Apr 24, 2019

Prying Open An Insurer's Black Box

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Brian S. King
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Insurers have conflicted loyalties in many ways. For example, in 29 U.S.C. Sec. 1104(a)(1), ERISA requires that when they are the funding mechanism for health or disability benefits offered by employers, insurers must exercise the loyalty of a fiduciary toward their insureds. This means they must act solely in the interest of the ERISA plan participants and beneficiaries, and for the exclusive purpose of providing them benefits. At the same time, from a business perspective they must protect their own economic interests as they seek to provide a return to investors and compete with other insurers. Doing both simultaneously can be a challenge. A recent case out of the U.S. Court for the Southern District of New York, Levy v. INA Life Ins. Co., 2006 U.S. Dist. LEXIS 83060 (S.D.N.Y. 2006), written by Judge Gerard E. Lynch, illustrates a specific facet of the conflict rather nicely. After INA denied Levy’s disability claim, he asked for a copy of the insurer’s claims handling manual. This internal document was, the insurer claimed, proprietary and could not be disclosed except with the court ordered requirement that Levy not share it with anyone else. Without such a protective order, the insurer argued that secret information developed for its own use would eventually end up in the hands of its competitors and damage it. Levy countered that ERISA’s regulations expressly allow claimants to evaluate whether the insurer’s handling of the particular claim in question conformed with the insurer’s own internal guidelines and whether it is consistent with how the insurer has treated other claimants with similar issues. Moreover, Levy argued, other claimants had already received the same guidelines without being required to keep them confidential. The court ordered production of relevant portions of the claims handling manual without any restrictions on their use. Not only did the court accept Levy’s “cat is out of the bag” argument, it noted that the largest disability insurer, UNUM/Provident, already made its claims procedure manual available to anyone who asked for it without any restrictions at all. The court also pointed out that INA had failed to specify how the information it sought to keep under wraps would harm its ability to compete in the market. Kudos to my friend, Scott Riemer, for his great work as Levy’s counsel. Levy is a disability case but its principles are the same whether the insurer is providing life, health or disability benefits under ERISA. Specifically, an insurer's obligation to provide open access to relevant information about how a person’s claim was evaluated, whether that processing conformed with the insurer’s internal guidelines and how the insurer has treated other similarly situated claimants trumps an insurer’s argument that it must keep its processes secret to allow it to more effectively compete with other insurers. Levy and other cases are good to keep in mind when dealing with insurers who stonewall when you ask for directly relevant information–an occurrence that is more common than not in my experience. I’ll see if I can’t get a public copy of the case and post it to the website library in the next day or two. UPDATE: here you are!

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7 Comments to "Prying Open An Insurer's Black Box"

Do you know of any statutory or case law that requires a formal set of plan documents, such as a trust document, for an ERISA plan to be enforceable. I am involved in a situation where my client's employer offers a plan, but the only "plan document" was the summary plan description, which was drafted by and published by the insurance carrier that was acting as a contract administrator. The carrier has indicated that there are no other plan documents. The SPD is about 60 pages long, but it does not provide information as to how the plan is funded, etc. It has what appears to be all the required SPD data. I am looking to see if there is a way to contest ERISA status in the absence of a formal plan and a trust document.
Phil Pfeifer
Posted by Phil on November 17, 2008 at 01:47 PM
I am curious where it states in ERISA that current profits of an insurer are subordinate to current and future claimants' interests. I can see how this is incorporated into surplus and reserves, in that the insurer anticipates losses in some years.

In regards to the insurer having loyalties to current and future insureds, this does have some credence. But as you mentioned, this type of thinking can be extended to the point of utter nonsense. How far into the future is the insurer suppose to project? It seems kind of silly, when the typical contracts are extended only on a yearly basis.

ERISA clearly points to the plan's interests being superior to that of an individual. This does not correspond, in my opinion, to the insurer siding with all current and future insureds over the current individual. There is a difference beteween the insurer's loyalties to all its policyholders, and an ERISA plan's loyalties to all its participants. This is why I like the concept of a VEBA that I mentioned earlier. If self insured, the plan IS the participants!
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
Posted by Don Levit on November 17, 2008 at 01:47 PM
Thanks for your reply.
As you posted in this column, insurers have conflicted loyalties. If the insurer is deemed a fiduciary, it would seem to me there would be conflicts in both parts of your fiduciary definition. Insurers do not act solely in the interests of plan participants and beneficiaries. As a practical matter, insurers will have many group clients, say, for health insurance purposes. The insurer is interested in the groups, collectively, not individually. You and I both know that insurers can get creative, when certain groups are costing them money, to discourage their continuance.
In regards to the second part of the fiduciary definition, the insurer usually gets to use the arbitrary and capricious standard for claims denials. How is using that definition enhancing its role to the participants in the first part of the definition, particularly in claims that have gray areas (as you recently posted).
This is exactly why I like the Voluntary Employees' Beneficiary Association (VEBA), particularly for self-funded multiple employer plans of 10 or more employers. The non commercial insurer here is interested in the entire group, for the entire group is its lifeblood, as one unit.
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
Can you cite a portion of ERISA or any federal court case in which the relationship between an insurer and insured is a fiduciary one? To my knowledge, it is settled law that the relationship between an insurer and insured is not fiduciary in character, Corrado Bros. v. Twin City Fire Ins. Co., 562 A.2d 1188, 1192 (Del. 1989).
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
Don, you ask how an insurer's assertion that it is entitled to have a court defer to its decision to deny a claim squares with its duty of loyalty to its insureds. A great question! You could argue that if an insurer took seriously its fiduciary obligation it would make no attempt to shield itself from unflinching scrutiny by an outside, objective, party. But, to the degree they can do it, insurers always want to tie the hands of a judge so they can have a free a rein as possible.

As for conflicted loyalties, insurers are quick to point out (rightly) that their fiduciary duty is not solely to the single insured whose claim is at issue but to ALL the plan's insureds. They have an obligation to protect the interests not only of the insured making the current claim but to all future insureds who have yet to make claims. Those future claimants are relying on funds to be available days, weeks, months and years down the road. Fair enough.

But, taken to its extreme, that rationale would dictate that no claims are paid now out of the concern that calamity may strike tomorrow. So the "future claimants" consideration can never be used as a justification to wrongfully deny a current insured's valid claim. And both current and future claimants' interests clearly have to be given a priority position by the insured over the company's own concern about making a current profit. That is the behavior ERISA requires of insurers under the fiduciary standards of the statute. supposed to
Posted by Brian S. King on November 17, 2008 at 01:47 PM
Don, a couple of provisions of ERISA have to be read together to establish the legal proposition you ask about. The first is 29 U.S.C. Sec. 1104(a)(1) which states that ERISA fiduciaries must act "solely in the interest of the [ERISA plan] participants and beneficiaries . . . and for the exclusive purpose of providing benefits . . ." to them. The second provision is 29 U.S.C. Sec. 1002(21) which states that any person or entity in connection with an ERISA plan who exercises any discretionary authority, control or responsibility respecting the assets of an ERISA plan or in administering the plan is a fiduciary. And once the label of "fiduciary" is affixed to an insurer, the duty of loyalty outlined in 29 U.S.C. Sec. 1104(a)(1) comes into play. Many decisions have concluded that insurers qualify as fiduciaries under this broad definition.
Posted by Brian S. King on November 17, 2008 at 01:47 PM

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