After winning summary judgment in the trial court, plaintiff Linda Ellis suffered a crushing defeat in the 5th U.S. Circuit Court of Appeals, which rejected her claim for disability coverage.Ellis v. Liberty Life Assurance Company of Boston, 2004 U.S.App.LEXIS 24199 (5th Cir., Nov. 19).

Ellis was a loan officer for Chase Manhattan Bank until 1999, when she became disabled on account of fibromyalgia. She was initially approved to receive short-term disability benefits; and long-term disability coverage also was approved; however, at the end of 2000, benefits were terminated based on an alleged absence of objective medical findings supporting disability. After a pre-suit appeal, Ellis filed suit in state court; and Liberty removed the case to federal court, subsequently obtaining dismissal of claims brought under Texas law for violations of the state insurance code, breach of contract and breach of the duty of good faith and fair dealing.

However, after considering cross-motions for summary judgment, the trial court found in favor of the plaintiff. Applying a deferential standard of review to the underlying claim, modified by a sliding scale due to Liberty’s inherent conflict of interest, and a de novo standard of appellate review to the court’s grant of summary judgment, the 5th Circuit reversed.

The definition of ”disability” under the policy is that benefits are payable to an employee who is ”unable to perform all of the material and substantial duties of his occupation on an active employment basis because of an injury or sickness.” The District Court interpreted the provision to mean the claimant is eligible to receive benefits if she ”could not perform any one of the material duties of her occupation.”

The appeals court found error in that determination, ruling: ”We interpret ‘unable to perform all’ as synonymous with ‘not able to perform every.’ In other words, ‘unable’ is synonymous with ‘not able,’ and ‘all’ is synonymous with ‘every.’ Applying the Wildbur methodology, we hold that Liberty gave a legally correct interpretation to this provision of the plan.”

In evaluating whether Liberty gave a uniform interpretation of the plan, the court disregarded the deposition testimony of Liberty’s litigation manager:

Q: Under that definition, if Ms. Ellis could not perform one of the material duties of her occupation, she would be disabled?

A: Yes.

A subsequent affidavit, however, explained that the witness was confused at the deposition and that Liberty had consistently interpreted the provision to mean unable to perform all duties. The corrected testimony was buttressed by other Liberty personnel who furnished depositions stating that Liberty applied the ”unable to perform all duties” definition.

Thus, the appeals court determined: ”We conclude that in the context of the policy as a whole, a fair reading of the term ‘unable to perform all’ is that Ellis is not disabled for purposes of LTD [long-term disability] if she can perform ‘at least one’ of the material and substantial duties of her occupation. Ellis’ proffered interpretation, that she is disabled if she cannot perform one (‘any one’) of the material and substantial duties of her occupation i.e., ‘unable to perform all’ means ‘not able to perform any one’ cannot be squared with the policy’s language.”

As further support for its conclusion, the court pointed to the provisions of the policy applicable to ”partial disability,” and stated that an interpretation consistent with Ellis’ argument would negate the provisions for partial disability.

The court then addressed the following argument:

”Ellis attempts to counter by asserting that Liberty’s interpretation is legally incorrect because ‘under this contorted interpretation, virtually no person could ever satisfy the definition of ”disability.” ‘ Ellis offers the example of a secretary who is rendered paraplegic, contending that this employee would not be disabled under Liberty’s interpretation if she could sit at her desk in a wheelchair and answer a speaker phone.

”Ellis’ argument ignores, however, the two adjectives that modify ‘duties’ ‘material and substantial.’ Merely because a disabled employee can perform a minor, collateral duty of his job, e.g., answering a speaker phone, would not justify the plan administrator’s considering such an employee ineligible for benefits under Liberty’s interpretation of the LTD policy. In such a situation, the disabled employee would be disabled under Liberty’s interpretation, despite his ability to perform minor duties, as long as he could not was ‘unable to’ perform any of the material and substantial duties of his occupation.

”We conclude that Ellis would have to demonstrate that she cannot perform ‘every single’ or ‘each and every’ ‘material and substantial duty of her occupation’ which she could not prove to obtain LTD benefits.”

The next significant issue the court addressed was whether a higher standard of proof existed to terminate benefits once the claim was initially approved, meaning whether a substantial change in medical condition occurred.

The appeals court ruled such proof was unnecessary and held:

”We disagree with the District Court’s view of the applicable law. We have found no statutory, regulatory or jurisprudential authority and neither Ellis nor the District Court has cited any to us that would heighten the level of the proof needed for a plan administrator to determine entitlement or non-entitlement to LTD benefits simply because the administrator previously had approved entitlement and paid benefits to the employee in question. The District Court committed legal error when it concluded that, once the administrator approves entitlement to LTD benefits, subsequent termination of those benefits would have to be supported by substantial evidence of a change in the employee’s condition.

”We have never articulated such an evidentiary distinction or imposed such a requirement on the plan administrator: All that ERISA requires is that substantial evidence support a plan administrator’s benefits decision whether it be to deny benefits initially or to terminate benefits previously granted when, as here, the plan administrator is vested with the discretion to determine, inter alia, both initial and continued eligibility for benefits. In the investigation that continued following its initial grant of LTD benefits to Ellis, Liberty acquired subsequent medical evidence that supported termination of her LTD benefits months after it had approved Ellis’ entitlement to them on the basis of the evidence that it had before it at that time.”

Consequently, the court ruled: ”We hold that when a plan administrator initially determines that a covered employee is eligible for benefits and later determines that the employee is not, or has ceased to be, eligible for those benefits by virtue of additional medical information received, the plan administrator is not required to obtain proof that a substantial change in the LTD recipient’s medical condition occurred after the initial determination of eligibility.”

The court also engaged in an extensive discussion of preemption of state law claims, holding that the claims brought under Texas law, including claims under the insurance code relating to unfair claims practices or insurance bad faith, were preempted by the Employee Retirement Income Security Act. The court found that the laws failed to meet the test of Kentucky Association of Health Plans v. Miller, in that the risk pooling arrangement between insurer and insured was unaffected.

Interestingly, Judge Charles W. Pickering Sr., who sits on the 5th Circuit pursuant to a recess appointment made by President Bush after the nomination stalled in the Senate, issued a stinging dissent. Pickering recognized that while the interpretation that disability requires the inability to perform every duty is a plausible reading of the policy, he finds the definition ambiguous and susceptible to more than one reading; therefore, it should be interpreted in a way that favors the insured.

The dissent gives the example of a job that has 10 material duties, but the claimant cannot engage in six of the duties – by definition that employee is ”unable to perform all of the material and substantial duties of the occupation.” (Emphasis in original.) The dissent also took issue with the majority’s conclusion that once benefits are approved, they can be terminated ”without demonstrating that [the] initial decision was erroneous or without substantial evidence of a change in the claimant’s medical condition.”

That fits with the requirements of the ERISA law, and Liberty’s conflicted role, which the court described as follows: ”If Liberty pays a claim it is not unreasonable to infer that every penny of the claim comes directly out of Liberty’s coffers. Any argument that the administrator did not have a direct and total, or almost total conflict of interest in this situation is to ignore reality. The fox guarding the chicken house is not entitled to great deference. Thus, in analyzing the administrator’s decision to terminate benefits, I would give little deference to the administrator’s exercise of discretion.”

Pickering added: ”It is undisputed that the administrator initially determined that Ellis was entitled to disability benefits based on the medical evidence, and later reaffirmed that fact in the letter of termination. I would hold as a matter of law, that once the administrator determined Ellis was entitled to disability benefits, a subsequent termination of those benefits would be an ‘arbitrary and capricious’ decision by the administrator, and hence an abuse of discretion, unless there is substantial evidence to support either (1) that the initial decision to grant benefits was incorrect; or (2) that there has been a change in condition that would justify the termination of benefits. Once the administrator has exercised its discretion and determined that a claimant is entitled to benefits, a later decision to terminate those vested disability benefits without justification is by definition arbitrary and capricious and an abuse of discretion. See Meditrust Financial Services v. Sterling Chemicals, 168 F.3d 211, 215 (5th Cir. 1999) (holding that administrator’s decision is arbitrary if made without rational connection between known facts and the decision or between found facts and the evidence).”

Because Liberty acknowledged the correctness of the initial approval of benefits and never asserted that decision was wrong, Pickering noted, ”The question then becomes whether there was a change in condition that would justify the later termination of benefits. The majority opinion fails to answer this question.”

The problem with the majority’s decision is that it is completely disconnected from 5th Circuit – or any other federal court – precedent that clearly addresses the issues presented. Although both Gallagher v. Reliance Standard Life Insurance Co., 305 F.3d 264 (4th Cir. 2002), and Carr v. Reliance Standard Life Insurance Co., 363 F.3d 604 (6th Cir. 2004), reached the same conclusion that the insured would have to be unable to perform all duties of her occupation to qualify for benefits, the 5th Circuit’s ruling in Lain v. Unum Life Insurance Co., 279 F.3d 337 (5th Cir. 2002), held that when the insured is incapable of performing any material job duty under an ”own occupation” definition of disability, benefits are properly paid. The 7th Circuit’s discussion of the issue in McFarland v. General American Life Insurance Co., 149 F.3d 583 (7th Cir. 1998), also supports a conclusion that the inability to perform any material job duty can meet the definition of total disability in a disability insurance policy.

However, Lain, which is not cited at all inEllis, is even more relevant since in that case, just as inEllis, the insurer’s own witness explained that the insurer interpreted the policy to mean that the insured’s inability to perform a material job duty means that individual is incapable of engaging in their regular occupation and benefits are due. Allowing Liberty to contradict its own deposition testimony in that regard and still prevail on summary judgment is so contrary to well-established federal guidelines, that it was shocking to see the 5th Circuit allow it.

A recent 7th Circuit ruling, relying on a Supreme Court decision, held in that regard: ”Affidavits, though signed under oath by the affiant, are typically and here written by the affiant’s lawyer, and when offered to contradict the affiant’s deposition are so lacking in credibility as to be entitled to zero weight in summary judgment proceedings unless the affiant gives a plausible explanation for the discrepancy. Cleveland v. Policy Management Systems Corp., 526 U.S. 795, 806-07, 143 L.Ed.2d 966, 119 S.Ct. 1597 (1999); Russell v. Acme-Evans Co., 51 F.3d 64, 67-68 (7th Cir. 1995); Hackman v. Valley Fair, 932 F.2d 239, 241 (3d Cir. 1991).” Beckel v. Wal-Mart Associates, 301 F.3d 621, 623 (7th Cir., 2002).

Nor is Liberty’s self-serving testimony credible since it is contrary to nearly a century of contrary court rulings.

The weight of authority holds: ”Provisions in a disability policy requiring that the insured be unable to perform every duty pertaining to his or her occupation must be given a liberal construction. For example, clauses which relate to the occupation to be considered in determining whether the insured is entitled to benefits will not be liberally construed or applied where, to do so, would make recovery of benefits unreasonably impossible in all or practically all cases. Thus, the duties of an insured’s occupation must be viewed as a whole and not separately or in piecemeal.” L. Russ and T. Segalla, Couch on Insurance 3d, section 147:106 at 147-138.

This statement illustrates the fundamental error in the 5th Circuit’s determination – it renders Liberty’s coverage illusory since virtually no one can meet the standard. Couch refers to a ”substantial performance test” as meaning that benefits may be recovered when ”the insured is incapacitated from performing any substantial part of his or her ordinary duties.” Id. at section 147:107. Under that standard, Ellis was entitled to benefits as the District Court properly held.

Other cases on this issue are collected by the American Law Reports. See ”Insurance: ‘Total Disability’ or the Like as Referring to Inability to Work in Usual Occupation or in Other Occupations,” 21 ALR 3d 1155, citing Elmore v. Southern Security Co., 209 Iowa 872, 224 N.W. 32 (1929), which construed almost exactly the same language as in this case to allow recovery if the insured ”is prevented from following his particular business or occupation.” 21 ALR 3d at 1201; see also, Fidelity & C. Co. v. Bynum, 221 Ky. 450, 298 S.W. 1080 (1927). 21 ALR 3d at 1202. Similar rulings are cited in the current supplement to the ALR; e.g., Cassady v. United Insurance Co., 370 F.Supp. 388 (D. Ark.).

The appeals court’s explanation that acceptance of the District Court’s determination would negate the partial disability clause is also extremely misleading. The definition of the application of that clause in the Liberty policy was only partially quoted – undoubtedly, for the partial disability clause to be applicable, the insured must actually be working, otherwise there would be no means of calculating the benefit due.

Indeed, quite the contrary from what the 5th Circuit held, the 9th Circuit, in Saffle v. Sierra Pacific Power Company Bargaining Unit Long Term Disability Plan, 85 F.3d 455 (9th Cir. 1996), rejected the conclusion reached by Ellis, and explained:

”This construction is inconsistent with the plain language of the plan, and is inconsistent with the plan’s two-tiered disability structure because it collapses the threshold for occupational disability into the standard for general, or permanent disability. Total (occupational) disability has to do with the inability to perform a regular occupation for two years and 180 days; total (general) disability by contrast has to do with the inability thereafter to engage in any occupation for which the participant is reasonably fitted.” 85 F.3d at 459.

In dissenting, Pickering also was correct in disagreeing with the majority with respect to the benefit termination in the absence of new evidence that would change the initial decision. The court’s statement that it could find no authorities in that regard meant it did not look hard enough.

Relevant precedents include McOsker v. Paul Revere Life Insurance Co., 279 F.3d 586 (8th Cir. 2002), which points out that when an insurer pays disability benefits for several years, the following principle applies: ”We are not suggesting that paying benefits operates forever as an estoppel so that an insurer can never change its mind; but unless information available to an insurer alters in some significant way, the previous payment of benefits is a circumstance that must weigh against the propriety of an insurer’s decision to discontinue benefits.” 279 F.3d at 589.

From that proposition, the court concluded, ”We have recently had occasion to remark that in determining whether an insurer has properly terminated benefits that it initially undertook to pay out, it is important to focus on the events that occurred between the conclusion that benefits were owing and the decision to terminate them. See Walke v. Group Long Term Disability Insurance, 256 F.3d 835, 840 (8th Cir. 2001).” 279 F.3d at 590. Also see, Levinson v. Reliance Standard, 245 F.3d 1321 (11th Cir. 2001), which places the burden of proof on the insurer to establish medical improvement sufficient to allow a return to work. Thus, this is a ruling that should be reconsidered.

This article was initially published in the Chicago Daily Law Bulletin.

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