A federal court in Nevada recently issued findings of fact and conclusions of law denying a motion for a new trial in Merrick v. Paul Revere Life Ins.Co., No. CV-S-00-0731-JCM-RJJ (D.Nev. Nov. 17), where a jury returned a bad faith verdict against Paul Revere Life and its parent corporation, Unum Provident, in the sum of $36,000,000. The court’s findings are a thorough indictment of Unum’s business operations which the court found to have exemplified systemic bad faith.

The court found more than ample evidence showing that defendants were engaged in a scheme to deny their disabled policyholders’ claims dating back to the early 1990s when the component companies that ultimately became Unum Provident Corporation changed from a claims paying attitude to a ”claim management” philosophy. In particular, the insurer targeted so-called ”subjective” claims such as those involving chronic fatigue syndrome and fibromyalgia, and denied claims lacking ”objective” evidentiary support, despite the absence of policy provisions requiring objective proof, and even though Unum Provident’s internal studies acknowledged that medical science had yet to develop objective laboratory tests for such conditions. Part of the scheme was to make it more difficult for claimants to prove their claims by limiting independent medical examinations and by placing greater reliance on in-house doctors who were instructed to ”cherry pick records to find grounds for denying claims regardless of actual merit.” In addition, the Unum Provident doctors would ”piecemeal” the claimants’ medical conditions and not consider co-morbidity of multiple conditions.

Unum Provident also set targets and goals for increased claim terminations. When goals were not being met, pressure would be exerted on claims personnel to increase terminations. Among the techniques used was to post Unum’s daily stock trading on a regular basis to show claims personnel how their actions were contributing to the overall profitability of the company.

Despite a multistate market conduct investigation of the Unum Provident Corporation and its component insurance companies, which resulted in an agreement to reevaluate more than 200,000 previously denied claims, the court found the numbers of individuals who actually participated were substantially suppressed by processes intended to impede participation. However, of those who did participate, approximately 42 percent of the earlier claim denials were overturned. Nonetheless, Unum’s tactics generated huge savings. Termination of benefit payments resulted in savings of over $130 million per quarter in 1996, and testimony credited by the court revealed that the savings from unjustified terminations exceeded one billion dollars.

The court was also able to relate its findings to the way in which Merrick’s claim was handled and found the mishandling of his claim was consistent with the overall scheme. Merrick was a very successful businessman who worked in the field of venture capital. He had purchased a disability policy that would pay $12,000 per month if he became disabled; and in 1994, he began experiencing symptoms that were ultimately diagnosed at the Mayo Clinic as chronic fatigue syndrome. Although Paul Revere acknowledged Merrick’s disability and put him on claim, shortly after benefits commenced, a field investigator visited Merrick and offered him four months of benefits if he would give up his claim, which was worth $1.5 million. At the conclusion of the visit, the field investigator tendered a check for one month of benefits, but language on the back of the check preceding the space for an endorsement indicated that acceptance of the payment would have released the claim in its entirety. Although Unum tried to justify the payment as a ”return to work” benefit, the court found that explanation incredible since Merrick was clearly incapable of returning to work as a venture capitalist at that time. Merrick was also presented with a veiled threat that if he did not accept the payment offered by the field investigator he might be sued for repayment of the benefits that had previously been issued.

When Merrick turned down the ”low ball” offer, Unum demanded that he attend an independent medical examination performed by a neurologist. Although the examiner disagreed with the chronic fatigue syndrome diagnosis, he concurred that Merrick was substantially impaired. After the examination, though, Merrick was notified that he was being paid under a reservation of rights based on the examiner’s conclusion that there was no objective evidence of disability due to chronic fatigue syndrome or an alternate posited diagnosis, Lyme disease.

Unum’s tactics impacted Merrick financially, and also affected him at a time while he was undergoing a divorce and his adult daughter was suffering from a terminal illness. Merrick’s teenage son also died during this period, and shortly after the son’s death, the field investigator visited him again and told him that all of the doctors had concurred that he was not disabled and that if he did not accept three months of benefit payments, his claim would be terminated and Unum would sue to recoup benefits it had paid.

When Merrick refused, his claim was terminated. Despite there being no basis for closing the claim, it appeared to the court the claim was closed in order to help meet year-end claim closure targets.

After the claim termination, Merrick submitted additional documentation which was rejected. For nearly four years, Merrick tried to get his claim reinstated; and when his efforts were unsuccessful, he finally resorted to litigation. Even though Unum knew Merrick’s illness could not be supported with objective evidence, it never told Merrick that fact and kept insisting that he produce objective evidence.

At trial, Unum’s witnesses proffered false testimony. As one example, the court pointed out that Unum’s witnesses testified that the insurance regulators found no wrongdoing.

The court stated, ”This position was demonstrably wrong and Defendants knew it. The evidence established that investigators found widespread misconduct in Defendants’ claims handling and that Defendants chose to enter into settlement agreements with regulators in order to avoid the formal findings of the very misconduct that they denied.”

The court also referenced a witness proffered by Unum who denied knowledge of the ”Columbo award,” which was an award given to Unum employees whose investigations led to the termination of claims. In addition, the court found notable that Unum failed to call a single witness to testify that the bad faith conduct has changed since the market conduct investigation. The court went even further, though, remarking that ”high level management of Defendants, who knew and participated in the institutional bad faith practices, remain in place.” The court also determined that Unum remained unrepentant and was hiding ongoing misconduct.

From the evidence, the court concluded that Unum engaged in highly reprehensible misconduct sufficient to justify a punitive damage award under the standards set by the Supreme Court. The court specifically cited Unum’s generation of improper profits ”obtained at the expense of physically, mentally, emotionally, and economically vulnerable individuals, through repeated actions systematically applied to deprive them of disability insurance benefits in their time of need.”

In its third conclusion, the court explained: ”At the time of Defendants’ second visit to Merrick, his teenage son had recently died. Merrick’s adult daughter had terminal cancer and he was supporting her economically. He was supporting his father. At a time of high emotional vulnerability Defendants attempted to settle Merrick’s claim for two months of payments and a threat of litigation. When he refused their low-ball settlement offer, Defendants terminated benefits adding to his emotional stress.”

The court’s fifth conclusion was the most devastating, though. The court found defendants’ actions were ”not the result of accident or inadvertence, but was part of a widespread corporate plan or scheme designed to augment corporate profits through wrongful conduct targeted at disabled policyholders.” The court found a deliberate and conscious course of conduct intended to disregard Merrick’s rights as well as the rights of hundreds if not thousands of policyholders.

Finally, the court determined that none of the payments under the reassessment or even Unum’s agreement prior to trial to pay Merrick ameliorated the misconduct. Because of the nature of Defendants’ misconduct, the court found the jury’s award of punitive damages appropriate, but the verdict was reduced to a ratio of 9:1, thereby remitting that portion of the verdict to $26,394,765.39.

This case was the second trial in this matter. At the initial trial, the jury had returned a bad faith verdict, although in a smaller amount. However, the 9th U.S. Circuit Court of Appeals vacated the verdict due to a defect in the jury instructions. Merrick v. Paul Revere Life Ins.Co., 500 F.3d 1007 (9th Cir. 2007).

This decision is shocking and exemplifies what the Supreme Court was pointing to in Metro.Life Ins. Co. v. Glenn, 128 S.Ct. 2343, 2351 (2008), in its discussion of insurer conflicts of interest:

”The conflict of interest at issue here, for example, should prove more important (perhaps of great importance) where circumstances suggest a higher likelihood that it affected the benefits decision, including, but not limited to, cases where an insurance company administrator has a history of biased claims administration. See Langbein, supra, at 1317-1321 (detailing such a history for one large insurer). It should prove less important (perhaps to the vanishing point) where the administrator has taken active steps to reduce potential bias and to promote accuracy, for example, by walling off claims administrators from those interested in firm finances, or by imposing management checks that penalize inaccurate decision making irrespective of whom the inaccuracy benefits.”

It is evident from this ruling that instead of best practices to promote accuracy, what the ruling describes as ”best practices” at Unum were directed toward claim terminations. Moreover, the court is plainly of the belief that neither Unum nor its competitors learned a lesson from the multi-state market conduct investigation. The court repeatedly cited to Unum’s claimed defense that it had no reason to be punished since it was acting in the same manner as its competitors. If that is true, the disability insurance industry needs far more stringent regulation and oversight to prevent another Merrick case from ever occurring again.

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

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