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For claimants, it is not easy to challenge an insurer’s denial of long-term disability benefits in court, particularly in an ERISA case.  Courts review the insurer’s or administrator’s decision under an “arbitrary and capricious” standard meaning that they will uphold the decision as long as it was the result of a “deliberate, principled reasoning process.”  To put it simply, a court will uphold a decision to deny long-term disability benefits even if it disagrees with it, so long as the insurer can point to some facts justifying the denial.

Because no two disability cases are alike, courts have not, and cannot, set out clear rules on what constitutes an arbitrary and capricious denial of benefits.  However, a recent decision from the United States Court of Appeals for the Sixth Circuit (the circuit that includes all the federal courts in Tennessee) provides important guidance on when an insurer’s disability determination, under the arbitrary and capricious standard, will be reversed. Continue reading →

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If you’re applying for long-term disability benefits, not much of your private life is off limits. Whether you’re mowing your lawn or posting on your Facebook page, your disability insurer can monitor your activities in search of any reason to deny your claim for benefits.  And, it may well do so.

In O’Bryan v. Consol Energy, Inc., (2012), the Sixth Circuit (which includes all federal courts in Tennessee) held that there is nothing improper with a plan administrator conducting surveillance on a claimant for long-term disability benefits.  In that case, Liberty Life Assurance Company (“Liberty”) paid an investigator to put a disability claimant under surveillance.  The investigator then observed the claimant performing common daily tasks, such as getting in and out of his vehicle, putting fuel in his vehicle, and mowing the lawn. Because of the investigator’s findings, Liberty denied the disability claim.  When the Plaintiff challenged the company’s decision, the court upheld Liberty’s decision to deny benefits, specifically citing Liberty’s argument that the investigator’s surveillance report contradicted the symptoms the claimant reported to his medical examiners.

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In our last post, we discussed the insurable interest requirement in Tennessee. Under that requirement, the prospective owner of the policy must prove that he or she would suffer some type of loss if the insured were to die while the policy was in effect. This requirement prevents speculators from buying insurance on a person’s life in the hopes that the person dies before the death benefit exceeds the amount of premiums paid.

Obtaining and assigning financial instruments can be a lucrative business. So, sometimes, parties may try to structure a life insurance policy in such a way that it appears that the policy were supported by an insurable interest.  Courts, however, may well scrutinize such policies, especially if it appears that a speculator used an elderly person as a conduit to acquire a beneficial interest in a life insurance policy that the speculator otherwise could not acquire.

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The law which requires a policy owner to have an insurable interest in whatever is being insured seems fairly straightforward.  Under Tenn. Code Ann. § 56–7–101, a person who buys an insurance policy must have an insurable interest in what is being insured.  For example, you can only take out a homeowner’s policy on your own home, and not on the home of a stranger.

In the context of life insurance, the insurable interest rule requires that the beneficiary of the policy suffer some type of loss if the insured were to die while the policy was in effect.

For example, a minor child would have an insurable interest in his or her parents.  An investment firm would have an insurable interest in an entrepreneur to whom it had just given a sizable loan to start a company. In contrast, if a stranger convinced a wealthy senior citizen to let him or her take out a policy insuring the senior citizen’s life, that policy would be void.

As it relates to life insurance, the insurable interest requirement prevents speculators from buying insurance on a person’s life in the hopes that the person dies before the death benefit exceeds the amount of premiums paid.

In practice, the insurable interest requirement is not as simple as it seems.  For example, what if there is an insurable interest at the time the policy is issued, but not at the time the person whose life is insured dies? That question was answered by the Court of Appeals of Tennessee in Trent v. Parker (1979).  In that case, a corporation took out a life insurance policy on its CEO.  The CEO later left the company, and then filed suit against the company asking the court to cancel the policy.  Ruling in favor of the CEO, the lower court voided the policy stating that the company no longer had an insurable interest in its former employee.

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In lawsuits challenging an ERISA plan’s denial of long-term disability benefits, can claimants who have qualified for Social Security disability benefits use that as evidence in their case?  Or, to put it another way, can a decision from the Social Security Administration (SSA) on a claimant’s disability status be a factor in a court’s overall analysis of whether an ERISA plan improperly denied long-term disability benefits?

The answer to both questions is “yes,” although with caveats.  Courts are mindful that the standards for determining disability under the Social Security requirements may vary considerably from the standards for determining disability under a private ERISA plan.  However, as noted by the district court in Gellerman v. Jefferson Pilot Fin. Ins. Co.  (S.D.Tex.2005) “no court has held that an SSA determination is completely irrelevant” in an ERISA dispute over disability benefits.

In Glenn v. Metlife (2006), the Sixth Circuit found that the insurer’s failure to give any weight to the claimant’s SSA disability determination was “perplexing” and a “significant factor” in its analysis of the claimant’s claim for long-term disability benefits.  (The Sixth Circuit includes the federal district courts in Tennessee.)

In Glenn, the claimant qualified for the first phase of long-term disability benefits under her ERISA plan after she showed that she could not complete the material duties of her regular job.   In order to reduce the amount of disability payments it had to make to the claimant, the insurer hired a law firm to help her with her disability claim with the SSA.  The claimant then qualified for total disability benefits through the SSA, and the insurer deducted those government benefits from the disability payments that it was obliged to pay, as provided for under the policy.  (All long-term disability policies this author has seen and is aware of allow the insurance company a credit for Social Security benefits.)

After receiving long-term disability benefits for two years, the claimant then had to meet the more difficult standard in phase two of her disability plan.  Now, she had to show that she could not perform the material duties of any gainful occupation, as opposed to the specific material duties of her prior job.  Despite receiving repeated and detailed correspondence from her physician supporting her claim, the insurer determined that she failed to meet the “any gainful occupation” standard and terminated her benefits.  The claimant filed a lawsuit in district court challenging the decision, and the district court ruled in favor of the insurer.  She then appealed her case to the Sixth Circuit.

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Under what circumstances will a court rule that the named beneficiary under a life insurance policy is not entitled to receive the proceeds of the policy?  In Estate of Lane v. Courteaux (2017), the Court of Appeals of Tennessee wrestled with that issue, before ruling against the party who argued that a named beneficiary should not be entitled to any proceeds under the policy.  According to the court, a named beneficiary of a life insurance policy will almost always be able to recover the death benefit, even when there are compelling reasons to award the proceeds to another party.

The facts of Estate of Lane are tragic.  A wife had a $600,000 life insurance policy in which she named her husband the sole beneficiary. Later, she was diagnosed with terminal cancer.  Shortly after, her husband learned he also had terminal cancer.

Although the husband was not expected to outlive his wife, she passed away before he did.  Shortly before her death, the wife, while retaining her husband as a co-beneficiary, added her sister, Amanda Courteaux, as a co-beneficiary.  This caught the husband by surprise.  When he discovered, after her death, that his wife did add her sister as a beneficiary of the life insurance policy proceeds, he speculated that his wife wanted her sister to provide for their son, who was on the verge of losing both his parents.  Under the life insurance policy at issue, the wife’s sister was entitled to $300,000 of the policy proceeds.

Later, the husband believed Courteaux was going to use the proceeds for purposes other than his son’s welfare.  He then filed a complaint against Courteaux seeking to have nearly all of her share of the proceeds placed into a trust for the benefit of his son.  In his lawsuit, the husband sought relief, in part, under the legal principle of promissory estoppel.

Prior to the trial, the husband passed away, and his executor and estate were substituted in his place.  Before he died, the husband gave a deposition in which he testified about a document created by his wife that he discovered after her death.  According to the husband’s testimony, the document indicated his wife wanted Courteaux to have only $30,000 of the proceeds for herself, with the remainder of her share to be transferred to her husband to use for their son’s benefit. (It is not clear from the court opinion what exactly this document was, or what it said.)  At trial, the deceased wife’s half-sister also testified wife wanted Courteaux to receive only a $30,000 share of the proceeds.

At trial, Courteaux conceded that she and her sister both promised to take care of each other’s children if anything ever happened to one of them.  Nevertheless, she testified that the life insurance proceeds were “my money.”

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Even when plaintiffs win ERISA disability lawsuits, their attorney’s fees can cut into their awards.  In some ERISA disability cases, however, plaintiffs can recover their attorney’s fees (and costs) under federal law.

What do plaintiffs need to show in order to be awarded their attorney’s fees in an ERISA disability lawsuit?  In Sec’y of Dep’t of Labor v. King (1985), the Court of Appeals for the Sixth Circuit, the circuit which includes federal courts in Tennessee, set out five guidelines for district courts to apply when deciding whether to award attorney’s fees under ERISA. They include:

(1) the degree of the opposing party’s culpability or bad faith;

(2) the opposing party’s ability to satisfy an award of attorney’s fees;

(3) the deterrent effect of an award on other persons under similar circumstances;

(4) whether the party requesting fees sought to confer a common benefit on all  participants and beneficiaries of an ERISA plan or resolve significant legal questions regarding ERISA; and

(5) the relative merits of the parties’ positions.

Sixth Circuit courts regularly use the above guidelines–referred to as the “King Factors”– in evaluating claims for attorney’s fees. For example, in Moon v. Unum Provident Corp. (2006), the Sixth Circuit applied the King Factors in awarding the plaintiff attorney’s fees even though the lower court initially ruled against her claim for long-term disability benefits.  After the Sixth Circuit reversed the district court’s ruling (Moon 1), the case was remanded to the district court to decide whether the plaintiff was entitled to attorney’s fees.

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What happens in life insurance policy litigation when an insured intended to change the beneficiary of his or her policy from an ex-spouse to a current spouse, but did not correctly fill out and/or submit all the necessary paperwork before his or her death? Can the current spouse make a successful claim to the life insurance policy proceeds?  Or, can the ex-spouse prevail by arguing that the insured cannot change his or her beneficiary without following all of the life insurance policy’s procedures?

In the Sixth Circuit (the circuit which includes Tennessee), courts will usually recognize a change in beneficiary even when the insured did not “strictly comply” with all of the life insurance policy’s rules on how to designate a new beneficiary.  Still, courts will not award proceeds to a current spouse if he or she can do no more than show that the insured merely intended to designate a new beneficiary.  The general rule in the Sixth Circuit, and in Tennessee state courts, is that the insured must be in “substantial compliance” with the terms of the life insurance policy for the beneficiary change to be effective.

The courts in the Sixth Circuit have admitted that there is no easy definition for the term “substantial compliance.” Making matters even more confusing, courts in the Sixth Circuit usually, but not always, apply the substantial compliance test in examining an insured’s flawed beneficiary designation for life insurance policies governed by ERISA.  That complexity aside, this much is clear: If the intended beneficiary seeks to collect policy proceeds, he or she will have to establish that the insured completed several critical steps in designating a new beneficiary.

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In an ERISA disability case, a court will not overturn an insurer’s decision to deny a claimant benefits unless it is clear from the administrative record that the decision was “arbitrary and capricious.” This can be a tough bar for someone covered by a disability policy.  In fact, courts in the Sixth Circuit (the circuit which includes Tennessee) have noted that the arbitrary and capricious standard is “highly deferential”, and “the least demanding standard of review of an administrative record.”

Even still, an insurer must justify its decision to deny long-term disability benefits to a claimant. In fact, Sixth Circuit courts have stressed that the arbitrary and capricious standard of review still “has teeth.” As one court noted, “merely because our review must be deferential does not mean our review must also be inconsequential.”

In other words, a court will not rubber stamp an insurer’s decision to deny benefits, even in an ERISA disability case. Rather, they will take a close look at, not only the the insurer’s decision, but also  the process the insurer followed in making its decision.

For example, in Calvert v. Firstar Fin., Inc. (6th Cir. 2005), the court observed that an insurer’s failure to conduct a physical examination of the patient “may, in some cases, raise questions about the thoroughness and accuracy of the benefits determination.”  In that disability case, the plaintiff maintained that her insurer acted arbitrarily and capriciously when it denied her claim for long-term disability benefits without examining her in-person, and instead, merely relied upon a physician’s cursory review of her medical file.

The Calvert court did not hold that a file review can never take the place of an in-person evaluation.  In fact, it noted that there is nothing “inherently objectionable” about an insurance company basing its decision on a physician’s review of the file, even when that review results in a different determination than the claimant’s treating physician.

Still, the Calvert court made it clear that the file review has to be rigorous, especially when it contradicts the opinions of the treating physician.  In Calvert, the court noted that the physician’s review of the file did not describe the data he reviewed.  In fact, the physician’s review made no mention of the surgical reports, x-rays or CT scans in the record.  He also did not discuss the claimant’s functional capacity evaluation.  As a result of the physician’s lax review of the claimant’s medical file, the court determined that the insurer acted arbitrarily and capriciously in denying benefits.

If there is a larger takeaway from Calvert, it is that a court’s “deferential” standard of review of an insurer’s denial of benefits does not mean that insurers can offer up a simplistic defense of their decision.  Insurers still have to show that they based their determination on an extensive and contextual evaluation of the claimant’s medical condition.

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A serious and important question in a life insurance policy case can be: Is a death caused by a drug overdose an “accident” or is it an intentional act that can permit an insurer to deny benefits under the terms of the policy?

Courts in the Sixth Circuit have wrestled with this issue for decades, but they now appear to agree that, barring evidence that the insured intended to commit suicide, a drug overdose should be deemed an accident, and not an intentional act. (Federal district courts in Tennessee are in the Sixth Circuit)

In Andrus v. AIG Life Ins. Co., (N.D. Ohio 2005), the Plaintiff was the beneficiary of her husband’s life insurance policy. The life insurance policy was governed by ERISA.  The Plaintiff was denied benefits after her husband overdosed on prescription medication, including OxyContin.  Under the terms of the life insurance policy, coverage was available only in the event her husband’s death was an accident.  The policy did not define the term “accident;” however, it excluded coverage from death caused by intentionally self-inflicted and suicidal acts.