In California, Federal Judges are often limited in their ability to reverse a denial of disability insurance benefits if a disability insurance policy is governed by ERISA. A California disability attorney must be very experienced in handling ERISA disability denials to have any chance of convincing a Judge to reverse a disability claim denial. Not every policy is governed by ERISA, but if your policy is then you must be prepared.
The first key question in every ERISA disability denial lawsuit is whether the claimant’s disability insurance policy contains a “discretionary clause.” This clause gives the insurance company the right to interpret the terms of the disability policy and make a final claim decision. If a disability policy does not contain a discretionary clause, then a court is not restricted in their review of a disability denial. But if there is a discretionary clause, then the court is limited in its analysis to an “arbitrary and capricious” review of the claim denial.
A California Court’s Review of a Claim Denial
The Ninth Circuit Court of Appeals, California’s highest federal court, explained “the arbitrary and capricious” standard of review in the case of Abatie v. Alta Health and Life Insurance Company. That case involved a dispute over life insurance benefits, but the same law applies to disability insurance claims. The plaintiff’s husband worked as a doctor for a Santa Barbara clinic from 1971 until November 1992, when he developed non-Hodgkin’s lymphoma and took a leave of absence. He never returned to work and, beginning in 1993, received permanent disability benefits. After his death in 2000, his widow filed a claim for life insurance benefits.
Alta Health and Life Insurance Company denied benefits. In its view, the policy was no longer in force when the plaintiff’s husband died. The case turned on whether the doctor had to continue to pay policy premiums even though he was on disability at the time. Under the language of his policy, his coverage ended when his employment ended unless he became totally disabled and the insurance company granted him what was called a waiver of premium.
Alta Health initially denied coverage because it asserted the doctor had not filed a request for the waiver of premium. However, the doctor had in fact filed the request but the insurance agent had not initially sent it to Alta Health. When the doctor’s widow filed suit, Alta Health added another reason for its denial: the doctor was not entitled to a waiver of premium because he was not totally disabled. It claimed for the first time that the doctor had to pay premiums because his non-Hodgkin’s lymphoma went into partial remission in the two years before his death. In the insurance company’s view, he wasn’t totally disabled and had to pay the premium to keep the policy in force and, in turn, be entitled to life insurance benefits.
The California Court’s Basis For Overruling the Insurance Company Denial
The Ninth Circuit Court of Appeals found that Alta Health had improperly denied coverage. The court’s decision was based on a number of factors including:
- Alta Health had a conflict of interest, as the insurance company was both the claims administrator and the source of funds for paying claims;
- The reasons for Alta Health’s denial of coverage changed over time; and
- Alta Health’s reasons for the denial of coverage were directly contradicted by its own files as well as by the discovery produced in the lawsuit.
Even though the policy contained a discretionary clause and gave Alta Health the right to make some decisions, the Ninth Circuit Court of Appeals determined that the decision to deny coverage could not stand. The court said these “procedural irregularities” showed that the denial of coverage was arbitrary and capricious, which resulted in a victory for the claimant.
Abatie v. Alta Health and Life Insurance Company, 458 F.3d 955 (9th Cir. 2006) (en banc)