The Circuit Court of Appeals recently reviewed an unusual short term disability insurance denial by applying North Carolina law. The short-term disability coverage offered by TYCO is not governed by ERISA as the disability plan is self-funded. Unlike the majority of disability plans that are funded by disability insurance companies, a self-funded plan is generally not governed by ERISA. In this case, the North Carolina Disability Attorney representing the claimant attempted to argue that ERISA laws should apply to a policy that is not governed by ERISA.
I consider this case to be strange, because I have rarely ever seen a disability insurance case where the claimant’s attorney wanted ERISA to apply to the case. The bottom line with this case is that the short term disability policy offered by TYCO was written with language that gave TYCO the ability to handle short term disability claims in whatever manner they desired. This case is also another example of the old saying that “you get what you pay for”. This benefit offered by TYCO was either free to employees or the employees could pay a small amount each month. The pertinent language from the Circuit Court of Appeals opinion is provided below:
Under North Carolina law, Tyco’s short-term disability policy is a unilateral contract in which Tyco offered its employees an opportunity to apply for and to receive short-term disability benefits. See White v. Hugh Chatham Mem’l Hosp., Inc., 387 S.E.2d 80, 81 (N.C. Ct. App. 1990); Hamilton v. Memorex Telex Corp., 454 S.E.2d 278, 282-83 (N.C. Ct. App. 1995). A Tyco employee accepts that offer by entering or maintaining employment. See White, 387 S.E.2d at 81.
North Carolina law provides that a contract is construed as a whole, and that individual clauses are construed in their context. Sec. Nat’l Bank v. Educators Mut. Life Ins. Co., 143 S.E.2d 270, 275 (N.C. 1965). If a contract provides a party “discretionary power affecting the rights of others,” then that party must exercise its discretionary power “in a reasonable manner based upon good faith and fair play.” Mezzanotte v. Freeland, 200 S.E.2d 410, 414 (N.C. Ct. App. 1973). A contract confers “discretionary power” when the contract language provides one party with the right to exercise its sole judgment. See Midulla v. Howard A. Cain Co., 515 S.E.2d 244, 246 (N.C. Ct. App. 1999).
We consider the plain language of the short-term disability contract. See Holshouser v. Shaner Hotel Group Props. Ltd. P’ship, 518 S.E.2d 17, 18 (N.C. Ct. App. 1999). The stated purpose of Tyco’s short-term disability policy is to “establish the procedure to determine an employee’s eligibility to receive Short-Term and Long-Term Disability Benefits for non-occupational illness/injury.” The policy defines a “Short Term Disability” as “a condition that renders an employee incapable of performing the required duties of his/her occupation… due to non-occupational injury or illness.” The policy states that a short-term disability benefit “may” be available to an employee who has a short-term disability.
The policy includes a section entitled “Short-Term Disability Procedure.” In that section, the policy explains that an employee must notify his supervisor when he is unable to work due to an illness or injury. The policy further details the responsibilities of the supervisor in contacting the short-term disability “vendor.” According to the policy, the vendor is responsible for contacting the employee and the employee’s medical provider to verify the employee’s medical information.
The procedure section of the policy also explains the various requirements imposed after the approval or denial of an employee’s disability claim. For example, if a claim is approved, the employee must provide medical updates to the vendor on a regular basis. However, if the disability claim is denied, the employee must return to work immediately or appeal the denial of the claim within fourteen days.
A “disclaimer” is provided at the end of the policy. The disclaimer states that “[t]he Vice President of Human Resources, or designee, whose decision shall be final, shall make any interpretation(s) of, or exception(s) to [the] policy.”
The plain language of Tyco’s policy demonstrates that the policy does not guarantee that an employee will receive short-term disability benefits if the employee meets the policy’s requirements for establishment of a short-term disability. Instead, the policy merely provides that short-term disability benefits “may” be available to an employee who has a short-term disability. This language also must be construed in light of other policy provisions, including the disclaimer and the statement that a claim may be “approved” or “denied.” See Sec. Nat’l Bank, 143 S.E.2d at 275.
These provisions, when viewed together, provide employees alleging a disability with the right to file a claim for benefits, and with an established claims procedure that allows Tyco the right to exercise its judgment when reviewing claims made under the policy. This policy language provides Tyco with “discretionary power” to approve or deny claims. See Mezzanotte, 200 S.E.2d at 414. An employee’s right to short-term disability benefits therefore is contingent upon Tyco’s exercise of its discretionary power.
We are not persuaded by Leone’s argument that Tyco lacks discretionary power to approve or deny benefit claims because such power is not stated expressly in the policy. In advancing this argument, Leone exclusively relies on court decisions involving claims brought under the Employee Retirement Income Security Act (ERISA). See Gallagher v. Reliance Standard Life Ins. Co., 305 F.3d 264, 268-69 (4th Cir. 2002); Herzberger v. Standard Ins. Co., 205 F.3d 327, 331-32 (7th Cir. 2000). These ERISA cases, which reflect the fiduciary relationship of an employer to its employees in certain contexts not applicable here, are not relevant to our breach of contract analysis. See Griggs v. E.I. Dupont De Nemours & Co., 237 F.3d 371, 379-80 (4th Cir. 2001) (discussing the responsibilities of a fiduciary under ERISA). As explained above, we reach our conclusion concerning Tyco’s contractual authority upon consideration of the plain language of the entire policy.
We also observe that, under North Carolina contract law, Tyco was required to exercise its discretionary power “in a reasonable manner based upon good faith and fair play.” Mezzanotte, 200 S.E.2d at 414. The evidence in the record shows that Tyco acted reasonably in reviewing Leone’s second claim for short-term disability benefits. Tyco referred Leone’s claim to Dr. Bates for multiple reviews, considered Leone’s appeal and additional documentation, and relied on Dr. Bates’ various recommendations to deny Leone’s claim. Additionally, Leone has not presented any evidence that Tyco failed to exercise its discretionary power in a reasonable manner. Therefore, we hold that the district court did not err in granting summary judgment to Tyco on Leone’s breach of contract claim.