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What is a disability insurer's structural conflict of interest?

A large insurance company that sells short- or long-term disability coverage can intimidate an individual fighting for their rightful benefits after having become disabled. When that insurer decides its own claims internally, rather than outsourcing that decision-making process, it has a structural conflict of interest.

This means that although it's claims examiners are supposed to make decisions on disability claims reasonably, fairly and according to policy terms and applicable law, the examiners may feel pressure to deny claims. In an approved claim that very insurance company must then pay out benefits, sometimes for years, and sometimes at a high rate.

Doing the right thing can be expensive

In other words, doing the right thing can be very costly and harmful to the bottom line of the for-profit insurance company. Unfortunately, all too often disability claims are denied because of bias or conflict of interest that even leads to use of deceptive tactics or behavior aimed at finding any reason to deny claims.

This financial conflict of interest inherent in deciding claims against its own interests can result in bias against claimants as well as outright bad faith. Judges have taken this conflict seriously in reviewing denied (or terminated) claims. For example, normally judicial review of a denied claim would be based only on the claim file’s content, sometimes called the administrative record. This would contain all the medical records and other evidence (vocational evidence, expert opinions, text of claim decisions and more) on which the insurer based its decisions.  

But, where an inherent conflict is identified, the court may allow the claimant to review internal documentation from the insurance company that could indicate bias, sometimes even communication between in-house lawyers and employees.

Conflict of interest is relevant in each claim

More often the structural conflict of interest inherent in wearing both the hat of plan administrator that decides claims and the hat of funder of approved claims gives courts the right to consider this dual role as a factor to weigh in deciding whether the insurer abused its discretion in deciding a claim. The court must discern whether and how much the conflicting interests influenced the insurance company’s decision making.

For example, the judge might consider whether the insurance company conducted a thorough investigation of the claim, whether it complied with the law and the terms of the policy, and whether there was evidence of behavior in its own interest at the expense of the claimant. Does it have a history of denying claims against the weight of the medical evidence? Did the insurer drag its feet or otherwise act unreasonably?

When the call is close as to whether the insurer abused its discretion, the conflict of interest might be the tie breaker if there are signs of self-dealing.

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