Tips on Disability Insurance Claims

Claim Filing Basics
State of Georgia Market Conduct Exam (download pdf 3MB)
National Survey of Actions against UnumProvident et al
Successfully Mediating Disability Claims
The Safety Net She Believed In Was Pulled Away When She Fell
NY bans LTD Discretionary Clauses (pdf)
CDI & Disability Policyholders Win Key Ruling (pdf)
CA limits on insurer discretion re: disability now finalized (pdf)
Few Unum claim denials are being reversed

Claim Filing Basics

1. BEFORE YOU MAKE A CLAIM: READ YOUR POLICY AND REVIEW YOUR APPLICATION.

• Read the definition of disability in your policy to determine whether or not your condition qualifies for benefits.
• Have your treating doctor confirm and explain your disability in writing to the insurance company. Almost all policies require that you be under continuing care by a doctor to qualify for disability benefits.
• Review the answers you gave on your application. Are they true? Will they conflict with the medical records that your insurance company will obtain? Be sure that if you answered any of the questions incorrectly you have a good explanation. If there is an inconsistency between your application and your medical history as reflected in your doctor's records, it is often because you misunderstood a question on an application, or, your agent told you the insurance company was not interested in minor problems, or, you did not know, at the time you filled out or signed to the truth of your answers that you had a condition that would have required a different answer. If so, be prepared to explain the inconsistency to your insurer during the claims process.

2. YOU MAY NOT BE ABLE TO COLLECT BENEFITS DURING AN INITIAL ELIMINATION PERIOD.

Most disability policies contain an elimination period that requires you to be disabled for a certain period of time before you can collect benefits. The shorter the elimination period, the more expensive the policy. It's like a deductible.

3. FILE A CLAIM AS SOON AS YOU KNOW YOU ARE DISABLED.

It doesn't matter if you won't be eligible for benefits for several months - file your claim promptly upon discovering your disability. The insurance company has the right to know that you are currently disabled and that you will be applying for benefits. A failure to promptly submit a claim can result in the insurance company denying your benefits. Don't give them the excuse to do this.

4. CONFIRM COMMUNICATIONS WITH THE COMPANY IN WRITING

It's okay to speak to the adjuster assigned to your claim over the phone but follow up with a letter documenting whom you spoke to and what was said. When you send notice of your claim to your insurance company make sure to send it by registered mail, return receipt requested. Don't give them an excuse to tell you that they never received notice of your claim or any other important information that you want them to have.

5. KEEP A CLAIM JOURNAL

Keep a running record of every phone conversation, in-person conversation, date, time, name of person spoken to, etc. Write for as long as it takes to clearly explain what transpired. You may think you will remember, but little details can be really important later on and are easily forgotten when you are under stress.

You have the right to tape record in-person meetings, telephone conversations, and/or insurance company scheduled doctor appointments. Just make sure to tell the adjuster that you are going to do so.

COMMON QUESTIONS AND ANSWERS:

IF I CAN NO LONGER WORK AT MY CURRENT JOB, AM I ENTITLED TO BENEFITS IF I CAN BE TRAINED FOR ANOTHER JOB?
It depends on your policy. Many policies specifically cover you for the job you had when you became insured. These are known as "own occupation" policies. If you have one of these policies and you become disabled and cannot do your job; you can collect benefits even if there are other types of jobs your disability would allow you to do.

Under an "own occupation" policy, for example, if you could no longer do your job as a violinist with a symphony due to a disabling wrist injury, you would be entitled to benefits even if your disability would not prevent you from working in the box office collecting tickets. Under an "any occupation" policy, the answer would be different. (See below). That's why it's so important to read your policy and know your rights. Some policies will insure you for your own occupation for a specific period of time. After that time elapses, you will only be paid your benefits if you are disabled for other work as well.

IF I DO NOT HAVE AN "OWN-OCCUPATION" POLICY, WHAT IS THE DEFINITION OF TOTAL DISABILITY?
The definition of "total disability" varies from state to state and policy to policy. In California, total disability is the inability to perform with reasonable continuity an occupation for which you might reasonably be expected to engage in view of your station in life and your physical and mental capacity. In other words, if you are a schoolteacher, the insurance company cannot deny you your benefits because you might be able to work at a fast food restaurant.

DO I HAVE TO KEEP PAYING PREMIUMS TO KEEP MY DISABILITY INSURANCE POLICY IN FORCE WHILE I'M DISABLED?
Generally not, under what is called the "premium waiver" provision in most policies. The answer depends on the wording of your policy. Read your policy. Know your rights. Do not run the risk of letting your policy lapse, (i.e. be canceled for non-payment), because you think you might not have to pay your premiums. When in doubt, pay your premium. Your insurance company is required to refund any premiums you paid while you were disabled if that is provided in the policy.

WHAT IF THE INSURANCE COMPANY TERMINATES MY BENEFITS WHILE I'M STILL DISABLED?
Ask your doctor to provide your insurance company with written documentation of your continuing disability. Then ask your insurance company to respond in writing to your request for reconsideration. If the insurer still refuses to reinstate your benefits, consult an insurance law expert.

WHAT IF THE INSURANCE COMPANY ASKS FOR COPIES OF MY TAX RETURNS?
Do not simply turn over your income tax forms just because they ask for them. You may have a constitutionally protected right of privacy.

HOW SHOULD I FILL OUT THE CLAIM FORM?
Answer as best you can, be honest, of course, and if you are unsure about something, indicate "undetermined". When you list the material and substantial duties of your occupation on your claim form be specific. If, for instance, you do administrative work only 5% of the time make sure the insurance company knows this.

CAN I STOP PAYING PREMIUMS EVEN IF MY CLAIM IS DENIED?
No! Pay the premium with a check and note "contested payment" on the check or in a letter accompanying the payment that explains that you are paying under protest because your disability entitles you to a premium waiver. But don't stop paying your premiums or the insurer will have an excuse to cancel your policy.

I'VE HEARD OF INSURANCE COMPANIES SURREPTITIOUSLY VIDEOTAPING PEOPLE. DOES THAT REALLY HAPPEN?
Yes. Be aware that if you file a disability claim, you could be videotaped by the insurance company when you unaware. The purpose is to record you doing some activity you claim you are unable to do. In a well-known case, a policyholder that claimed to have a disabling back injury was captured on tape on fast-moving rides at an amusement park. Insurance fraud is costly for all of us and allows insurers to justify privacy invasions such as surreptitious videotapes. Don't give them an excuse to deny your claim by exaggerating your disability.

IF THE INSURANCE COMPANY IS WEARING ME DOWN, SHOULD I OFFER TO COMPROMISE BY ACCEPTING LESS BENEFITS THAN I'M ENTITLED TO?
NO! Stand your ground and don't give up! You are entitled to the full benefits you paid premiums for. You have kept your end of the agreement by paying your premiums and the insurer should honor their part of the agreement and pay your claim. Don't give up your rights! Don't agree to or sign anything without knowing your rights. Seek counsel whether it is an attorney, your insurance agent, or the Department of Insurance. Leave no stone unturned. Fight for your rights. Use your telephone book and local agencies to get help.

There are no dumb questions. If you don't understand something, keep asking questions until you are satisfied with the answers. You won't know if you don't ask. Take care of business--don't put things off when it comes to your claim. Address issues as they come up. If you don't take control, the insurer will, and their interests are not the same as yours.

GOOD LUCK!

UP thanks Alice Wolfson, Esq. of Bourhis, Wolfson and Schlictmann, Amy Bach, Esq. of the Law Office of Amy Bach, and policyholder Katherine Sanchez for assistance in preparing this Tip Sheet.

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National Survey of Actions against UnumProvident et al

download pdf (40K)

From publicly available federal court records, it appears that Unum, Unumprovident, Provident Life, and Paul Revere companies have been named in at least 4,575 civil actions concerning insurance from 2000 to the present. This may understate the total number of federal court filings, because an insurance coverage action might also be described as contract or some other category of action, and also because not all federal courts participate in the PACER system from which this information was drawn.

As to state court filings, it appears that those same companies were named as defendants in at least 1155 civil actions from 2000 to the present. Although the available electronically searchable records on Westlaw do not distinguish between insurance coverage and other types of actions, this figure likely understates the total number of state court filings. Electronic databases of state court filings are less complete than the federal PACER system. Also, the state court figure does not include cases in which the companies in question were plaintiffs, not defendants.

From Unumprovident's 10-Q for the period ended march 31, 2004:
Other Claim Related Examinations and Investigations

The Company has experienced increased market conduct examinations by state insurance departments focused specifically on its disability claims handling policies and practices. On March 19, 2003, the Company consented to the entry of an order by the Georgia Insurance Commissioner that, among other things, ordered four of the Company's insurance subsidiaries to each pay a monetary penalty of $250,000 and to adhere to certain claims handling practices. The order also placed these four companies on regulatory probation for two years, during which period certain Georgia claims and complaints will be reviewed on a quarterly basis by representatives of the Georgia Department of Insurance. The Georgia order did not cite any violations of Georgia law or regulations.

Because of the number of market conduct examinations initiated during 2002 and 2003, a coordinated market conduct examination of the Company's disability claims handling policies and practices was organized during 2003 by Massachusetts, Maine, and Tennessee, the states of domicile for several of the Company's insurance subsidiaries. Currently 44 states and the District of Columbia are participating in this coordinated examination in which the domiciliary states are attempting to address common state concerns and also eliminate or reduce the number of duplicative individual examinations by multiple states. California, Arizona, Minnesota, and New Mexico have chosen to continue pursuing their own examinations and investigations, although California and Minnesota have elected to participate in the multi-state examination as well. Additional state market conduct examinations may be commenced.

In addition, the Company received a letter in September 2003 from the office of the New York State Attorney General indicating that it is reviewing the disability claims-handling procedures of the Company and its insurance subsidiaries. The Company is cooperating and is in the process of gathering and providing information in response.

In a letter dated March 25, 2004, the U.S. Department of Labor informed the Company that it was conducting an examination pursuant to the Employee Retirement Income Security Act of 1974 (ERISA) of the benefit plans the Company provides to its employees and the products and services provided to third party plans. The Company is cooperating and is in the process of gathering and providing information in response.

These regulatory examinations and investigations could result in, among other things, changes in the Company's claims handling and other business practices, increases in policy liabilities, reopening of closed or denied claims, fines, and other administrative action. Such results, singly or in combination, could injure the Company's reputation, cause negative publicity, and impair the Company's ability to sell or retain insurance policies, thereby adversely affecting the Company's business and potentially materially affecting the consolidated results of operations in a period. Determination by regulatory authorities that the Company or its insurance subsidiaries have engaged in improper conduct could also adversely affect the Company's defense of various lawsuits described herein

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Successfully Mediating Disability Claims

By Robert Kaplan, Esq.
(download pdf 67K)

Should you consider using mediation in a disability claim dispute?  

Disability bad faith lawsuits are a unique breed of cases. They all involve highly detailed factual issues juxtaposed with multifaceted legal and medical issues. Furthermore, even in claims that are not based upon a psychiatric disability, there is almost always a complex psychological component - because most claimants are professionals who have so much tied into their professional identity; and, going from being the much adored wonderful Dr. Smith or the highly respected prominent Attorney Jones to the Totally Disabled e x-Dr. Smith/ex- Attorney Jones - is a very tough pill to swallow and carries with it, a whole host of psychological issues.   

I am keenly aware of all the above. Before I retired from law practice, I developed a sub-specialty in representing doctors, lawyers, dentists and others in these type of cases. After nearly 2 decades of being a Plaintiffs' bad faith attorney I decided to step off of the litigation treadmill for several years and do some soul searching. I ultimately decided that I wanted to focus my energies on being a peacemaker instead of a warrior.  

In March 1997, Provident acquired Paul Revere. Then, in 1999 (during my sabbatical) Provident merged with Unum, resulting in UnumProvident becoming the major player in the Disability insurance market nationwide. In the Fall of 2001, I contacted UnumProvident for the purpose of discussing a number of alternative dispute resolution ideas, which I believed would be a win/win for all. Over the next 6 months or so, I had a number of exploratory discussions and several meetings with people from UnumProvident's home office legal department. Things were moving in a positive direction (albeit very slowly) until the summer of 2002, when the McSharry matter hit the fan. Then came the Dateline and 60 Minutes exposés.

Over the last year, I've had the privilege of mediating a number of extremely challenging UnumProvident cases. In addition to being aware of some lesser publicized verdicts against UnumProvident and it's predecessor companies, I am familiar with McKendry ($17 million in Arizona, March 2001), Tedesco ($36.7 million in Florida, June 2001), Hangarter ($7.7 million in California, February 2002), Chapman ($31.8 million in California, February 2003) and Ceimo ($84.4 million in Arizona, April 2, 2003); and, I've seen the October 2002 Dateline broadcast and the November 2002 60 Minutes broadcast referenced earlier. I am also very familiar with the U.S. Supreme Court Campbell case (decided on April 7, 2003 - literally, just days after the last of the above listed string of multimillion dollar verdicts).  

On the other side of the coin, although many policyholders and their attorneys are not aware of the 3-5 cases per month in which UnumProvident disability policyholders are convicted of insurance fraud, I am also familiar with Burroughs (the Texas dentist found guilty in 2001 of defrauding the company out of 9 years of benefits), Pritt (the West Virginia chiropractor convicted last year of criminal fraud and ordered to pay UnumProvident nearly $1million restitution) and Krouner (the New York attorney who, last year, plead guilty to defrauding UnumProvident out of nearly $100,000).

With all of the above in mind, the primary purpose of this article is to share the insights I have gained from the Mediator's perspective insofar as the mediation of these cases is concerned.

The Earlier the Better

It is my belief that in most of these cases, it is better for both the policyholder and the company to attempt to resolve their dispute as early as possible. There are a number of reasons for this belief. First and foremost, the most important thing for the policyholder is closure. These cases often become the sole focus of the policyholder's life, frequently inhibiting the physical recovery from illness or injury. Many policyholders are constantly looking over their shoulder while the litigation is pending. They have the ever present concern, that they may be videoed doing something that could potentially be misconstrued and undermine their case. There is so much riding on the case, that most are paralyzed from getting on with their lives until the litigation is over. From their standpoint, the sooner that happens, the better.

From the company's standpoint, the most significant consideration is dollars and cents. If they can settle on day 30 for X (with minimal defense fees, minimal home office involvement and virtually no litigation costs) vs. on day 250 for X or even X+Y (however, by then they've incurred significant defense fees, significant home office involvement and significant litigation costs) - it's to the company's benefit to get their file closed on day 30.

In nearly every case against UnumProvident, there are the following four (4) givens :  

1. There is a threshold coverage dispute. For example:
• In this case, the threshold coverage issue that needs to be resolved is whether the policyholder [is or is not] [continues to be or is no longer] "Totally Disabled";
• ... is whether the policyholder [is] [continues to be] "Residually Disabled", but   [is not] [no longer continues to be] "Totally Disabled";
• ... is whether the policyholder is neither [no longer] "Totally Disabled" nor "Residually Disabled";
• ... is whether the policyholder's "Total Disability" is due to "Accident" or "Sickness";
• ... is whether the Company is entitled to rescind the subject policy(ies); and so on .
2. The policyholder's attorney will want to use the "pattern and practice" evidence that has been accumulated in connection with the above referenced multimillion dollar verdicts against UnumProvident to gain whatever benefit or advantage he or she can in connection with his or her client's case.
3. If the case does not settle relatively early, UnumProvident will, without question, attempt to knock out the bad faith and punitive damage claims via a Motion for Partial Summary Judgment based on the Genuine Dispute doctrine; and, will also likely attempt to have the threshold coverage issue resolved via summary judgment as well.
4. If the policyholder survives the summary judgment motions and motions in limine; and, if the policyholder prevails on the coverage issue at trial and if he or she obtains a bad faith and punitive damages verdict - UnumProvident will, without question, appeal.

From the plaintiff's perspective much, if not all, of the pattern and practice evidence can now easily be obtained from other plaintiff attorneys and/or consumer organizations, such as United Policyholders. However, as all of the attorneys representing policyholders in these type of cases know - just as in Monopoly, one does not collect $200 unless she passes Go; likewise, one does not get to the bad faith and punitive damage issues unless he gets over the threshold coverage dispute.  

Although nearly all websites, by definition, are self-serving, UnumProvident's site does contain the following statements (in which the proffered statistics are presumably accurate):  

"Of the approximately 421,000 new disability claims filed with the company in 2002, approximately 90% were paid.

Of the remainder, while some were not covered or not eligible and some were no longer claiming benefits at the end of their elimination period, less than 2% were determined not to be disabled.
(emphasis in original).

"Our business requires a determination of whether someone is disabled. While in most cases that determination is clear, in some cases it is not, and even reasonable people may disagree. Our claim decisions are made within the context of a sound, fair process that we have worked hard to build. Still, we can and do make mistakes. And, when we become aware of an error on our part, we work urgently to correct the situation."

An early mediation can, and should, initially focus on whether the coverage decision was correct and whether the company arguably overlooked anything or made any mistakes.   These type of mediations tend to almost always be heavily "evaluative" and require a mastery of the facts. The mediator should, among other things, be prepared to point out specifically why he/she believes that the policyholder is/is not going to prevail on the pivotal threshold coverage issue.  

To the extent that the plaintiff's attorney feels that they need certain key discovery in order to engage in a meaningful early mediation, I have found that UnumProvident is usually willing to informally accommodate reasonable requests (and that they will ordinarily defer to the mediator to iron out/resolve any wrinkles, problems or issues that surround any such request).

The Policyholder Needs an Opportunity to Vent

of the greatest benefits of any mediation (irrespective of the type of case and when it occurs) is that the parties are in total control of choosing the mediator, dictating the process, and agreeing to any resolution that is reached. Although it is rarely (if ever) productive for a policyholder to use a company lawyer or representative as a punching bag - for a mediation of a disability dispute to be successful, in addition to reaching a mutually agreeable financial resolution, the policyholder has to be given the opportunity to vent. This can, and should be done, in private caucus with the mediator. To obtain full closure, the catharsis component of disability mediations should not be underestimated; and, certainly should not be overlooked.

Plain Vanilla is Not the Only Flavor for Resolution

Most lawsuits end up getting resolved for a negotiated lump sum payment. Although disability cases often get resolved pursuant to that type of traditional plain vanilla settlement, there is always "more than 1 way to skin a cat". I have found UnumProvident to be receptive to creative ways to resolve a dispute, such as modifying one or more policies and/or agreeing to "put their money where their mouth is" pursuant to some kind of a binding summary judgment or subsequent non-traditional arbitration (with a pre agreed upon floor and ceiling) predicated on the outcome of one or more pivotal issue(s).

Conclusion

There are obviously exceptions to every rule. Sometimes, it is in the policyholder's or the company's interest to do more extensive discovery or to test certain positions via summary judgment before agreeing to go to mediation. And, psychological issues and amount spent in litigation costs aside, there are certainly cases in which the policyholder may get a higher settlement in a mediation just before trial. And, although I have yet to see one, I'm sure that sometimes - from either the policyholder's standpoint or from the company's standpoint - there are cases that just gotta be tried.

By Robert J. Kaplan, Esq. (www.KaplanMediation.com)
Robert Kaplan is a full-time mediator based in San Diego and specializing in insurance-related disputes. He was formerly a litigator with Churchill, Kaplan and Roberts. This article expresses the views of the author and is published here for informational purposes by United Policyholders.

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The Safety Net She Believed In Was Pulled Away When She Fell

Debra Potter made a good living selling disability coverage.
But like many working Americans, she learned the hard way that federal law now favors insurers.

By Peter G. Gosselin, Times Staff Writer
as posted at www.latimes.com

Until a few years ago, Debra Potter made sure that her family could cruise the Caribbean, watch the NFL on big-screen TV and keep her elderly mother and in-laws at home in comfort.

She did so by earning $250,000 a year selling more insurance than almost anybody else in the state of Virginia, virtually all of it disability and health policies that she thought put a safety net under middle-class and affluent families such as her own.

Potter so believed in the protection she was providing that she made sure she was covered under a policy her employer, Southeastern financial services giant BB&T, had with UnumProvident Corp., the nation's largest disability insurer.

But when Potter began falling down in 2002 and was subsequently diagnosed with multiple sclerosis, she discovered that the protection didn't work anything like she'd expected.

UnumProvident, whose policies the 50-year-old insurance agent had been selling, questioned whether Potter really was disabled and refused to pay her. Although the firm, based in Chattanooga, Tenn., relented a few weeks ago, the reversal took three years and did not come before the Potters had run through most of their savings, yanked one of their five children from college for lack of tuition and hired a lawyer.

The $10.5-billion-a-year insurer denies mishandling Potter's case, saying only that "new information" caused it to change its position and start paying.

"People need safety nets, and that's what I thought I was selling them," Potter said. "But here I am with all my knowledge of insurance and I couldn't make it work for me."

When middle-class Americans talk about safety nets, they usually mean such things as food stamps or housing subsidies — public assistance on which generally only the poor depend. In fact, working people up and down the income spectrum lean heavily on a long list of protections such as healthcare coverage, unemployment compensation and pensions or 401(k)s.

But an examination of Potter's experience, UnumProvident's legal and regulatory record and the practices of several other insurers suggests that a key component of working Americans' protective shield fails with unnerving regularity.

Disability insurance — now carried by more than 50 million Americans — generally promises to replace at least half of a person's wages in case of illness or injury. However, in a substantial number of cases, especially those involving workers with long-term or permanent disabilities, it doesn't deliver.

The chief reason — and one that affects not only disability but the whole universe of employer-provided benefits — is a series of court decisions dealing with the federal benefits law known as ERISA. The decisions have prevented states from extending almost any form of consumer protection to these benefits, and have severely limited individuals' ability to successfully sue their insurers.

"People who file disability claims today are worse off than they were two or three decades ago," said Judge William M. Acker Jr., who was appointed to the U.S. District Court in Alabama by President Reagan. "The law that was supposed to protect them has been turned on its head; the chief beneficiaries are now the insurance companies," said Acker, who has presided over a variety of disability insurance cases and has written extensively on the subject.

That such a sweeping change could occur and that it could upend someone as well-heeled as Debra Potter illustrates how close most Americans are to the economic edge, where a few setbacks at work or in health can send a person tumbling.

"The safety nets designed to protect people from being run over by economic forces beyond their control have been shredded," said California Insurance Commissioner John Garamendi, a Democrat whose department is investigating UnumProvident.

Expanding coverage

For years, disability was a sideline, often thrown in by insurance agents as an incentive to buy life insurance. But starting in the 1960s, the scope and importance of the disability safety net increased dramatically.

Types of policies expanded to include both individual and employer-provided coverage. Benefit-payment periods were extended to last to age 65 or later. Eligibility rules were loosened to include not only people who could do no work at all but those unable to do just their "own occupation." An example of the difference: An airline pilot whose eyesight had deteriorated so much that he couldn't fly but could still do a desk job would not have been covered under the old system, but would be covered under the new one.

Washington weighed in by extending Social Security to cover the most disabled, elderly or not, and by boosting benefits several times.

Much of the expansion was driven by economic changes that spurred the need for disability coverage. The changes required many families to begin fielding not just one full-time worker, but two, in order to afford a middle-class life. As a result, families lost their "reserve player," the non-working spouse who could enter the workforce if the other fell ill or was injured, and so found it increasingly important to take out insurance against that possibility.

However, by the late 1970s and early 1980s, many politicians and business executives had become convinced that matters had gone too far, that industry and government could not afford many of the promises they'd already made, and that some programs were backfiring by leading people to fake or exaggerate problems to collect benefits.

Remarkably, in the case of disability insurance, the first group to bring the issue to a head was the nation's doctors, seeking payments not for their patients but for themselves.

Disability insurers had sold a generation of doctors extremely generous, individual, "own occupation" policies, confident that their new clients would continue working almost no matter what, and therefore file few claims. But as the managed care revolution began to clamp down on what physicians could charge, many doctors started to exit their profession and, according to insurance industry executives, a considerable number filed for disability.

At the U.S. Supreme Court and at many federal appeals courts, attention focused on the Employee Retirement Income Security Act of 1974.

According to its preamble, ERISA's goal was to "protect … participants in employee benefit plans and their beneficiaries." Although the 208-page law's chief focus was pensions, it also superseded virtually all state laws that "relate to any employee benefit plan." One of its authors, the late Sen. Jacob K. Javits, a New York Republican, praised ERISA as "the greatest development in the life of the American worker since Social Security."

But over the last 25 years, the Supreme Court has read the "relate to" provision so broadly that claimants who believe they have been wrongly denied benefits are rarely able to sue for punitive damages under state bad-faith or fraud laws.

The court has said the most that claimants generally can win by suing in federal court is the original benefits due them, no matter how long their wait or, often, how steep their legal fees.

In addition, the court has effectively granted insurance companies and benefit plan administrators a special status that requires an employee whose claim has been denied to prove not just that the denial was wrong, but that the officials making the decision acted in an "arbitrary and capricious" manner.

Two views of ERISA

The insurance industry argues that the recent trend in the law has strengthened, not weakened, the employee benefit system.

"It has allowed companies and unions to operate benefit plans without getting chewed up by lawsuits," said Steven J. Sacher, who helped draft ERISA as a young Labor Department lawyer and now represents insurers as an attorney with the Washington office of Kilpatrick Stockton. "That means they're willing to offer employees more choice of benefits at better prices."

"I'm a big fan of ERISA," UnumProvident Chief Executive Thomas R. Watjen said in a recent interview. "It gives consumers a voice they didn't have before."

Watjen and other UnumProvident executives defend the company's operations, especially its handling of claims. "We strive to set the standard for fair and objective claims handling," said Senior Vice President George A. Shell Jr.

As evidence, Shell said UnumProvident paid more than 90% of the 450,000 disability claims it received last year, at a cost of $4.2 billion. He said that in an additional 8% of cases, the firm did not pay because of what he described as technical reasons, as in cases where claimants returned to work before they became eligible for benefits. Only in the remaining 2% of cases or less — involving no more than 9,000 claimants — did the firm limit or deny benefits that led claimants to appeal.

But industry experts say that the profitability of disability insurers hinges not so much on the mass of routine claims, which typically are for short periods and involve small sums, but rather on a small number of long-term claims by people who were making good — and therefore expensive-to-replace — incomes.

"There's no question claims costs are driven by the adverse experience of a small percentage" of claimants, said Charles E. Soule, retired CEO of Paul Revere Life Insurance Co., one of three firms that merged in the late 1990s to form UnumProvident, and author of the definitive textbook on disability insurance. "I mean we're talking about single-digit."

The ability to deny even a fraction of these high-cost claims and to ensure that those denials stick can make a huge difference to the finances of an insurer. (UnumProvident refused to provide separate payout and denial rates for its long-term claims, although a spokesman said they differed only "slightly" from the overall rates.)

UnumProvident's claim denial practices have made it the target of several government investigations in recent years, a treatment that regulators say other insurers either already face or are likely to face in short order.

"In the last 12 months alone, we've seen the largest insurance brokers in America, the largest property and casualty companies in America, the largest title insurance companies, the largest financial service firms and the largest disability insurers all engaged in flagrant violations of their most basic obligations to their customers," said Garamendi, the California insurance commissioner. "This is not just a UnumProvident problem; it's an insurance industry one."

Although ERISA prohibits state regulators from intervening to help individuals in most disputes over employer-provided disability insurance, states can investigate insurers' overall conduct, penalize firms for bad behavior and, in some cases, ban companies from doing business within their boundaries.

In an investigation concluded last year, regulators representing all 50 states looked at a random sample of almost 300 UnumProvident cases to see whether the company was engaged in "systemic unfair claim settlement practices," then examined 75 additional cases after the firm said it had made improvements. The state examiners concluded that both sets of cases had problems "sufficient to merit further regulatory action."

However, 48 of the 50 states decided to settle with UnumProvident. The company agreed to pay a $15-million fine, review its decisions in more than 232,000 claims denied or closed over the last five years and revamp its entire claim-handling system.

The major holdout from the agreement was California, which is conducting its own investigation and negotiating a separate settlement with the firm.

In an interview, Shell, the UnumProvident senior vice president, emphasized that those states that did settle made no formal finding of wrongdoing against the firm. He said the problems that the states uncovered were not representative of the firm's overall performance because examiners looked only at "contentious" closed cases. He characterized the changes agreed to by the company as the furthest thing from an admission of failure.

"I look at them as improvements from the past," Shell said.

However, Garamendi said in a recent interview that among his chief complaints about the settlement was that it failed to allege specific violations by the insurer, a deficiency that he said rendered the accord legally useless.

"Any settlement we sign will … allege specific violations of law and regulations," the California regulator said. "We want there to be no mistake in the minds of the company or the public about what the company did wrong and that it can't continue to do it."

Soaring income

The middle child of two railroad workers, Debra Potter grew up in Birmingham, Ala., spent a few years at Auburn University and worked variously as a teacher, a secretary at a Pepsi bottling plant and a Girl Scout camp director.

She married Ron Potter, a Presbyterian minister, in 1983. They had three children from previous marriages and soon had two together. They moved to this small northwestern Virginia community when Ron was appointed pastor of Sunnyside Presbyterian Church. The couple set about raising a family on his $20,000-a-year salary. Potter settled in for what she thought would be her life's work — being a stay-at-home mom.

But by the late 1980s, it was becoming clear to the family that they'd never be able to send all of their kids to college on a preacher's pay alone. Debra and a girlfriend were helping an elderly parishioner of Ron's church fill out insurance forms one night when it struck the two women: Why not get their state insurance licenses?

"Here was something I was already doing anyways and that helped people and it had to pay more than I was making at the time," she said.

Potter eventually got hired by an old-line Winchester insurance agency, J.V. Arthur Inc., to start its group business. In a matter of a few years, she'd become one of the Arthur agency's top producers, sewing up the business of 230 groups that covered thousands of employees and paid the agency three-quarters of a million dollars a year in commissions. Close to one-third of that money went directly to Potter.

The realization that the couple's income was taking off dawned slowly on the Potters. At Christmastime 1994, Potter bought her sports-crazed husband a 48-inch TV to watch football, golf and soccer. "I realized I could pay cash and not even feel it," she said. The family has since stepped up to a 56-inch screen.

As the good news sank in, the Potters purchased one Winchester condo, and then another, to house Ron's parents and his grandmother. They remodeled the basement of their house as an apartment for Debra's mother. They started to do some serious traveling — to the Bahamas, Cancun and Australia. And by 2001, they'd begun to lay plans for their retirement.

"We literally thought we were going to be millionaires," Ron Potter marveled.

Reining in claims

As Debra Potter's career was taking off in the mid-1990s, disability industry executives were struggling with an onslaught of expensive claims.