Because group disability insurance policies coordinate the benefits payable with benefits paid by other sources such as Social Security disability insurance (SSDI) payments, disability insurers frequently require claimants to apply for such benefits.

A recent 1st Circuit opinion, U.S. ex.rel. Loughren v. Unum Group, 2010 U.S.App.LEXIS 15668 (1st Cir. July 29, 2010), dealt with an assertion that mandating Social Security disability applications for claimants who did not qualify for such benefits caused the expenditure of unnecessary tax dollars and thus violated the False Claims Act.

A jury had returned a verdict finding Unum (the insurer) guilty of two violations, although the insurer was exonerated as to other claims that had been tried. Because of improper exclusion of relevant evidence, the court overturned the jury verdicts.

The court began its discussion as to the merits of the case by recounting the stringent standards for awards of SSDI, which defines “disability” to mean: an “inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment, which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” 42 U.S.C. § 423(d)(1)(A).

In order to meet that standard, the claimant’s physical and/or mental impairments must be of such severity that he is not only unable to do his previous work but cannot, considering his age, education and work experience, engage in any other kind of substantial gainful work that exists in the national economy, regardless of whether such work exists in the immediate area in which he lives, or whether a specific job vacancy exists for him, or whether he would be hired if he applied for work.

42 U.S.C. § 423(d)(2)(A). At the time of trial, Social Security defined “substantial gainful activity” to mean the performance of labor for which the claimant received in excess of $940 a month; it is currently $1,000. The court also noted that the application for SSDI requires the claimant to make the following affirmation:

“I know that anyone who makes or causes to be made a false statement or representation of material fact in an application or for use in determining a right to payment under the Social Security Act commits a crime punishable under Federal law by fine, imprisonment or both. I affirm that all information I have given in this document is true.”

In contrast to SSDI, the court explained that the Unum long-term disability (LTD) policies had less stringent qualification requirements and typically would pay benefits to claimants unable to perform the duties of their own occupation.

After two years, the definition of disability under the LTD policies became more stringent (albeit less stringent than the Social Security standard) and required proof that the claimant was unable to perform “any occupation,” meaning that Unum would ask whether, based on the claimant’s training, education and experience, and taking into consideration the claimant’s medical restrictions and limitations, the insured was capable of performing an occupation that would pay 60 percent or more of pre-disability earnings.

Turning to the cause of action at issue, the court explained the False Claims Act “covers all fraudulent attempts to cause the government to pay out sums of money.” United States ex rel. Conner v. Salina Regional Health Center, Inc., 543 F.3d 1211, 1217 (10th Cir. 2008).

Although the government can bring an action in its own right (31 U.S.C. § 3730(a)), the Act permits a private citizen to sue on a qui tam basis “in the name of the Government.” 31 U.S.C. § 3730(b)(1); see also United States ex rel. Lissack v. Sakura Global Capital Markets, Inc., 377 F.3d 145, 152 (2d Cir. 2004).

At trial, the jury was instructed that to establish a violation of the False Claims Act, the plaintiff (known as the relator) “had to prove that a false or fraudulent claim was submitted to the United States, that Unum had the requisite scienter, and that Unum caused the submission of the claim.”

The alleged false statement was that the claimant was “unable to work” or “disabled.” Further, to establish the claim, the allegedly false statement would have to be material, a term defined by the Supreme Court to mean that “[i]n general, a false statement is material if it has ‘a natural tendency to influence, or [is] capable of influencing, the decision of the decision making body to which it was addressed.'” Neder v. United States, 527 U.S. 1, 16, 119 S. Ct. 1827, 144 L. Ed. 2d 35 (1999) (quoting United States v. Gaudin, 515 U.S. 506, 509, 115 S. Ct. 2310, 132 L. Ed. 2d 444 (1995)).

Thus, a claimant’s statement made to the Social Security Administration of being “unable to work” or “disabled” was material “if it had a natural tendency to influence or was capable of influencing the SSA’s decision whether or not to award SSDI benefits.”

Unum argued that the statement of “disabled” or “unable to work” was not material as a matter of law since (1) the claimants had “disclosed fully and fairly the underlying facts upon which the statement[s] [were] made”; and (2) “that decision is made by the SSA alone, after a full review of all of the available medical records.”

The court disagreed, finding the statements material. The court explained that the focus is on the “potential effect” of the false statement when it is made, and all that is required is that the false statement “is capable of influencing the Agency’s decision.” Further, just because the alleged false statement as to disability was a statement of opinion, the court found: An opinion may qualify as a false statement for purposes of the FCA where the speaker “knows facts ‘which would preclude such an opinion.'” United States ex rel. Siewick v. Jamieson Science and Engineering, Inc., 214 F.3d 1372, 1378, 341 U.S. App. D.C. 459 (D.C. Cir. 2000).

Thus, the court found that the statements made to Social Security were material because they had “the potential to influence the Agency’s determination of one’s eligibility for benefits.” The court also cited United States v. Phythian, 529 F.3d 807, 812-13 (8th Cir. 2008), which held in the context of a 42 U.S.C. § 408(a)(3) prosecution (making a false statement for the purpose of obtaining a Social Security benefit) that a statement made to SSA claiming the applicant was not working and was unable to work were material in that they had ” ‘a natural tendency to influence’ the SSA in making its eligibility determination, as the ability to work is critical to the SSA’s determination.”

Furthermore, the Social Security Act defines “a material fact” as “one which the Commissioner of Social Security may consider in evaluating whether an applicant is entitled to benefits.” 42 U.S.C. § 1320a-8(a)(2). Thus, the court determined “it is reasonable for the SSA to conclude that an applicant in good faith believes that he may be eligible for SSDI benefits when submitting an application.”

As to the issue of scienter, the False Claims Act requires that an individual must act “knowingly” in submitting a false claim. 31 U.S.C. § 3729(a)(1)-(2) (2008). The Act further defines “knowing” and “knowingly” as having “actual knowledge” of information or acting in “deliberate ignorance” or “reckless disregard” of the truth or falsity of the information. 31 U.S.C. § 3729(b)(1)-(3) (2008).

The court of appeals upheld the jury’s finding of scienter, interpreting Social Security’s regulations as implying that those without a good faith belief that they would qualify should not apply.

However, there was one aspect of Unum’s argument the court of appeals found meritorious.

Unum claimed it could not be held responsible for failing to “pre-screen” SSDI applicants because the same practice is engaged in by the Federal Employee Retirement System (FERS) and state governments, which require applicants to file for SSDI as a condition of receiving other federal or state benefits.

The district court had excluded that evidence, and the court of appeals found an abuse of discretion in that exclusion. Although the court acknowledged that the operations of FERS and other state programs is not particularly relevant to Unum’s defense, what the court did deem relevant was SSA’s knowledge of the practice and its inability to differentiate between FERS and Unum claimants.

The court considered that evidence relevant to the question of materiality since, if SSA was aware that under FERS every federal employee seeking FERS disability benefits was required to apply for SSDI and that states were also doing the same, SSA could not take the representations made on the application at face value and such statements would therefore not influence SSA’s decision to process or pay the claims at issue. Hence, the jury verdicts were vacated and the case remanded for a new trial.

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

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