Accidental death & disability dismemberment; AIG reversed by Colorado Court

After Hans-Gerd Rasenack was struck by a hit-and-run driver he applied for benefits under the accidental death and dismemberment insurance he paid for through employee deductions. The policy was issued through AIG Life insurance Company (AIG) and administered by AIG Claim Services. The policy provided an accidental paralysis benefit which covered hemiplegia.

At issue before the U.S. Court of Appeals for the Tenth Circuit was the decision of the U.S. District Court for the District of Colorado. The matter before the court arose under the Employee Retirement Income Security Act (ERISA) which lays out the procedures the court must follow in evaluating a case.

What standard of review must a court apply?

Rasenack and his wife, joint plaintiff Jessica Tribolet, argued that the case should have been reviewed under the “de novo” standard instead of the arbitrary and capricious standard. What is the difference? And why did it matter?

“De novo” means to review a case again as if for the first time. In most cases, the review only includes the evidence before the lower court, commonly the Administrative Record used by the insurance company to make their decision to deny or approve benefits. There are six distinct steps the District Court generally follows.

1. The Court applies the de novo standard to determine whether the claim administrator’s benefits denial was correct. If it was, the Court issues summary judgment for the insurance company, and the case proceeds no further.
2. If the Court finds that the policy administrator’s decision was “de novo wrong”, then the Court determines if the policy administrator had discretion in the claims review process. If the Court finds that the administrator did not have discretion, the benefits denial is reversed by the court.
3. If the Court finds that the policy administrator did have discretion in reviewing the claim, then the Court looks at whether the grounds supporting the decision were reasonable using the arbitrary and capricious standard. This standard is deferential to the policy administrator.
4. If the Court finds that the denial was not based on reasonable grounds, then the administrator’s decision is reversed. If the grounds appear reasonable, the Court then seeks to determine if a conflict of interest existed that contributed to the administrator’s decision.
5. Finally, if conflict of interest was present, then the next level of arbitrary and capricious review is applied, which is not as deferential to the administrator.

On the surface, it might not appear that reviewing a case under “de novo” versus “arbitrary and capricious” would make much of a difference, but for Rasenack and Tribolet it did. Let’s look at their case.

The facts

On May 21, 2003, Rasenack stepped outside his home to say goodnight to some friends. He was struck by a car and thrown approximately 25 feet. His injuries were severe enough to leave him in a coma for about three weeks. On July 7, 2003, he was admitted into a brain rehabilitation program at Craig Hospital where he remained until October. After his release, he continued treatment as an outpatient.

The lawsuit & policy language

On July 21, 2004, Rasnack’s wife and duly appointed guardian and conservator, filed a claim for accidental death and dismemberment (AD&D) under the policy issued to his employer, Marriot International, Inc. by AIG. Her claim was based on the hemiplegia provision of the policy. The policy defined “hemiplegia” as the “complete and irreversible paralysis of upper and lower limbs on the same side of the body.”

The policy defined a limb as the “entire arm or entire leg.” The policy did not define “paralysis.” The policy also stated that to cover the loss, it must occur within one year of the accident. In the event of accidental paralysis, the policy promised to pay 50% of the principle sum of the policy, $124,000 plus rehabilitation expenses of up to $10,000 during the first 2 years after the accident.

The policy also required that written proof be furnished within 90 days of the loss, though failure to do so would not invalidate or reduce the claim if “it was not reasonably possible to give proof within such time.” The outside time limit for filing a claim and providing proof was one year and 90 days. Tribolet had met the provisions of the extended deadline.

Sixteen months later, on November 15, AIG denied Rasenack/Tribolet’s claim. Their conclusion, Rasenack did not suffer from “hemiplegia” according to the policy definition. Tribolet submitted an administrative appeal on January 13, 2006. Based on the policy, she should have received a decision on the appeal within 60-120 days. Instead, AIG didn’t get back to her with its denial until August 31, 2006, over seven months later.

Meanwhile, Tribolet had filed a complaint earlier in August in federal district court. While the plan had two additional levels of administrative review, because AIG had not responded to the timely filing of Tribolet’s appeal, exhausting these levels was deemed unnecessary.

The District Court’s first impression of the complaint was that it fell under an arbitrary and capricious standard. Using this standard, the Court held that AIG’s interpretation of “hemiplegia” as complete paralysis of both limbs on the same side was reasonable. The complaint did not move past the third stage, and AIG’s decision was upheld.

On appeal, Rasenack argued that the correct standard of review should have been de novo and that the administrative record established that he suffered from hemiplegia as defined by the policy.

Court grants a de novo review

If there had been an ongoing exchange between AIG and Rasenack between the filing of the appeal and the rendering of the denial almost eight months later, de novo would not have applied. However, AIG’s failure to render a final decision within the limits stated within their own policy and demanded under ERISA guidelines, coupled with only one phone call in over seven months, entitled Rasenack to a de novo review based on failure of substantial compliance under ERISA.

Once de novo was accepted as the standard of review, the Court began to consider Rasenack’s eligibility for benefits. First, under consideration, whether the language in the policy was ambiguous, as claimed by Rasenack.

Rasenack produced the dictionary definition of paralysis from multiple sources. The consensus of the definitions could be summed up as “the loss of muscle function, loss of sensation or both” or “a complete loss of motor function.”

Because there is more than one reasonable interpretation for the word “paralysis”, the court found AIG’s hard-line definition of paralysis as “no movement at all” could not be supported by the definition of paralysis. Ambiguous language always favors the policyholder not the policy provider. The court found that “complete and irreversible paralysis” could mean complete and irreversible loss of muscle function or sensation, but not the absence of all movement.

The court then reviewed the administrative record. Before he was admitted to Craig Hospital, his preadmission assessment noted that his left side was “plegic.” Further, review upon admission to Craig found the same condition. A brain injury evaluation performed three months later stated that Rasenack required assistance with all mobility issues and had limited use of his left arm.

A physical therapy notation a few weeks later noted that Rasenack could use the left arm for stabilizing. A nurse hired by AIG interviewed Rasenack over a year later in December 2004. She observed that he remained strapped in a wheelchair during the interview. She observed no leg movement, though he did occasionally squeeze the therapy ball with his left hand.

Rasenack’s attending physician reported to AIG that Rasenack suffered hemiplegia, stating that “Mr. Rasenack’s paralysis does appear to be complete and irreversible, although from a quantitative standpoint, he has benefited from rehabilitation treatment.” AIG sought independent review of the file. The physician they chose preferred to define Rasenack’s condition as hemiparesis, which AIG used to deny the claim. This physician noted that he could not answer some of their questions because the details present were insufficient.

In response, Tribolet submitted a detailed affidavit regarding her husband’s condition. This description defined the level of paralysis present and how Rasenack used other muscle groups in the trunk to help him swing his left leg. AIG failed to investigate her claims through an independent medical evaluation. Instead, they sent the same file that had already been reviewed and found incomplete on to another physician. The court found this failure on AIG’s part demonstrated a failure of fiduciary duty. Without an accurate assessment of Rasenack’s specific functional abilities, AIG could not make a fair decision.

Because the administrative record was inadequate, the Appeals Court reversed the district court’s decision. They also instructed the District Court to supplement the record with additional evidence so that’s a proper determination regarding the extent of Rasenack’s disability might be reached.