A recent decision out of the Seventh Circuit Court of Appeals reinstated a disabled employee’s benefits, finding a conflict of interest by the insurer. Under federal law, a long-term disability policy obtained through employment requires the fiduciary to allow a claimant at least one administrative appeal, before filing in federal court. In many cases, the fiduciary and the company paying the benefits are one and the same. So an employee files a claim stating that he or she is temporarily or permanently disabled, and can no longer work. The insurance company responsible for paying the claim is also responsible for deciding if the claim is valid. As might be expected, there have been some abuses.
After a Supreme Court decision from 1989, these insurers were given “deferential” review of their decisions by courts. So long as their policies stated that they retained discretion to interpret the provisions of the policy, their decisions were difficult to challenge in court. But a few years ago the Supreme Court acknowledged that the company can have a conflict of interest, and courts need to take that into account.
This case came up in a common enough situation. An employee, Mr. Raybourne, developed a painful condition that eventually prevented him from working. His doctors called him permanently disabled. The insurance company, CIGNA, paid him for a little more than two years, but at the end of the two years started to develop a record to cut off his benefits. It sent him to a different doctor for review. That doctor determined that he could do some sedentary work.
Meanwhile, Mr. Raybourne had a hearing in pursuit of social security disability benefits. CIGNA helped him with that hearing — if Mr. Raybourne received government benefits, CIGNA got to be repaid for a portion of its benefits paid. Mr. Raybourne was held to be disabled, CIGNA took its money, and then cut him off.
The appeals court decided that CIGNA had a structural conflict of interest, and that its change of position, depending on which way the money fell, was unreasonable. It failed to make a reasonable argument based on the conflicting medical evidence, and reinstated the benefits. And though CIGNA fought his request to be reimbursed for his attorney’s fees, the Seventh Circuit awarded fees for the entire litigation (including two trips to the appeals court).