formally acknowledging the legal consequences for failure to comply. Under these new DOL Regulations, a claimant may demand a written explanation of any asserted violation, which the administrator must provide within ten days. Further, when a claim is “deemed denied” because the administrator fails to render a decision within the applicable time-frame, a claimant will have exhausted his or her administrative remedies and can file a lawsuit under a de novo standard of review. A de novo standard of review is much more beneficial for the claimant because the court gives no deference to the administrator’s decision to deny benefits.

With these Regulations, the DOL took a strong stance in protecting disability claimants from wrongful denials by attempting to minimize conflicts of interest, promote an open and robust discussion of the claim and ensure that administrators strictly comply with procedural protections. Hopefully, the DOL will not decide to rescind, modify or further delay implementation of these Regulations, which now will apply to disability claims filed on or after April 1, 2018.

Robert McKennon and Stephanie Talavera Publish Article in the Los Angeles Daily Journal: “Ruling Limits Who Can Bring Suit Under ERISA”

In the April 13, 2017 edition of the Los Angeles Daily Journal, Robert McKennon and Stephanie Talavera of the McKennon Law Group PC published an article entitled “Ruling Limits Who Can Bring Suit Under ERISA,” summarizing a new Ninth Circuit case which limits the circumstances in which health care providers can bring suit under ERISA. In the article, Mr. McKennon and Ms. Talavera explain that the new ruling limits the ability of healthcare providers to bring suit under ERISA by narrowing the term “beneficiaries” under ERISA to exclude health care providers, eliminating their right to sue under ERISA in most, but not all, situations. DB Healthcare, LLC v. Blue Cross Blue Shield of Ariz., Inc., 2017 DJDAR 2813 (Mar. 22, 2017). However, the article also explains that even if health care providers are not able to avail themselves of ERISA remedies, they may well find solace in non-ERISA state law remedies.

The article is posted below with the permission of the Los Angeles Daily Journal.

Ruling limits who can bring suit under ERISA

By Robert J. McKennon and Stephanie L. Talavera

Courts continue to grapple with who can sue under the Employment Retirement Income Security Act of 1974. ERISA provides procedural and fiduciary protections that govern employer-sponsored insurance plans, but persons who want to sue under ERISA first must qualify as a plan “participant” or “beneficiary.” See ERISA Section 502(a), 29 U.S.C. Section 1132. Last month, the 9th U.S. Circuit Court of Appeals narrowed the term “beneficiaries” under ERISA to exclude health care providers, eliminating their right to sue under ERISA in most, but not all, situations. DB Healthcare, LLC v. Blue Cross Blue Shield of Ariz., Inc., 2017 DJDAR 2813 (Mar. 22, 2017).

The Case

In DB Healthcare, the 9th Circuit decided two similar cases together, as both addressed the same central issue: whether a health care provider (the doctor or hospital that provides health care to a covered patient) designated to receive direct payment from a health plan administrator for medical services is authorized to sue under ERISA. The 9th Circuit answered “no,” because the health care providers did not have direct authority as “beneficiaries” under ERISA and did not have derivative authority to sue as assignees.

The parties in DB Healthcare were engaged in a standard health care reimbursement dispute. The plaintiffs included 12 medical facilities in Arizona, 10 nurse practitioner employees and a medical facility in Bakersfield (the providers). The defendants, the administrators for the relevant ERISA-governed employee benefit plans, included Blue Cross Blue Shield of Arizona Inc. and Anthem Blue Cross Life and Health Insurance Company (the ERISA plan administrators).

The providers performed blood tests and other services for the individual patients enrolled in an employer-sponsored health insurance plan. Initially, the ERISA plan administrators reimbursed the providers for $237,000 and $295,912.87, but later changed course and requested repayment. After running post-payment reviews, the ERISA plan administrators decided the providers were not entitled to the reimbursements. Blue Cross found the tests were investigational, and therefore were not covered by the plan, while Anthem determined the women’s health center had used faulty practices to bill for the tests and therefore was not entitled to payment. The providers refused to return the money and a legal battle ensued.

The providers filed lawsuits against the ERISA plan administrators, asserting numerous claims under ERISA, but generally alleging that the ERISA plan administrators violated ERISA’s protections when they unilaterally determined that the blood tests and other services performed were not reimbursable.

As to Blue Cross, the providers sought injunctive relief regarding Blue Cross’ refusal to credential nurse-practitioners and its threat to cancel provider agreements if they did not repay them, alleging that Blue Cross violated ERISA’s prohibition against retaliation for the exercise of rights guaranteed by employee benefit plans. See 29 U.S.C. Section 1140. The providers also sought a declaratory judgment that Blue Cross’ recoupment efforts violated the ERISA claims procedure, 29 U.S.C. Section 1133, and the ERISA claims procedure regulation, 29 C.F.R. Section 2560.503-1, which provide procedural protections for ERISA claimants.

As to Anthem, the providers asserted four claims for relief, three under ERISA. Under ERISA, the providers sought declaratory judgment and an injunction that prohibited Anthem’s attempts to recoup payments as violating ERISA’s claims procedure, 29 U.S.C. Section 1133, and the ERISA claims procedure regulation, 29 C.F.R. Section 2560.503-1. The providers also sought monetary damages for past recoupments, and requested declaratory and injunctive relief regarding Anthem’s alleged violation of fiduciary duty to plan beneficiaries and participants. The district courts in each case found the providers were not authorized to sue under ERISA’s civil enforcement provisions.

The 9th Circuit affirmed the district court judgments dismissing the actions. As the court noted, ERISA outlines who can sue to vindicate a claim as a “beneficiary” under Section 502(a). ERISA defines “beneficiary” as “a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder.” 29 U.S.C. Section 1002(8) (emphasis added). However, as the 9th Circuit noted in DB Healthcare, ERISA does little to directly define “benefit.” But, within the larger context of ERISA, the courts have determined that “benefit” refers to the specific advantage provided to a covered employee because of his or her employment, for a purpose connected to alleviating various life contingencies. See DB Healthcare at 2815-16 (citing Spinedex Physical Therapy USA Inc. v. United Healthcare of Arizona, Inc., 770 F.3d 1282, 1289 (9th Cir. 2014); Rojas v. Cigna Health & Life Ins. Co., 793 F.3d 253, 257 (2d Cir. 2015)). The 9th Circuit reasoned that reimbursement for health care services is not a “benefit” within the meaning of the ERISA. Thus, consistent with several other circuits, the 9th Circuit found that the providers were not “beneficiaries” within the meaning of ERISA’s enforcement provisions and could not bring claims directly under ERISA.

The 9th Circuit further held that the providers could not bring their ERISA claims under derivative authority, through assignments by individual employee beneficiaries. In determining that the providers were not entitled to reimbursement, the 9th Circuit reviewed several contracts that governed the relationships between the parties, as well as the underlying assignments.

As to Blue Cross, the governing plan document had a non-assignment clause that read as follows: “The benefits contained in this plan, and any right to reimbursement or payment arising out of such benefits, are not assignable or transferable, in whole or in part, in any manner or to any extent, to any person or entity.” The court found that this non-assignment clause prevailed over any purported assignments.

With respect to Anthem, the 9th Circuit found a lack of derivative authority for a slightly different reason. Although the plan had no prohibition on the assignment of the right to benefits, the dispute was as to recoupment of payment and therefore did not fall within the scope of the assignment. Thus, although the patients signed forms to the health care provider that stated “I Hereby Authorize My Insurance Benefits to Be Paid Directly to the Physician,” those forms did not actually give the health care provider the right to relief.

Moving Forward

While DB Healthcare limits the possibilities for reimbursement for some health care providers, it does not entirely foreclose the possibility of recovery. As the 9th Circuit noted, there is no reason that the providers in DB Healthcare could not have brought their claims in state court, as ERISA would not have preempted the claims. See Blue Cross of Cal. v. Anesthesia Care Ass’n, 187 F.3d 1045, 1050-52 (9th Cir. 1999).

Moreover, if medical providers cannot sue under ERISA because of an anti-assignment clause in the ERISA plan document, it is possible that they may still bring an action against a claims or plan administrator for breach of oral contract, equitable or promissory estoppel and other theories for recovery under state law if the claims or plan administrator pre-authorized coverage of the claim directly with the medical provider. See Morris B. Silver M.D., Inc., v. Int’l Longshore & Warehouse Union Pac. Maritime Ass’n Welfare Plan, 2 Cal. App. 5th 793 (2016) (holding that ERISA did not preempt provider’s claims for breach of oral contract, quantum meruit and promissory estoppel). Therefore, even if health care providers are not able to avail themselves of ERISA remedies, they may well find solace in non-ERISA state law remedies.

Robert J. McKennon is a shareholder of McKennon Law Group PC in its Newport Beach office. His practice specializes in representing policyholders in life, health and disability insurance, insurance bad faith, ERISA and unfair business practices litigation. He can be reached at (949) 387-9595 or rm@mckennonlawgroup.com. His firm’s California Insurance Litigation Blog can be found at mslawllp.com/news-blog.

Stephanie L. Talavera is an associate at McKennon Law Group PC.

Robert McKennon and Scott Calvert Publish Article in the Los Angeles Daily Journal: “New Regulations Will Benefit Claimants in Disability Insurance Cases”

In the January 12, 2017 edition of the Los Angeles Daily Journal, Robert McKennon and Scott Calvert of the McKennon Law Group PC published an article summarizing the new U.S. Department of Labor disability insurance claims regulations aimed at reducing the inherent conflicts of interest present when ERISA plan administrators review long-term disability and short-term disability insurance benefit claims. In the article entitled “New Regulations Will Benefit Claimants in Disability Insurance Cases,” Mr. McKennon and Mr. Calvert explain that the new regulations require that insurance companies and ERISA plan administrators keep individual claimants much more informed throughout the claim process, which the Department of Labor believed was necessary to ensure a full and fair review of short-term disability and long-term disability claims.

The article is posted below with the permission of the Los Angeles Daily Journal.

New Regulations Will Benefit Claimants in Disability Insurance Cases

By Robert J. McKennon and Scott E. Calvert

Disability insurance cases dominate the Employee Retirement Income Security Act litigation landscape today. According to the U.S. Department of Labor, ERISA employee benefits litigation from 2006 to 2010 involving long-term disability claims accounted for 64.5 percent of benefits litigation, whereas lawsuits involving health care plans and pension plans accounted for only 14.4 and 9.3 percent, respectively. It is no secret that insurers and plans looking to contain disability benefit costs are motivated to aggressively dispute disability claims. Indeed, the DOL estimates that roughly 75 percent of long-term disability claims are denied.

The DOL is charged with promulgating new regulations governing disability insurance and health insurance benefit claims that are governed by ERISA. In late December 2016, the DOL finalized new regulations, codified at 29 C.F.R. Section 2560.503-1 and discussed at 81 Fed. Reg. 92316, aimed at minimizing the conflicts of interest inherent in the administration of ERISA plans and providing individual claimants with additional information regarding the reasons why their disability claim was denied. The DOL indicated that the regulations were “necessary to ensure that disability claimants receive a full and fair review of their claims, as required by ERISA section 503.”

The new regulations must be followed by plan and claim administrators when reviewing disability insurance benefit claims submitted by plan participants and their beneficiaries. The regulations take effect on Jan. 18, 2017, but only apply to claims for disability benefits that are filed on or after Jan. 1, 2018.

The primary change is to reinforce and strengthen the rules designed to avoid conflicts of interest. Paragraph (b)(7) of the rule is designed to “ensure that all claims and appeals for disability benefits are adjudicated in a manner designed to ensure the independence and impartiality of the persons involved in making the decision.” The rule requires that decisions regarding hiring, compensation, termination and promotion must not be made based upon the likelihood that a person will support the denial of disability benefits. For example, a plan is not permitted to hire an “independent” medical expert based on that expert’s reputation for providing administrator-favored reports.

The biggest change is the expansion of what information must be disclosed and included in any denial letter.

First, a denial letter must specially include the bases for disagreeing with any disability determination by the Social Security administration. It requires that a denial letter explain why the plan agreed or disagreed with the conclusions reached by the Social Security administration after it evaluated the same disabling conditions, medical evidence, and job duties.

Similarly, a denial letter must now also include a discussion as to why the denial decision differs from the opinions offered by a claimant’s treating physician. This is important because, typically, a claimant’s treating physicians support the claim for disability benefits. By forcing the administrator to specifically address the contrary positions offered by the treating physicians, the administrator will be forced to confront and refute this significant evidence supporting the claim.

Additionally, the denial letter must include the internal rules, guidelines, protocols, standards, or other similar criteria that were relied upon in denying the claim. Providing a claimant with this information will allow him or her to specially address those rules and standards in seeking to overturn a claim denial.

The final disclosure requirement imposed by the new regulations is that the plan administrator must explain its basis for disagreeing with any experts whose advice was initially sought but not followed. This requirement was added to prevent “intentional expert shopping” by a claims administrator. That is, when an insurance company “may consult several experts and deny a claim based on the view of one expert when advice from other experts who were consulted supported a decision to grant the claim.” By forcing the administrator to acknowledge and explain why it did not follow the recommendation of its hired experts, the DOL seeks to prevent the hiring of multiple experts until an administrator-favorable opinion is secured.

Another significant change to the regulations, codified at paragraph (h)(4), requires the plan administrator to provide claimants, free of charge, any new or additional evidence considered or relied upon when making the benefit determination, thus giving the claimant the right to review and respond to new information even before the final claim decision is made. The new evidence must be provided to a claimant as soon as possible and sufficiently in advance of the date on which the notice of adverse benefit determination is required, thus giving the claimant a reasonable opportunity to address the new evidence or rationale prior to the denial decision being made. This important new rule will allow claimants to augment the Administrative Record because they will have another opportunity to present evidence in support of their claim.

Other changes relate to when a claim is “deemed denied,” freeing a claimant to initiate litigation despite the fact that his or her administrative remedies were not yet exhausted. If a claim for benefits is denied, the claimant is required to appeal that decision before initiating litigation.

Under the new regulations, if a plan fails to adhere to all the requirements in the claims procedure regulations, the claim is “deemed denied” without the exercise of discretionary authority. This gives the claimant the right to file a lawsuit without further delay and will allow a court to decide the merits of the claim de novo, without any deference to the fiduciary who violated the rules. Thus, the claimant would be deemed to have exhausted administrative remedies, with a limited exception where the violation was (i) de minimis; (ii) non-prejudicial; (iii) attributable to good cause or matters beyond the plan’s control; (iv) in the context of an ongoing good-faith exchange of information; and (v) not reflective of a pattern or practice of non-compliance.

The regulations also include a provision that allows a claimant to request a written explanation of any asserted violation. The administrator is required to respond to such a request within 10 days and include a specific description as to why the violation should not render the claim “deemed denied.” However, if a court finds the violation to be “de minimis,” then the matter would be remanded back to the plan administrator for further review.

Importantly, the regulations require a final denial to describe “any applicable contractual limitations period that applies to the claimant’s right to bring … an action [under ERISA], including the calendar date on which the contractual limitations period expires for the claim.” The DOL clearly states in the preamble to the new regulations its belief that any contractual limitations period that expires before the final denial is issued (or even less than a reasonable amount of time thereafter) is per se impermissible.

Finally, the claims procedures apply to any “adverse benefit determination,” which now specifically includes any rescission of disability coverage (unless it was caused by a failure to pay required premiums or contributions on time).

With these regulations, the DOL has acted to protect claimants from ERISA administrators by attempting to minimize their conflicts of interest, promoting an open and robust discussion of the claim, and ensuring that administrators strictly comply with the regulations. These are positive steps for ERISA claimants who file claims for short-term and long-term disability benefits.

As a whole, these changes will greatly benefit claimants and should make it easier to understand the claim review process and the reasons for denial, as well as make it easier to provide documents to support their claims. Indeed, the regulations finally “give some teeth” to the long-standing requirement that administrators engage in a “meaningful dialogue” with disability claimants.

Robert McKennon and Scott Calvert Publish Article: Insurers turn to Drones

In the October 18, 2016 edition of the Los Angeles Daily Journal, Robert McKennon and Scott Calvert of the McKennon Law Group published an article regarding the use of drones by insurance companies in their insurance claims investigations. In the article entitled “Insurers Turn to Drones,” Mr. McKennon and Mr. Calvert explained that insurers are increasingly using drones as part of the insurance claims handling/investigation process, including disability insurance claims, but noted the use of drones is regulated by a series of Federal, State and local laws. In addition, the article noted that courts are increasingly questioning the use of and reliance on surveillance by insurance companies in ERISA and non-ERISA insurance cases.

The article is posted below with the permission of the Los Angeles Daily Journal.

Insurers Turn to Drones

By Robert J. McKennon and Scott E. Calvert

Insurance companies have the right, and indeed the duty, to thoroughly investigate claims. In California, an insurer’s failure to reasonably investigate an insurance claim may result in bad faith liability.See Egan v. Mutual of Omaha Ins. Co., 24 Cal. 3d 809, 819 (1979);Guebara v. Allstate Ins. Co., 237 F.3d 987, 996 (9th Cir. 2001).

In the process of those investigations, insurers often secretly enlist private investigators to gather information on their insureds. With respect to disability insurance claims, for example, insurers typically hire private investigators to follow and videotape their insureds whenever they ventured out of the home, whether to take the trash out, go to a doctor’s office, or travel to the grocery store. Typically, insurers will attempt to use that surveillance to assert that their insureds are capable of working and not entitled to disability benefits, often overstating the level of activity depicted on tape and the conclusions that can be drawn from such surveillance.

However, with technological advances, the methods of surveillance are changing. Recently, insurance companies started moving beyond the proverbial “guy in a van” method of surveillance, and began using unmanned drones to conduct photographic and video surveillance. There are many different kinds of drones, but some can travel on auto-pilot to a preset location, and slowly fly above an insured and his property, undetected, while taking high-resolution photos and video. Others need to be operated by someone who keeps the aerial vehicle within the line of sight.

Drones, also referred to as unmanned aerial systems (UASs) or unmanned aerial vehicles (UAVs), are increasingly being used for commercial purposes. The use of drones is regulated both by the Federal Aviation Administration (FAA), and a variety of state and local laws and regulations. Those regulations have not prevented insurance companies from making drones part of the claim review process. In 2015, multiple insurance companies, including AIG, State Farm Mutual and USAA, were granted permission by the FAA to use drones for commercial purposes. More recently, in July, the FAA promulgated rules permitting the use of drones weighing less than 55 pounds for all commercial applications, including by insurance companies.

Most often, drones are used for claims involving property and casualty insurance, to examine the condition of tall buildings or inspect property in hard-to-reach locations or even disaster areas. However, the neither the FAA nor any other authority strictly limits the use of drones to these specific situations.

Some private investigators believe that drones are preferable to more traditional methods of surveillance, as they can often provide quicker, cheaper and safer surveillance and documentation while also reducing the risk than an investigator will be spotted, and can be used to gain access to otherwise inaccessible locations.

With FAA approval, insurers are working to research and develop best practices, safety and privacy protocols, and procedures as they further develop plans for operational use. Privacy protocols will be especially important as insurers can be sued if they obtain surveillance that impermissibly intrudes on an insured’s privacy. Thus, even with FAA approval to utilize drones, insurance companies are not simply permitted to use drones in every situation in order to attempt to assert that an insured does not qualify for benefits. They will have to be prudent using them.

As drones multiply in number and category, cities and states are setting their own boundaries. For example, while over the last two years Gov. Jerry Brown repeatedly vetoed bills that would have criminalized the use of drones in certain situations, including over wildfires, schools, prisons and jails, he did sign a law modifying California Civil Code Section 1708.8 so that the definition of a “physical invasion of privacy” now includes sending a drone into the airspace above someone’s land in order to make a recording or take a photo. A person who violates the “airspace above the land of another person” is now liable for up to three times the amount of any general and special damages caused by the invasion, as well as a civil fine between $5,000 and $50,000. While this change was developed mainly to prevent paparazzi from flying drones over private property, it would equally apply to insurance company employees and contractors conducting surveillance of insureds.

Florida has gone a step further, as the Freedom from Unwarranted Surveillance Act provides a private right of action which can be pursued when a drone is used to take pictures or video that would not be otherwise available to someone standing on ground level. Cities are also passing similar laws. For example in 2015, Poway, in San Diego County, passed an ordinance banning the use of drones in any open space or rural residential area.

In light of these rules, in any case involving photographs or videos taken by drone, attorneys on either side of litigation involving such evidence are well-advised to ensure that the evidence was gathered within the confines of the law.

While insurers often use the results of surveillance to assert that an insured does not qualify for insurance benefits, courts are increasingly weary of how insurance companies use and interpret video footage. For example, in one influential 9th U.S. Circuit Court of Appeals case involving a long-term disability insurance claim,Montour v. Hartford Life & Accident Insurance Co., 588 F.3d 623 (9th Cir. Cal. 2009), the insurer relied on surveillance footage of the claimant engaged in short periods of activity over four nonconsecutive days and concluded he was capable of sustaining this activity in a full-time occupation. The court criticized the insurer’s decision, explaining the insurer over-relied on footage and this bias pervaded its decision process, eventually ruling that the claimant was entitled to long-term disability benefits.

Similarly, inBeaty v. Prudential Insurance Co., 313 Fed. Appx. 46, 49 (9th Cir. 2009), the 9th Circuit rejected the insurer’s attempt to rely on “unsupportable inferences from a surveillance video and reports which show the plaintiff engaging in a variety of normal day-to-day activities” and criticized the insurer’s failure to explain how activities show “she can perform the duties of her occupation.”

Other courts have likewise ruled that an overstatement of a claimant’s activities in surveillance is improper, and warn that activities observed for a short amount of time do not necessarily translate into full-time work capacity. For example, inThivierge v. Hartford Life, 2006 WL 823751, *11 (N.D. Cal. Mar. 28, 2006), the district court held that activities observed “for a couple of hours on five out of six days she was under surveillance does not mean that Plaintiff is able to work an eight-hour a day job.”

Thus, while insurers increasingly use drones to gather information on their claimants, gathering and using that information to support claims denials may not be as easy as it seems. This is especially true in the case of disability insurance claims. Not only are insurers obligated to obey an increasingly number of federal, state and local rules and regulations limiting the use of drones, but courts are growing increasingly weary of insurers’ attempts to over-rely on surveillance. Thus, while surveillance, especially the use of drones, becomes increasingly popular in insurance investigations, insurers will have to be especially wary of its use in making decisions on their insurance claims.

Ruling limits who can bring suit under ERISA

New Regulations Will Benefit Claimants in Disability Insurance Cases

Insurers Turn to Drones

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