When Marianne Locher accepted a legal secretary position with Katten Muchin and Zavis (now Katten Muchin Zavis Rosenman) in 1992, she didn't tell her new employer she suffered from chronic fatigue syndrome. Although two years earlier a doctor had diagnosed her with the disease, which causes muscle pain and fatigue, Locher feared the law firm wouldn't hire her if she disclosed her illness.
But after 13 months on the job, Locher's symptoms worsened, and she began missing work. When she finally told her employer about the illness, the firm agreed to allow Locher to reduce her hours--on the condition she provide documentation from her doctor confirming the diagnosis.
Locher never provided that documentation. And after she continued to miss work, Katten gave Locher poor performance evaluations. Ultimately, she resigned from her position in 1993.
The ensuing battle between Locher and her insurance company significantly clarifies what evidence a court will admit when reviewing a denial of ERISA disability benefits.
Cause For Alarm
Two months after her resignation, Locher submitted a request for disability payment under the Employee Retirement Income Security Act (ERISA). Her insurance company, UNUM Life Insurance Co., denied the initial claim, arguing that although medical evidence showed Locher was sick for part of the time she worked at Katten, there wasn't sufficient evidence she was ill on her last day of work--which meant she was ineligible to collect disability benefits.
Locher filed two appeals, which the insurance company also denied. Ultimately, she filed suit in a New York federal court.
Normally, courts will admit evidence only from the insurance company's "administrative record" when reviewing a denial of ERISA benefits, but a judge can hear outside evidence if it has "good cause" to do so. However, prior to Locher's case, what constituted "good cause" was open to interpretation.
Locher argued that the judge should consider outside evidence because UNUM was a "conflicted administrator"--meaning it was responsible for both evaluating her claim and paying the benefits.
Judge Laura Taylor Swain agreed and admitted testimony from an expert witness and a former co-worker and awarded Locher monthly benefits and attorneys' fees.
In her ruling, Swain held that a conflicted administrator automatically created good cause for seeking outside evidence. Initially, the decision looked like a major victory for those seeking disability benefits. But a closer reading reveals that people with ERISA claims might not be the ultimate winners in this case. On appeal, Second Circuit Judge Chester J. Straub upheld Swain's decision, but criticized the grounds on which it was made.
He said that the "good cause" for considering outside evidence in Locher's case came from the insufficiency of UNUM's appeal-review procedures, not simply the fact that UNUM had a conflict of interest.
"A conflicted administrator does not per se constitute good cause, and [we] caution district courts that a finding of a conflicted administrator alone should not be translated necessarily into a finding of good cause," Straub wrote in his Nov. 12, 2004, decision.
The decision gives judges more discretion in deciding which evidence to allow in cases involving denial of disability benefits claims, a move that will generally favor insurers.
"I think it's a sign that [the court] approves of the system that currently exists for the review of disability claims by insurance companies," says Craig Martin, a partner at Jenner & Block in Chicago who specializes in ERISA litigation.
But Michael Gradisek, an attorney who specializes in qualified plan insurance for Duane Morris in Philadelphia, thinks the ruling may create more work for insurers.
"What the court is saying here is that they want the insurance company to provide details on their procedures for handling the initial requests and the appeals of disability claims," he says. "It's another procedural step insurance companies will have to comply with."
Moment Of Clarity
Insurance companies most likely will be willing to accept this headache. Straub's decision significantly clarifies the Supreme Court case DeFelice v. American International Life, which held that when the insurer both evaluates the claim and pays for it, "plaintiffs are utterly helpless against the whim of [its] interpretation of the facts."
Straub said that DeFelice, which is often invoked as the standard for determining "good cause," involved more than simply a conflicted benefits administrator. In that case, Straub said, the court had to consider evidence outside the insurer's records because the very process by which it evaluated claims was prejudiced against the insured person. But Straub stressed that a conflicted benefits administrator alone isn't enough to require the admission of outside evidence.
Straub also pointed out that insurance companies are almost always both the reviewer and payer of the claim, so saying that a conflicted administrator automatically triggers a review of the case "would also eliminate the appropriate incentive for a claimant to submit all available evidence regarding [his or her] condition to the insurance
company upon first submitting a claim."
If a conflicted administrator was an automatic trigger, courts would have to hear outside evidence on almost every disputed claim, and insurers, their clients and the courts all would end up spending more time and money resolving such cases.
"Up until now, judges had always ruled that there is a so-called conflict of interest if the person who pays for the benefits is the one who decides who gets them," Martin says. "[This decision] says that a conflict does not automatically trigger the need for a judge to go beyond the administrative record in considering the case. Before that, districts were split on this."
Coming from such a well-regarded court, the decision probably will have a broader influence on other districts, Martin says. Also, the new guideline will streamline the process for hearing such cases, whose increasing numbers have begun to bog down courts.
Even more broadly, the case may be used in resolving other disputes such as severance packages. In such cases, the conflicted administrator would be the company's human resources department rather than an insurance company, but otherwise the cases are similar, Martin said.
"This will have a broader impact than just the health care field," he says.