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Dealing With a Disability Insurance Denial Based on a Policy Exclusion

If you have a disability insurance policy governed by ERISA and you are challenging an insurance company’s denial of disability benefits, you’ll have to convince a court that the decision was “arbitrary and capricious” and not just incorrect.

This is a tough bar to meet in disability insurance cases in Tennessee, or anywhere else. Even if a court believes that the claimant is entitled to benefits, it will still uphold the insurer’s denial as long as it is based on a “reasoned explanation.”  As the Sixth Circuit has explained, this “is the least demanding form of judicial review of administrative action.”

There is one area of good news for disability claimants. If an insurer denies disability benefits due to an exclusion listed in the disability insurance policy, then the insurer will have the burden of showing that the exclusion applies.

Insurance policies include exclusions which allow insurers to deny benefits under certain defined conditions. For example, many insurers will not pay benefits if the insured engaged in an unlawful, reckless or dangerous activity that resulted in the disability, death or accident at issue.  Under this type of exclusion, for example, an insurance company may not have to pay if the insured individual is injured or dies in a hang gliding accident.

In an ERISA disability case, if an insurer denies benefits on the basis of an exclusion, a court likely will examine that decision more stringently than it would if the decision was based on a medical determination, for example, denying the claim on the basis that the claimant’s condition does not prevent him from performing the material duties of his occupation. This stricter standard was applied in Mitzel v. Anthem Life Ins. Co. (6th Cir. 2009), where the defendant-insurance company denied disability benefits after concluding that the claimant had a pre-existing condition called Wegener’s granulomatosis (“WG”).

At a first glance of the facts of the Mitzel case, it might appear that the insurer’s decision was not arbitrary and capricious.  The claimant had multiple visits to her doctor prior to the effective date of the policy.  During those visits, she displayed symptoms associated with WG.  The insurer seemed to have an arguable basis for concluding that the claimant had a pre-existing condition.

Nevertheless, the Sixth Circuit determined that the insurer’s denial was arbitrary and capricious because the claimant’s doctor did not diagnose her with WG until after her policy went into effect.  In explaining its decision, a split court noted that the benefit booklet defined a pre-existing condition as a sickness or injury for which the insured “received medical care or services.”  The Mitzel court found that, because the claimant could not have received medical care for WG until after she was diagnosed, she did not have a pre-existing condition under the terms of the plan.

In looking to challenge a denial of long-term disability benefits based on an exclusion, claimants should be cautious in over-relying on the court’s decision in Mitzel. ERISA disability cases are highly fact-intensive, and the same rule might result in different outcomes in different cases.  Still, if there is a takeaway from Mitzel, it’s that the arbitrary and capricious standard has its limits,  when a court examines an exclusion-related denial.