Issue: February, 2005
Author: Kathryn J. Hensley
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Bad Faith in Wyoming Long-Term Disability Disputes
Disability is generally defined as the “inability to pursue an occupation because of a physical or mental impairment.” Long-term disability insurance policies are intended to provide income benefits in the event that a person becomes disabled. Typically, such policies include two separate definitions of disability. During the first 24-months of disability, policies most often determine eligibility for benefits using the “own occupation” definition, meaning that if a person cannot perform his current occupation due to an injury or illness he will receive a portion of his income for a specified time, usually up to 24 months. After the initial 24-month period, policies often require that the insured must be disabled from “any occupation” for benefits to continue. It is here that many disabled insureds face difficulty maintaining their benefits. Intuitively, a person who has purchased a long-term disability insurance policy should receive income benefits if he becomes disabled. As noted by the Supreme Court of Kansas: “Total disability does not mean utter helplessness, or inability to perform any task, or even in some cases, unusual tasks for a limited period. It is only necessary that the disability render him unable to perform the substantial and material acts of a business or occupation in the usual and customary way.” However, thousands of long-term disability cases making their way into courts leads to the supposition that many disabled Americans experience adverse benefit determinations. This article is meant to address Wyoming’s bad faith cause of action under plans that are not within the scope of the Employee Retirement Income Security Act (ERISA) , in view of the fact that bad faith actions are preempted by ERISA. It is written with the hope that attorneys representing disabled clients will explore exemptions to ERISA, which if present, provide an avenue for utilizing Wyoming’s tort of bad faith in long-term disability actions.
Is It an ERISA Plan or Isn’t It?
In Pilot Life Insurance Company v. Dedeaux, the U.S. Supreme Court issued an insurer-friendly decision indicating that an insured cannot recover consequential damages, emotional distress damages, or punitive damages if his policy is subject to ERISA. This inevitably leads employers and/or insurance companies to zealously argue that every plan that is in any way related to employment is an ERISA plan. “It is predictable that insurers will go overboard to minimize claims that are preempted by ERISA since ‘there is no practical or legal deterrent to unscrupulous claims practices’ to dissuade insurers from such practices.” An attorney for a plaintiff should act with equal zeal in searching for exemptions to ERISA.
ERISA preemptions apply only to “employee benefit” or “employee welfare plans.” Thus, state law tort remedies are available in long-term disability disputes if the policy in question falls within an ERISA exemption. The Department of Labor guidelines recognize a safe harbor exemption to ERISA for group or group-type insurance programs offered by an insurer to employees or members of an employee organization where (1) the employer does not pay for the plan; (2) participation in the plan is voluntary; (3) the employer or employee organization does little more than publicize the plan and allow for payroll deduction for employees to pay premiums; and, (4) the employer or employee organization receives no consideration other than reasonable compensation for administrative services actually rendered in connection with payroll deductions. Plans which meet each of these four factors are excluded from ERISA coverage.
Safe harbor exemptions are most often found in long-term disability, short-term disability and life insurance plans which often are “add-on” or “limited scope” plans, sold under a separate policy or “rider” that limits coverage to a narrow range of benefits usually excluded from hospital/medical/surgical benefit packages. Employers often use such plans as internal marketing tools, allowing employees to sign up through the employer and have insurance premiums deducted from their paychecks, although the employee pays for the policy. Particular attention should be paid to the date such a plan became effective in light of the fact that following the Pilot Life ruling, insurers restructured many plans to fall within ERISAs sweeping preemptions. Nonetheless, many older plans have not been altered and remain beyond the confines of ERISA regulation.
That a plan is not exempted from ERISA under the safe harbor provision does not alone compel the conclusion that the plan is an ERISA plan. Whether an ERISA plan exists is a question of fact that must be decided based on the surrounding circumstances from the point of view of a reasonable person. Importantly, the insurer has the burden of proving a preemption defense. There are two main elements to an ERISA plan. First, there must be a “plan;” second, it must be established or maintained by the employer. An employer’s mere purchase of insurance for its employees, does not, without more, constitute an ERISA plan. Where a reasonable person could ascertain the intended benefits, beneficiaries, source of financing, and procedures for receiving benefits, a plan is deemed to exist, thus, the degree of involvement by the employer is key to determining whether the plan is an ERISA plan. An interpretive opinion issued by the Department of Labor indicates an employer who performs functions for an employee benefit plan within a framework of policies, interpretations, rules, practices and procedures made by other persons is not a plan fiduciary because such person does not have discretionary authority or discretionary control respecting management of the plan. Where an employer’s involvement does not exceed such functions, the plan likely will remain outside the ambit of ERISA, making state law claims viable.
Wyoming Affirmatively Recognizes Bad Faith Tort Claims in First-Party Insurance
In McCullough v. Golden Rule Insurance Company, the Court of Appeals for the Tenth Circuit certified two issues to the Wyoming Supreme Court: (1) whether Wyoming recognized the first-party independent bad faith tort against insurers, and (2) if so, the standard of proof for the tort. Noting that a majority of states already had adopted the bad faith cause of action, Justice Walter Urbigkit, writing for the court, stated, “Despite the diversity among the jurisdictions, we believe the superior view recognizes the existence of the independent tort for violation of a duty of good faith and fair dealing in insurance policy application by the carrier to its insured.” Thus, Wyoming adopted an intentional bad faith tort in first-party insurance.
The court adopted the “fairly debatable” objective standard care analysis developed in Wisconsin’s Anderson v. Continental Insurance Company as the standard of proof for any award of extra-contractual damages. In order to meet the fairly debatable standard, the insurer must properly investigate the facts necessary to evaluate the claim. Without such investigation, the insurer cannot be said to have a reasonable basis for a benefit decision. This objective standard requires analysis of whether a reasonable insurer under the circumstances would have denied or delayed payment of the claim.
The McCullough court was careful to limit the circumstances under which punitive damages will accompany a finding of bad faith, noting that such damages should remain consistent with Wyoming law and require wanton or willful misconduct. The court stated: “Outrageous conduct done with malice, bad motives or reckless indifference is neither so hard to define nor impossible to defend in seeking justice for the insured. Economic misconduct of this egregious character is most appropriately corrected by financial responsibility plus, if action was willful and wanton, punitive retribution.”
Where an insurer initially approves disability benefits, then later requires the insured to meet a more stringent “any occupation” definition, “a relevant consideration in determining the existence of a disability is whether any significant changes have occurred in the individual’s condition since the insurer’s initial determination that the covered individual was disabled.” When the policy’s definition changes, it is not uncommon for an insurer to rely on old information to decide that an insured does not meet the more demanding definition. Without investigating the insured’s current condition, “one must necessarily find, at least in most instances, that the insurer either knew or should have known that a reasonable basis for failing to pay the claim did not exist.” The knew or should have known requirement is “inherent in a finding of unreasonableness because claim denials are ordinarily the result of the intentional act of denying the claim or, where the unreasonableness is attributable to an inadequate claims investigation, from the reckless disregard of facts necessary to a fair evaluation of the claim.” In State Farm Mutual Automobile Insurance Company v. Shrader, the court acknowledged that there may be a fine line between conduct justifying punitive damages and less culpable conduct, however, such fine distinctions are best left to the finder of fact. Thus, the insurer’s lack of investigation of an insured’s present condition likely is as important as the denial of benefits in punitive damage awards.
The Plaintiff Need Not Prevail on the Contract Claim to Sustain a Claim of Bad Faith
The absence of a breach of an express term of an insurance policy is not fatal to a bad faith claim where the plaintiff can prove a breach of the implied covenant of good faith and fair dealing. In Hatch v. State Farm Fire & Casualty Company, the Wyoming Supreme Court agreed with the Hatches that even if the insurer has a fairly debatable defense for denying a claim, the insurer should still be subject to liability whenever it violates the implied covenant of good faith and fair dealing. The court reiterated what McCullough established - the duty of good faith and fair dealing arises from the relationship of the parties to the contract, rather than from the express or implied provisions included in the contract. Thus, an insurer’s conduct in its dealings with insureds will be scrutinized in bad faith actions.
Other jurisdictions have extended actions for bad faith to abuse of the insurer’s right of subrogation, unfair premium increases, spoliation of evidence, an insurer’s failure to respond to an insured’s request for clarification of the latter’s rights under the policy, post-claim underwriting, unwarranted offsets, or failure to inform the insured of remedial rights. It is reasonable to expect that a Wyoming court also would consider such actions as evidence of bad faith.
A Conflict of Interest Exists When the Plan Administrator Also Pays Disability Benefits
In Brown v. Blue Cross & Blue Shield of Alabama, Inc., the court expressively described why unjust benefit decisions arise when the plan administrator who determines if a person is disabled is also the company who has contracted to pay disability benefits. “Decisions made by the issuing company on behalf of a plan based on a contract of insurance . . . inherently implicate the hobgoblin of self-interest. Adverse benefits determinations save considerable sums that are returned to the fiduciary's corporate coffers.” Nonetheless, a deferential arbitrary and capricious standard applies to an insurer’s decision when a policy gives the insurer the authority to determine the existence of disability. The Tenth Circuit has adopted a sliding scale, decreasing the level of deference to the insurer’s decision in proportion to the severity of the conflict, and weighing it as one factor in determining whether the decision was arbitrary and capricious. Despite the deferential arbitrary and capricious standard, this inherent conflict must be raised because an adverse long-term disability determination that was at least partially financially motivated demonstrates it was made with reckless disregard for the insured, or at a minimum, without a reasonable basis.
The number of disabled people struggling to obtain and retain disability income benefits in this country is significant. Even the comparatively few disability cases reaching our court system suggest that insurance companies expend considerable resources defending decisions to deny benefits. As the majority of insureds don’t file suit, routinely denying benefits likely is of significant financial benefit to insurers.
Several steps could be taken to level the playing field in the disability arena. First, Wyoming’s Insurance Commission should be empowered to advocate for insureds instead of simply monitoring companies who conduct business in Wyoming to ensure they comply with the minimal requirements of state law. In an industry where unequal bargaining power between companies and consumers permeates, consumers need to be able to turn to the Insurance Commission for assistance in benefit disagreements. Second, courts should consider abandoning the arbitrary and capricious standard used in analyzing conflicts of interest. Utilizing a de novo standard in reviewing cases would remove a significant obstacle insureds currently must overcome in challenging insurers’ decisions in long-term disability disputes where the most obvious of conflicts of interest exist, those where insurance companies benefit financially by not providing benefits. Finally, disability insurers must become more introspective, keeping in mind their original mission: to protect insureds and their families in the event that the insured can no longer work. People purchase disability insurance to safeguard themselves and their families should they suffer the hardship of becoming disabled. When disability benefits are groundlessly denied, the purchase of disability insurance is illusory, and insurers are unjustly enriched in the form of insurance premiums which provide little or nothing for the insured.
Perhaps the greatest frustration for a disabled person occurs when an insurer discontinues benefits without investigating the insured’s present condition. Fortunately, the Wyoming Supreme Court recognizes that without proper investigation, there cannot be a reasonable basis to deny benefits. Thus, the insurer who fails to investigate likely has acted in bad faith, entitling the insured to damages. Wyoming attorneys have the opportunity to provide legal assistance to a person who is suffering financial hardship in addition to physical distress because of an adverse long-term disability determination. A person living with a disability likely feels degraded and exasperated by physical limitations. Having his dignity further affronted by egregious treatment from an insurer adds to the person’s despondency and should be punishable by extra-contractual and punitive damages.
Kathryn J. Hensley earned a B.S. in Business Administration/Marketing at Utah State University. She is currently a student at the UW College of Law. She has worked at the UW Office of General Counsel for two years. Following graduation, Kathy will be employed with the Mathey Law Firm in Green River, Wyoming.