In this several-part blog series titled The Basics of an ERISA Life, Health and Disability Insurance Claim, we discuss the basics of an ERISA life, health, accidental death and dismemberment and disability claim, from navigating a claim, to handling a claim denial and through preparing a case for litigation.  In Part Seven of this series, we discuss the full and fair review required under the Employee Retirement Income Security Act (“ERISA”), in contrast with the usual practices and power imbalance insurers employ to deny claims.  Our focus in this article will be mostly on disability insurance claim denials.

Every year, millions of Americans seeking to buy a safety net for their middle-class lifestyles enroll in individual or group disability insurance.  If they become sick or are injured badly enough that they cannot work, the disability insurers promise to pay disability benefits to cover part of their salaries they may lose upon becoming disabled.  In a two-part Los Angeles Daily Journal series, published on October 20, 2009, a Daily Journal investigation examined practices by insurance companies which enable them to legally deny insurance claims.  The investigation looked into paid opinions by doctors and found that insurances companies, “regularly deny, or terminate, benefits to people even after they are found disabled by the federal government and approved for Social Security checks.  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 claims, tying performance evaluations to meeting money-saving goals.  Despite this internal conflict of interest, insurance companies often escape regulation, as California Department of Insurance complaints are often ignored and the only thing the law provides is recourse in federal court.  While insurers notify policyholders that the Consumer Communications Bureau with the California Department of Insurance is available to assist customers with claims they feel have been wrongfully denied or rejected and that they may call or write the Bureau to have claims reviewed, state government agencies rarely do much, if anything, for consumer policyholders.  “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.  Indeed, because federal law does not allow for any damages, there is no peril for the insurance companies to repeatedly deny legitimate claims, aside from litigation.  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.  However, recent regulations from the Department of Labor and case law may have the impact of positively impacting this troubled history.

Federal courts have pushed back on insurance companies wrongfully denying claims, and have found that a full and fair review of a claim for benefits is required by statute and regulation.  The Ninth Circuit in Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666, 669 (9th Cir. 2011), found that Life Insurance Company of North America (“LINA”) unreasonably denied the plaintiff’s claim for disability benefits.  The Ninth Circuit determined that LINA 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 administrator’s procedural violations are similar to those in Saffon v. Wells Fargo & Company Long Term Disability Plan and Booton v. Lockheed Medical Benefit Plan.  There, as here, the administrator did not provide material sufficient to meet the requirement of “meaningful dialogue.”  We held in those cases, where the denials were based on absence of some sort of medical evidence or explanation, that the administrator was obligated to say in plain language what additional evidence it needed and what questions it needed answered in time so that the additional material could be provided.  An administrator does not do its duty under the statute and regulations by saying merely “we are not persuaded” or “your evidence is insufficient.”  Nor does it do its duty by elaborating upon its negative answer with meaningless medical mumbo jumbo.  In this case, the skeptical look required by us in a case of a conflicted administrator requires us to conclude that the administrator acted arbitrarily and capriciously, both procedurally and substantively, thereby abusing its discretion in the denial of Salomaa’s claim.

Id. at 680.

Insurance companies are required to give claimants a full and fair review by explaining specifically what additional information is needed.  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, supra, 522 F.3d at 870; 29 CFR § 2560.503–1(g).

Furthermore, a full and fair review takes on new significance under two new regulations, 29 C.F.R. Section 2560.503-1(h)(4)(i) and (ii). They state:

(4) Plans providing disability benefits. The claims procedures of a plan providing disability benefits will not, with respect to claims for such benefits, be deemed to provide a claimant with a reasonable opportunity for a full and fair review of a claim and adverse benefit determination unless, in addition to complying with the requirements of paragraphs (h)(2)(ii) through (iv) and (h)(3)(i) through (v) of this section, the claims procedures –

(i) Provide that before the plan can issue an adverse benefit determination on review on a disability benefit claim, the plan administrator shall provide the claimant, free of charge, with any new or additional evidence considered, relied upon, or generated by the plan, insurer, or other person making the benefit determination (or at the direction of the plan, insurer or such other person) in connection with the claim; such evidence must be provided as soon as possible and sufficiently in advance of the date on which the notice of adverse benefit determination on review is required to be provided under paragraph (i) of this section to give the claimant a reasonable opportunity to respond prior to that date; and

(ii) Provide that, before the plan can issue an adverse benefit determination on review on a disability benefit claim based on a new or additional rationale, the plan administrator shall provide the claimant, free of charge, with the rationale; the rationale must be provided as soon as possible and sufficiently in advance of the date on which the notice of adverse benefit determination on review is required to be provided under paragraph (i) of this section to give the claimant a reasonable opportunity to respond prior to that date. (Emphasis added).

This means 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, insurers still maintain that claimants have not presented sufficient medical support for a claim, insurers 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.”  Hopefully, these recent regulations will have the effect of evening the power imbalance insurance companies wield against vulnerable disability claimants.