In the November 19, 2019 issue of the Los Angeles Daily Journal, the Daily Journal published an article written by the McKennon Law Group PC’s Robert J. McKennon.  The article addresses a previous 2009 Daily Journal investigation that revealed insurers’ regular practice of improperly denying claims.  Since 2009, recent regulations promulgated by the Department of Labor and recent court opinions have helped even the playing field for claimants.  A full and fair review of a claim for benefits is required by statute and regulation, and helps prevent insurers from illicit claim denials as detailed in the Daily Journal investigation.  However, it remains to be seen whether these recent regulations and court decisions will ultimately have the effect of evening the power imbalance insurers wield against vulnerable disability claimants.

Leveling the Field Between Insurers and Disability Claimants

Every year, millions of Americans seek and obtain individual or group disability insurance, hoping to buy a safety net in case of an unexpected disability.

By Robert McKennon

Every year, millions of Americans seek and obtain individual or group disability insurance, hoping to buy a safety net in case of an unexpected disability. If they become sick or are injured and can no longer work, these disability policies promise to pay disability benefits to cover part of their salaries they may lose when they become disabled. Unfortunately, disability insurers often do not honor their promises. In a two-part series in 2009, the Daily Journal reviewed 576 lawsuits filed in federal court in California against seven of the largest disability insurers in the country. (“Ill Workers Denied Benefits Face Fight Alone,” Oct. 20, 2009, and “Doctors Paid To Aid In Disability Denials,” Oct. 21, 2009.) This investigation found that “insurance companies regularly deny, or terminate, benefits to people …. The companies hire contract doctors who routinely reject the opinion of treating physicians without ever having seen the patients.” The Daily Journal also found that some insurers provide incentives to their employees to deny and terminate disability insurance claims, tying performance evaluations to meeting money-saving goals.

When group disability insurance policies/plans are involved, they are governed by the federal Employee Retirement Income and Security Act of 1974. Under ERISA, a policyholder’s recourse against an insurer is constrained to filing a lawsuit in federal court, in which his or her damages are limited. Unlike state laws such as California’s that allows a policyholder to sue for contract and tort damages, including punitive damages, ERISA limits recovery to plan benefits, interest on the delay in paying these benefits, and attorney fees. And, even attorney fees can be avoided. This can be done if the insurer initially denies the disability claim, waits to see if the policyholder files a mandatory administrative appeal, and if he does, the insurer can pay the claim and avoid any liability for attorney fees. Under ERISA, a policyholder cannot recover attorney fees for work done in the administrative appeals process. If the policyholder does not appeal the wrongful denial, the insurer profits. This results in a system that often does not penalize insurers that deny much needed benefits of disabled workers. Despite the internal conflict of interest insurers have, where they tie denial of disability claims with profitability, insurers often escape any negative ramifications of their illicit claim denials.

Insurers even go so far as to reward employees who deny claims. The Daily Journal’s investigation found that one employee of The Hartford Financial Services Group’s claims department received high praise for work that saved over $4 million. This same employee was chastised for continuing the claim of a 35-year-old worker, rather than speculating the worker could have worked a sedentary desk job. Sun Life Financial sent a memorandum telling claims handlers to “kick it up a notch” because the insurer was behind on its goal to “achieve the planned terminations/denials of 271 by the end of the month.” The Daily Journal found this memo offered a $250 gift certificate lottery to meet the insurer’s bottom line financial results. In nearly half the cases reviewed by the Daily Journal that reached court, judges found that the insurance companies had no appropriate basis to deny benefits.

To assist in the wrongful denial of these claims, insurers often rely upon doctors they hire frequently to write reports on claims they do not want to pay. Insurers will send files to so-called “independent” medical reviewers. The doctors conduct “paper reviews” and render conclusory opinions without seeing or even talking the claimant or her doctors. The reviewers may receive hundreds of assignments per year in repeat business from these insurers and may be their only source of income. Shockingly, these reviewing physicians do not have to be part of an independent panel overseen by regulators. The firms that coordinate these reviews collect millions of dollars a year, sometimes from a single insurer, and aggressively market their services to insurers. The Daily Journal found that these firms coach their doctors to never use the word “disabled” in reports and to use strict medical definitions they provide to determine a person’s ability of work. In many instances, these reviewers are not provided all of the claimant’s medical records and are not even qualified to render opinions for the specialty needed.

The Daily Journal even found one doctor who specialized in reviewing disability cases, Suresh Mahawar, M.D., who “nearly never” disagreed with the insurer. In the 202 cases he was assigned to review for The Hartford Financial Services Group between 2005 and 2007, court records show he only found nine people who were so sick or injured they could not return to work. Dr. Mahawar opined that anybody can work a desk job regardless of reported pain and physical limitations. Another disability case reviewer, Amy Hopkins, M.D., was paid $493,832 for file reviews for just one firm from 2001 to 2004. In 2004, a federal judge in Pennsylvania described her work as a “pick and choose approach” that ignored evidence and “completely mischaracterized” a treating physician’s notes in order to deny a claim.

Regulatory oversight to protect policyholders is weak. While insurers are required to notify policyholders that the California Department of Insurance is available to assist them with claims they feel have been wrongfully denied or rejected, in practice, the department is ineffectual in successfully resolving these complaints. Typically, complaints are ignored or, if the department takes any action, they conduct a routine inquiry with the insurer and, once the insurer responds, they do not pursue the matter, requesting that the policyholder hire an attorney who specializes in insurance denials to pursue the disability insurance benefits. The Daily Journal observed that, “No regulatory agency has taken responsibility for these cases.” “The result is a rare and gaping absence of regulation in a private insurance market that insures nearly a third of the nation’s workforce,” the Daily Journal wrote.

However, recent regulations promulgated by the Department of Labor and recent court opinions may help mend this troubled history. Federal courts have pushed back on insurers who wrongfully deny claims, and have found that a full and fair review of a claim for benefits is required by statute and regulation. The 9th U.S. Circuit Court of Appeals in Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666, 669 (9th Cir. 2011), found that Life Insurance Company of North America unreasonably denied the plaintiff’s claim for disability benefits. The 9th Circuit determined that the insurer failed to properly conduct a full and fair review of the claim for benefits, “violated its procedural obligations and violated its substantive obligation by abusing its discretion and judging the disability claim arbitrarily and capriciously.” As explained by the Salomaa court, in order to “conform to the claim procedure required by statute and regulation,” Cigna was required to “explain, upon denial, any additional ‘information needed’” to support a claim for benefits. The Salomaa court concluded the insurer did not meet the requirement of meaningful dialogue under this standard. Id. at 680.

Insurers are required to give claimants a full and fair review by explaining specifically what additional information is needed to qualify for disability benefits. As such, insurers are prevented from playing “hide the ball” with claimants by failing to advise them of documents or information needed to obtain approval of a claim, and by failing to send forms to claimants or their doctors that would have elicited the information needed. Boyd v. Aetna Life Ins. Co., 438 F.Supp.2d 1134, 1153–54 (C.D. Cal. 2006); see also Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 870 (9th Cir. 2008); 29 CFR Section 2560.503–1(g).

Furthermore, a full and fair review takes on new significance under two new ERISA regulations, 29 C.F.R. Section 2560.503-1(h)(4)(i) and (ii). They require that if there is “any new or additional evidence considered” or if there is a “new or additional rationale” upon which the insurer intends to rely to deny the claim, the insurer must point out and provide this evidence or rationale to claimants, and they must have an opportunity to respond to the “new or additional evidence considered” or “new or additional rationale” before there is an adverse determination (i.e., a denial).

If, after reviewing the available evidence, an insurer still maintains that a claimant has not presented sufficient medical support for a claim, the insurer must provide a specific list of any tests and/or examination results that must be given and allow claimants an opportunity to meet that request. It is no longer sufficient for insurers to place the burden on claimants to guess which medical records will be found necessary, when they need to be submitted, and why they are necessary. This is particularly the case given the Department of Labor’s recent regulations codified at 29 C.F.R. Section 2560.503-1. The regulations clearly aim to minimize conflicts of interest and provide claimants with additional information, which the Department of Labor indicated was “necessary to ensure that disability claimants receive a full and fair review of their claims, as required by ERISA section 503.” It remains to be seen whether these recent regulations and court decisions will have the effect of evening the power imbalance insurers wield against vulnerable disability claimants.

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 www.californiainsurancelitigation.com.