Policy Language Limits Disability Insurer Administrator’s Power

A recent court opinion sheds light on the ramifications of disability insurance policy language that describes what powers the insurer’s administrator has to decide claims. We recently posted a blog about the standards of review courts apply when considering an appeal of an insurer’s disability claim denial under the Employee Retirement Income Security Act, usually called ERISA.

ERISA is the federal law that governs most group and/or employer-supplied disability insurance plans. ERISA establishes minimum standards for these policies to help protect the rights of individuals they insure.

As we explained in our previous post, when a federal court reviews a denied disability insurance claim, it must first decide which standard of review applies: “de novo” or “arbitrary and capricious.” The standard of review determines how extensively and in what way the court considers and examines the insurer’s claim denial.

Which standard applies depends on the policy language. Under ERISA, if the policy gives the insurance company’s administrator the discretion to decide claims, the court normally applies the arbitrary and capricious standard (deferential review). This means that the court gives wide deference to the administrator’s decision and that the court will only reverse that decision if the administrator acted outrageously or unreasonably.

If the insurance contract does not give the administrator the discretion to decide disability claims, the de novo standard applies, under which the court completely reweighs the evidence and decides if the denial was correct.

Sorting out the parameters of the insurer’s discretion to decide the claim can be complicated

In April, the U.S. Court of Appeals for the 10th Circuit decided Hodges v. Life Insurance Company of North America (called LINA) in which Lou Hodges, a cryotherapy technician, appealed LINA’s determination that he was not a salesperson and that his eye condition did not prevent him from performing the duties of his occupation. The policy had two tiers of benefits – one for salespeople and another for everyone else. If LINA had determined that Hodges was a salesperson, his monthly benefit checks would have been larger because the benefit calculation would have considered bonuses.

Hodges occupation included working as a cryotherapy technician as well as securing sales leads and selling products. His earnings were roughly 70% salary and 30% “sales-driven compensation, including bonuses.”

In this case, the issue was whether the administrator had the discretionary authority not only to determine if Hodges was disabled, but also to determine whether Hodges was a salesperson under the policy terms. LINA argued that language in the policy, although not specific, gave it discretionary authority over all issues in the claim.

The court disagreed, saying that the policy language was too vague for such a broad grant of authority. Acknowledging it had previously allowed broad language to allow an administrator to “interpret all policy terms,” those decisions involved policy language like authority to “interpret” or “construe” plan language – words missing from the current policy. Lina’s discretion to decide if Hodges was eligible for disability benefits under the policy did not “stretch” to cover every decision under the plan.

Courts require unambiguous and explicit language to “convey discretion” – “borderline language” is no longer enough and insurers have been on notice of this for years now. Because the policy did not clearly give LINA the power to decide who is a salesperson, the court applied the de novo standard of review for that issue.

Takeaway

Because insurance plans are complicated contracts and understanding the language and terms is important to the success of a claim, an attorney can help explain policy terms and your rights and obligations under the policy. Please contact us at 954-989-9000 or www.dilawgroup.com if you have questions about your claim or your policy.