On Sept. 3, the U.S. Court of Appeals for the 1st Circuit held that Aetna had wrongly denied long-term disability insurance coverage to a claimant with malignant melanoma. The opinion turns on a legal issue that comes up often in LTD cases — whether the claimant had a pre-existing condition that invalidated his disability claim.
The claimant got Aetna LTD insurance through his employer and filed his federal lawsuit under ERISA.The Employee Retirement Income Security Act of 1974 or ERISA is the federal law governing most group insurance policies through private employers. ERISA establishes standards of fairness to level the playing field between insured individuals and their large, powerful insurers.
Most disability policies exclude coverage for pre-existing conditions. The exclusion is normally limited to a “look-back period” immediately before coverage began.
In the policy in question, a disability in the first year of coverage is not covered if, in a three-month look-back period, a pre-existing impairment was evidenced by any of these:
- It was “diagnosed or treated.”
- The claimant received “services” for the condition.
- A doctor prescribed medication for the impairment and the claimant took it.
The facts are simple in this case. During the look-back period, the claimant’s doctor said that a red spot on claimant’s back might be basal cell carcinoma. The physician did not diagnose anything or provide treatment or medication for the spot. He referred claimant to a dermatologist who diagnosed melanoma after the look-back period.
The question before Aetna and the courts was whether this red spot and the doctor’s reaction during the look-back time met the policy definition of a pre-existing condition.
Aetna denied the claim, saying that the claimant got “treatment” during the look-back period. On internal appeal, Aetna said that he “was seen [during the look-back period] for the spot … that caused the diagnoses.” Aetna continued that “the pre-existing clause … does not cover any disability that is caused by or substantially contributed to, a pre-existing condition.”
Court’s disagreement with Aetna
The appeals court reversed Aetna’s denial because:
- The pre-existing condition exclusion language was ambiguous. While the policy allowed Aetna to interpret ambiguous language, the court was not required to defer to even a reasonable interpretation if the denial was “arbitrary and capricious.”
- The court considered whether Aetna acted fairly as a “true fiduciary,” including whether Aetna’s conflict of interest as both decisionmaker and party liable to pay the claim influenced its denial. The court found that it did.
- In its final decision, Aetna asserted a different look-back period, violating an ERISA regulation that a new denial rationale cannot be used without giving the claimant a reasonable chance to respond.
- The court concluded that Aetna either read the pre-existing condition exclusion too broadly or it was “behaving like a conflicted party … rather than a fiduciary …” so the denial was arbitrary and capricious
It is not uncommon for an LTD insurer and an insured party to dispute whether a pre-existing condition clause applies to a claim. The disagreement may revolve around interpretation of the policy language that defines a pre-existing condition or what the medical evidence proves about the claimant’s medical problems and treatment during the look-back period.