The Conflict of Interest of a Long-Term Disability Insurer

We have talked here before about the inherent conflict of interest that a long-term disability insurance company has when it administers its LTD policies, especially when deciding whether a claimant is eligible for benefits. Today we will expand on this idea as federal courts have explained it.

Federal courts across the country have written a rich tapestry of opinions in deciding appeals under ERISA of LTD insurance claim denials. (ERISA is the federal law that imposes standards and procedures based on fairness and transparency on insurers when they administer LTD claims.) These judicial opinions shed much light on how judges should consider the inherent conflict of interest in ERISA-governed LTD appeals.

First, on a basic level, the insurance company has a conflict of interest when it is the decisionmaker on a claim for disability benefits as well as the entity that will pay money to a successful claimant. In other words, it not only decides whether payment is appropriate, but also makes those payments from its own coffers, reducing profits and hurting the bottom line of the company.

Attorneys have argued — and courts have agreed — that this conflict of interest can hurt some claimants’ chances of having their disability status carefully examined and determined because of the built-in possibility of bias based on financial self-interest on the part of the insurers.

The highest court in the land in the 2008 case of Metropolitan Life Ins. Co. v. Glenn explored the conflict of interest and its impact on court review of claim denials and terminations. In this case and in other cases where the insurers’ claims administrators had the discretion to approve or disapprove claims, the reviewing court decides whether the administrator abused his or her discretion.

Sometimes this standard of review is described as whether the administrator’s decision making was arbitrary and capricious.

The court noted there that in a “borderline claim,” the conflict becomes more problematic as the decisionmaker is pulled one way by its fiduciary duty to fairly administer the claim and the other by the financial hit it will take if it approves the claim.

However, the court said that when it reviews a claims administrator’s decision-making process on a claim, the conflict of interest is only one of the factors to consider in determining whether there was an abuse of discretion. While the court left room for judicial discretion in each case, it did say that the court must determine the weight to give the conflict of interest, depending on the individual circumstances.

For example, did the insurance company or its administrator deciding the claim take any steps to lessen the conflict? Was there built-in distance or a wall between the claim administrator and the part of the company that deals with financial matters? Or, was the administrator trained to correctly decide claims regardless of the potential cost to the insurer? Could the administrator expect neutral review of her decision-making process by her superiors regardless of whether she approved the claim?

After determining the relative weight to assign the conflict of interest in a case, the court then looks at other factors that could help to determine whether the administrator abused his or her discretion in the decision-making process. Depending on the weight given the conflict, it could be a tie breaker if the other factors are not independently determinative, or if the conflict has little weight, the other factors will be more important to the abuse-of-discretion question.

Other factors to consider could be things like whether the administrator cherry-picked through the evidence to emphasize medical records less supportive of a finding of disability without adequately explaining why she was discounting records that strongly support the disability claim.

As of the date of this writing, more than 3,000 cases have cited Glenn, according to Westlaw. Courts all over the country continue to shape and interpret the concepts discussed by the Supreme Court concerning the inherent conflict of interest of LTD insurers governed by ERISA. We will continue to share information in this space about new court interpretation important to our clients.