Last year I posted about a jury verdict in Indiana in favor of a disability insurance claimant, Donna Combs. A couple of days ago the Indiana Court of Appeals affirmed the bulk of the jury's verdict, an award of $22,583.75 in lost disability benefits and $1.5 million dollars in damages for the insurer's bad faith. As I read the decision I was reminded, again, of how ERISA's limited remedies encourage insurer misconduct. Donna Combs was employed by a county operated hospital. Because the disability insurance she had through her work was provided by a governmental, rather than private, employer, she fell outside the scope of ERISA. She was able to get a lot of information during the discovery process in litigation about how Lumbermens, her insurer, evaluated her claim. For example, Lumbermens internal documents made clear that the insurer had calculated how much money it would save itself by terminating Combs claim. She found that, despite assurances from Lumbermens in April, 2004, that it had almost completed review of her claim, it did not even order a peer review of her medical records until July, 2004. No big deal? Try going three months without the normal income from your job. That was not all. Discovery revealed that when the insurer asked peers of Combs's to review her file, it also instructed them not to contact Combs's treating physicians about any questions or concerns raised during their review. This instruction violated the insurer's own claims procedure manual which required contact with the treating physicians if questions arose or there were discrepancies in the medical records. In addition, discovery revealed that one of the reviewers advised that the insurer arrange for an independent medical examination of Combs. The insurer ignored that recommendation. The same reviewing physician recommended that Combs undergo additional diagnostic testing to assist the reviewers in evaluating her claim. The insurer failed to follow through in arranging for any of that testing or telling Combs that it would be necessary or helpful for her claim. There was more. The insurer did not give the reviewing physicians the proper definition of "disability" under the policy. Thus, the reviewing physicians were not able to competently evaluate whether Combs was disabled under the insurance contract. The reviewing physicians ended up giving their opinion that Combs was not disabled. Then they shredded the records they reviewed, another violation of the insurer's own practice guidelines. The Indiana Court of Appeals found that sufficient evidence had been presented by Combs to justify the jury's verdict awarding her lost disability benefits and damages for bad faith. ERISA and Indiana state law provide different remedies for claimants whose benefits have been denied for no good faith reason. ERISA prohibits individuals from getting any compensation for consequential damages arising out of this type of an insurer's wrongful denial of benefits. In contrast, Indiana state law, like the law of many states, gives folks the right to be compensated for the entire package of losses they suffer when an insurer's denial is so unjustified that it constitutes breach of the implied covenant of good faith and fair dealing. The kind of behavior the jury faulted Lumbermens for in this case is not particularly uncommon in my experience dealing with insurers. What is unusual is that a jury ever gets a chance to compensate the claimant for losses associated with that conduct. ERISA generally restricts discovery in a way that prevents claimants from uncovering the detailed information Combs was able to get from the insurer in her case. But even if that information is available, it is crystal clear that, under ERISA, the most Combs could ever recover from Lumbermens is her unpaid past benefits of $22,583.75 and perhaps her interest on that amount and attorney fees. The difference between that relatively small amount and the amount the jury in Combs awarded goes a long way toward explaining why insurers love ERISA. Take a look again at this Provident memorandum to see how ERISA's limited remedies affect insurer thinking. It's really pretty straightforward. When the financial results of an insurer's bad faith denial of claims are more positive than negative, you'll get a lot of bad insurer behavior.
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