Herin v. The Prudential Ins. Co. of America, 2008 U.S. Dist. LEXIS 7279 (E.D. Tenn. 2008), involves a disability claim. Velma Herin had a seizure disorder. She was awarded benefits initially under the policy’s requirement that she demonstrate she was disabled from her own occupation. But after two years she was required to show that she was disabled from any occupation in order to continue to receive benefits. Prudential did not believe she qualified under that standard and terminated Herin’s benefits. Herin brought suit to challenge that termination.
The judge spends a fair amount of time outlining the details of Herin's condition, the opinions of various doctors, etc. In that sense, the decision is like many other disability decisions: intensive discussion of facts, medical records and other information specific to the claimant’s condition. The court concludes that, ". . . the objective evidence [supporting a determination of disability] in this case is sparse. . . . however, the file review relied upon by Prudential [in denying benefits] was equally infirm." The decision goes on to outline the court’s concerns about Prudential’s actions and concludes that the insurer's denial of Herin’s benefits was arbitrary and capricious. Then the decision discusses the proper remedy in light of Prudential’s actions.
The court states that "remand to a plan administrator is appropriate ‘where the problem is with the integrity of the plan’s decision-making process, rather than that a claimant was denied benefits to which he was clearly entitled.’" This is remarkable. The court has just determined that the ERISA plan administrator’s claim procedure lacks integrity and that the insurer has acted in an arbitrary and capricious manner. Nevertheless, remanding the claim to the insurer is the appropriate remedy! Perhaps this result would be somewhat defensible if, in so doing, the court ordered that Herin’s benefits be reinstated until the ERISA claims procedure requirements were properly carried out. But this court didn’t enter such an order and it is uncommon for the federal judiciary to do so, even in the face of serious procedural violations by insurers.
This decision and decisions like it (which are numerous) make it hard to understand why an insurer would ever feel the need to take seriously the need to comply with ERISA’s procedural and fiduciary duties. If the worst an insurer can expect as the outcome in litigation is a remand, how to handle these claims is a no-brainer from the insurer’s perspective. You spend as little time and money as possible investigating these claims and deny them if you can. Of the pool of individuals holding denied claims, a large portion will simply go away.
These individuals are usually struggling with significant illnesses or disorders that impair their ability to pro-actively and effectively challenge an insurer’s denial. They almost invariably do not have the money to pay an attorney by the hour to represent them. They often times do not have claims of enough value to interest an attorney in representing them on a contingent fee basis. If they attempt to appeal the denial themselves without the help of someone who understands the landmined terrain of ERISA, they will almost invariably fail to do what is necessary to prepare the case for a reasonable likelihood of success in litigation. A few may find one of a couple of hundred or so competent, experienced ERISA claimant’s counsel in the country to help them. Many will not.
You, the insurer, have placed discretionary language in your policy that triggers an arbitrary and capricious standard of review. Statistically speaking, decisions from courts reviewing your denial under that deferential standard of review are much more likely than not to affirm your denial. And even if you lose and the court determines that you abused your discretion, the court will usually remand the case to you so you get to try again, this time in a little more thorough fashion, to put together a non-arbitrary and capricious denial. What a sweet gig!
That is not all. In an ERISA case, even if you, the insurer, lose, the most the court will order you to pay, even if you have acted outrageously, is the unpaid benefits, prejudgment interest and, if the court is in a really bad mood or is quite annoyed with you, attorney fees to the claimant. And that happens, if at all, only after protracted litigation and only months or, usually, years, down the road. All the while you get to hold the claimant's money and earn investment income off it. It's a little undestood fact that for insurers, a huge portion of their income results from investment income on premium dollars they are holding for the benefit of claimants.
You can make a strong argument that, the way ERISA operates right now and the way the federal judiciary interprets the statute, there is a clear business incentive for insurance companies to deny all but the stongest, most obviously meritorious, ERISA claims. Doing anything else would be a disservice to their shareholders.
This is clearly not as Congress intended. Individuals who don’t know much about ERISA may think I’m exaggerating. Those who have experience with the statute know I’m not. From my perspective, doing anything less than acknowledging the statute’s clear shortcomings and crying them from the rooftops assures that the statute will continue to be used as a basis to cheat claimant’s out of benefits to which they are entitled.