Appeals Court Rules Against Disability Insurer

(AP Photo/Wally Santana) (AP Photo/Wally Santana)

A 3-judge panel at the 9th U.S. Circuit Court of Appeals has decided 2-1 to give a paralyzed California man a new chance to get more benefits from a group long-term disability (LTD) insurance carrier.

In a split decision, the panel majority found that a U.S. District Court judge should have paid more attention to how much the fact that the plan administrator, Unum Life Insurance Company of America, was also the plan insurer should have affected the court's analysis of whether Unum Life might have abused its discretion to interpret the group LTD policy.

Circuit Judge Marsha Berzon and Senior 3rd Circuit Judge Robert Cowen ruled in favor of Mark Stephan, the plaintiff in the case, Mark Stephan vs. Unum Life Insurance Company of America (Number 10-16840). 

Circuit Judge Diarmuid O'Scannlain ruled in favor of the insurer, Unum, which is a unit of Unum Group Corp. (NYSE:UNM).

Mark DeBofsky, a Chicago lawyer who helped represent Stephan, welcomed the ruling.

The 9th Circuit majority "recognized in this ruling that the purpose of disability insurance is to protect a worker’s financial well-being in the event of catastrophic injury or illness," DeBofsky said. "The court placed common sense limits on an insurer’s interpretation of its policy which favored its self-interest as against the interests of the policyholder."

Unum finds the ruling disappointing, company representatives said.

"We believe it may have the potential to jeopardize the sanctity of attorney-client privilege," company representatives said. "We are exploring our options, but we will, of course, continue to pay the claim, as we have from the beginning.  We conducted a thorough and complete investigation and analysis of this claim, and we’re confident we reached a decision that was reasonable and well-supported by the record."

Mark Stephan, the plaintiff, began working for an investment banking firm in August 2007. He was injured in a bicycling accident three months later and was paralyzed from the neck down, Berzon wrote in an opinion for the 9th Circuit panel majority.

Unum agreed that Stephan was permanently disabled. When the company calculated Stephan's monthly benefits, it based the calculations on Stephan's monthly salary and excluded Stephan's annual bonus.

Like many insurance policies, the group LTD plan that covered Stephan included a provision giving the insurer the discretion to interpret the terms of the policy. The federal courts generally hold that, when a benefit plan includes a discretionary clause, the courts can review the facts in a benefits decision involving the plan from scratch only if the insurer appears to have abused its discretion.

The district court found that Unum had made reasonable use of its discretion and granted summary judgment in favor of Unum, Berzon said.

The 9th Circuit majority agrees that the right standard to apply is the abuse-of-discretion standard, and the district court also was right when it noted that Unum had a conflict of interest because it acted as both the insurer and the plan administrator, Berzon said.

When deciding how to weigh the effects of the conflict of interest, the district court erred by keeping some internal memoranda between Unum’s claims analyst and its in-house counsel out of the reach of Stephan's lawyers, Berzon said.

The district court also "did not take into account substantial evidence that Unum’s conflict of interest 'infiltrated the entire decisionmaking process' and therefore ought to be accorded 'significant weight,'" Berzon said.

The 9th Circuit panel majority has asked the district court to reconsider the effect of Unum’s conflict of interest and whether Unum did abuse its discretion in failing to include Stephan’s bonus in his predisability earnings.

O'Scannlain said in a dissent that he thinks the district court did a good job of weighing the evidence.

The plan itself said nothing about whether a bonus should be counted as monthly income, O'Scannlain said.

"Unum consistently explained that it was not including the annual bonus because that bonus was contingent on Stephan completing a year of satisfactory performance, which he did not do; because the bonus was not paid on a monthly basis; because TWP [the employer] had not paid premiums on the higher amount; and because it did not find TWP’s expert persuasive," O'Scannlain said. "Its interpretation of the plan should not be disturbed."

California is a state that has been particularly active in efforts to keep disability insurers from using discretionary clauses in policies. 

The U.S. Supreme Court ruled in 2008 in a discretionary clause case that having the same company insure a group disability plan and administer the claims creates an inherent conflict of interest.

The Supreme Court also looked at the discretionary clause issue in a 2006 case.

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