Insurer's own guidelines dismissed as not binding
Chicago Daily Law Bulletin
October 6, 2008
by MARK D. DEBOFSKY
The case of Pannebecker v. Liberty Life Assurance Company of Boston, 2008 U.S.App.LEXIS 19753 (9th Cir., Sept. 18), involved the question of whether, in assessing a claimant's ability to work at ''any occupation,'' the individual's pre-disability earnings and station in life have to be taken into consideration.
This claim arose in 1996 when Nancy J. Pannebecker had to quit a lucrative job with Hughes Electronics Corp. due to coronary artery disease. Although Liberty Life paid her long-term disability benefits for three years, at the end of that period, the insurer terminated the payments, claiming that she could perform sedentary work and was therefore not disabled.
The District Court disagreed with Liberty's determination and remanded the matter to the insurer because it had failed to identify any specific jobs for which Pannebecker was qualified. However, Liberty once again found her not disabled after consulting with a vocational expert.
The District Court upheld that determination and the plaintiff appealed. The 9th U.S. Circuit Court of Appeals found that benefits should not have been terminated, but also found the decision Liberty rendered following the initial remand was correct.
The court focused on whether Pannebecker met the definition of disability: ''unable to perform, with reasonable continuity, all of the material and substantial duties of his own or any other occupation for which he is or becomes reasonably fitted by training, education, experience, age, and physical and mental capacity.'' (Emphasis added.)
Although the insurer identified a number of jobs it believed the plaintiff could perform, the plaintiff strenuously objected that such jobs were not equivalent to her prior station in life and that the earnings the identified jobs paid were so disproportionate to pre-disability earnings that such occupations could not be considered a reasonable other occupation.
The plaintiff argued that Madden v. ITT Long-Term Disability Plan for Salaried Employees, 914 F.2d 1279 (9th Cir. 1990), required consideration of prior salary in assessing ''training, education and experience.'' Pannebecker also asserted that Helms v. Monsanto Company Inc., 728 F.2d 1416 (11th Cir. 1984), required consideration of comparable earnings based on its comment that disability had to be assessed based an ''occupation from which [one] could earn a reasonably substantial income rising to the dignity of an income or livelihood, even though the income is not as much as he earned before the disability.'' Id. at 1421-22.
The 9th Circuit disagreed with Pannebecker's reading of those cases, though, and refused to read into the plan a requirement that the alternative occupation pay wages comparable to Pannebecker's prior earnings even though the plaintiff cited a Liberty Life Assurance internal claim manual that indicated the insurer ''should consider 'reasonable replacement of income based on TEE [training, education and experience].''
The appeals court found the internal guidelines were not ''hard and fast rules'' that required modification of the specific plan language.
Hence, the court refused to overturn the final denial even though the court also determined that the initial decision to terminate benefits was arbitrary. Thus, the court ordered payment of benefits for the interim period because the initial termination was contrary to the plan requirements.
The court ruled its decision was in compliance with Grosz-Salomon v. Paul Revere Life Insurance Co., 237 F.3d 1154, 1163 (9th Cir. 2001), which held that benefits should be reinstated when but for the insurer's arbitrary and capricious conduct, the insured would have continued to receive the benefits.
''Pannebecker was already receiving benefits,'' the 9th Circuit explained, ''and, but for Liberty's arbitrary and capricious conduct - i.e., its failure to apply the terms of the plan properly - she would have continued receiving them. While Liberty was given a second opportunity to determine whether Pannebecker was 'disabled' under the plan, that second chance should not have left Pannebecker empty-handed during the time that it took Liberty to comply with the plan's requirements. The District Court should have awarded Pannebecker benefits from the time of Liberty's improper denial in 2000 until the company's decision of May 3, 2005, to decline to alter its benefits determination.''
The court also remanded the matter for a determination of entitlement to attorney fees.
The main holding in this case deviates from substantial precedent. Both the commentators and ALR annotations suggest that the insured's station in life must be written into the policy as an implied term in assessing whether the claimant is capable of working in any capacity. Appleman on Insurance 2d, section 683; Annot., ''What Constitutes Permanent or Total Disability within Coverage of Insurance Policy Issued to Physical Laborer or Workman,'' 32 ALR 3d 922 (1970).
Indeed, that standard has been universally applied dating back Erreca v. Western States Life Insurance Co., 19 Cal.2d 388, 394-395, 121 P.2d 689, 141 A.L.R. 68 (1942), which was reaffirmed in Moore v. American United Life Insurance Co.,150 Cal.App.3d 610, 197 Cal.Rptr. 878 (1984). Other key cases on this issue include Mossa v. Provident Life and Casualty Insurance Co., 36 F.Supp.2d 524, 531 (E.D. N.Y. 1999), Hoffert v. Commercial Insurance Company of Newark,729 F.Supp 201 (S.D. N.Y. 1990); Minnesota Mutual v. Lawson, 377 F.2d 525 (9th Cir. 1967); Minnesota Mutual v. Wright,312 F.2d 655 (8th Cir. 1963); Weum v. Mutual Benefit Health and Accident, 54 N.W.2d 20 (Minn.); Blackwell v. Prudential Life Insurance Company of America, 34 S.E.2d 57 (S.C. 1945), and Metropolitan Life Insurance Co. v. Hawley, 198 S.W.2d 171 (Ark. 1947).
All of the cited cases, along with many others, hold that the insurer may consider only jobs that pay earnings commensurate with the insured's pre-disability earnings; and many insurers internally recognize that they will not consider any occupation that pays less than 60 percent of pre-disability earnings indexed to reflect increases in the consumer price index since the onset of disability.
Liberty appears to interpret its policies to incorporate that standard as well, which makes this ruling even more difficult to understand. Insurers may not apply, under the Employee Retirement Income Security Act, differing interpretations to the same issue.
Indeed, the Department of Labor explained this point in the ERISA regulations: ''[A]s a general requirement for reasonable claims procedures for all plans, that a plan's claims procedures must include administrative safeguards and processes designed to ensure and to verify that benefit claims determinations are made in accordance with governing plan documents and that, where appropriate, the plan provisions have been applied consistently with respect to similarly situated claimants. Courts have long recognized that such consistency is required even under the most deferential judicial standard of review.'' (Citing Lutheran Medical Center v. Contractors, Laborers, Teamsters and Engineers Health and Welfare Plan, 25 F.3d 616, 620-22 (8th Cir. 1994); De Nobel v. Vitro Corp., 885 F.2d 1180, 1188 (4th Cir. 1989).) 65 Fed.Reg. 70246, 70251 (Nov. 21, 2000).
In addition, both Egert v. Connecticut General Life Insurance Co., 900 F.2d 1032 (7th Cir. 1990), and Glista v. Unum Life Insurance Co. of America, 378 F.3d 113 (1st Cir. 2004), cited insurers' deviation from their own internal guidelines as the basis for concluding the benefit plans acted arbitrarily by not administering claims in accordance with its own rules and standards. Since the footnote in this case suggests Liberty has engaged in haphazard application of its own guidelines, instead of excusing the irregularity, consistent with the ERISA law and regulations, the court should have found that Liberty's inconsistency is per se arbitrary without more of a rationale as to why Liberty felt free to ignore its own guidelines in this case.