Disability Insurers: Steps To Avoid Litigation

The first step is to understand the nature of a bad-faith disability claim and why it opens the door to extracontractual and punitive damages. An important motivation for obtaining disability insurance is to provide income during periods when the insured cannot work because of illness or injury.

Insureds do not seek to obtain a commercial advantage by purchasing disability coverage they seek protection against calamity. Disability insurance provides peace of mind and security in the event the insured cannot work. To protect these interests, it is essential that insurers fully investigate all possible bases that might support the insureds claim. Insurers must thoroughly investigate the claim and not withhold payment of claims unreasonably. If an insurer ignores evidence, it acts unreasonably toward its insured and breaches the implied covenant of good faith.

In Amadeo v. Principal Mutual Life Ins. Co., 290 F.3d 1152, 1164-65 (9th Cir., 2002), the Ninth Circuit Court of Appeals revisited the reasons courts allow tort remedies, including punitive damages, against insurers who deny disability claims in bad faith. As the court explained:

The availability of punitive damages is compatible with recognition of insurers underlying public obligations and reflects an attempt to restore balance in the contractual relationship. These considerations are particularly acute in disability insurance cases where the very risks insured against presuppose that if and when a claim is made, the insured will be disabled and in strait financial circumstances and, therefore, particularly vulnerable to oppressive tactics on the part of an economically powerful entity.

Punitive damages are therefore made available to discourage the perpetuation of objectionable corporate policies that breach the publics trust and sacrifice the interests of the vulnerable for commercial gain. Consistent with this goal, a plaintiff may meet the state of mind requirement for an award of punitive damages by showing that the insurers bad faith was part of a conscious course of conduct, firmly grounded in established company policy.

The next step is to make sure disability claims are handled in accordance with insurance industry standards. These include:

*Insurance companies have a duty to treat their insureds fairly. First-party claims handling is not an adversarial process.
*Insurance companies must treat the interests of the policyholder with at least equal consideration to their own interests.
*Insurance companies must thoroughly and fairly investigate each claim. A diligent effort must be made to collect all facts necessary for a good-faith judgment on the claim. Facts must be weighed in a fair and honest way.
*When evaluating a claim for benefits, the financial impact on the insurance company should not be considered.
*An insurance company must not place undue emphasis on information favorable to itself. The company must give fair consideration to information favorable to its insured.
*The insurance company should pay the claim unless there is a good reason not to --denial should not be based on speculation.

And finally, take a page from the recent Multistate Settlement Agreement between UnumProvident (the largest writer of disability insurance in the United States) and state insurance regulators. Be sure your claims handling procedures include the following:

*Give significant weight to Social Security disability awards.
*Give weight to objective, subjective and the treating doctors opinions to evaluate impairment.
*Look at co-morbid claims collectively.
*Select unbiased, financially disinterested, fully trained medical examiners for independent medical examinations.
*Require that in-house doctors be skilled and have all medical information before making impairment findings.
*Have senior claim management involved at the earliest stages of a claim.
*Require that claim personnel undergo rigorous training to ensure best claim practices.

These new claim objectives create a bright-line, good-faith checklist and, more importantly, should help disability insurers avoid bad faith litigation.