Insurance for long term disability – payments to an insured who is prevented from earning his or her income due to long term disability – is a fruitful field for litigation for many reasons. Though the insurance may be arranged and paid for by or through the employer, the plan is often both administered and financially managed by an insurer, so that there is an element of self-dealing in the insurer’s decisions in the eyes of the courts. (Why this is a particular concern in LTD disability cases is unclear, since in virtually all other situations the insurer is both the administrator which decides whether to honor a claim and the party whose bottom line is diminished through claims expenses such as payment of benefits or damages. Perhaps it is because the insured in these matters is, of course, disabled and thus perceived as more vulnerable to insurance company abuse. The fact that the disability insurers are second guessing treating physicians on medical issues may also be a factor.)

LTD claims often fall under ERISA, the Employment Retirement Income Security Act of 1974, and are thus within the jurisdiction of the federal courts, which have developed their own jurisprudence for the disposition of ERISA claims. Most importantly, the federal courts have developed an “abuse of discretion” standard for review of benefit denials where the retirement plan’s administrator/payor has discretionary authority to determine eligibility. Such determinations are reviewed for abuse of discretion rather than under the more common standard of review which determines whether a decision is supported by sufficient evidence. It is not unusual for the courts to reverse denial of LTD benefits in ERISA cases for abuse of discretion: in effect, the courts will not allow the plan administrators to save the costs of the disability insurance payouts where their obvious interest in making the plan profitable appears to deny legitimate benefits. A recent case illustrates the courts’ affirmative, but still too limited role in this context.

Daniel Demer was an auditor at IBM, whose LTD benefit plan was administered by Metropolitan Life Insurance Co. (“MetLife”). He stopped working because of disability and received short term disability payments but was eventually denied long term disability benefits. Demer submitted statements and medical records from several treating physicians, but MetLife denied the claim for long term benefits, relying largely on the opinion of an independent physician consultant who had conducted “only a paper review” of Demer’s file and had not examined the patient. Demer appealed within the MetLife organization, providing further supporting information from his treating pain medicine specialist among other things. But MetLife denied the appeal, now relying on the opinions of two other physicians of its choice who had seen only the paper file and had not examined the patient. Demer then brought suit.

The District Court ruled against Demer, rejecting his argument that because of a conflict within MetLife the review for abuse of discretion “must be tempered with skepticism,” and finding that because the treating and reviewing physicians disagreed, MetLife reasonably relied on its reviewing physicians’ opinions although those opinions were derived only from an office review of the treating physicians’ charts. The Ninth Circuit reversed on August 26, 2016.

In an opinion by District Judge Edward Chen, the court held that there was a structural conflict of interest on MetLife’s part, both because of the previously announced rule that being both the decider and the funder of the benefit creates a structural conflict (Abatie v. Alta Health & Life Ins. Co. (9th Cir. 2006) 458 F. 3d 955, 963) and because at least two of the independent physician consultants used by it to evaluate the Demer file had been, in effect, in-house reviewers for the company because they had “performed a significant number of reviews for MetLife and have received significant compensation for their services.”

The court developed the evidence of the outside independent medical evaluators’ “financial conflicts” in some detail, showing that these physicians earned substantial sums each year from acting as independent medical evaluators for MetLife, though it noted that neither the claimant nor MetLife developed the evidence to show – either that their evaluations favored denial of benefits, or the opposite: the court based its finding of structural prejudice entirely on the volume and financial value of the physicians’ work. And it did so while briefly acknowledging the District Court’s position that MetLife, following prior case law, had taken affirmative steps to separate the claims evaluation process from financial parts of the firm. The court belittled the reviewing physicians’ conclusions that Demer was not limited physically or mentally from employment and that his (and by implication his treating physicians’) conclusions to the contrary were not credible.

The reviewing physicians, the opinion found, had stated no convincing reasons for their conclusions that Demer was not disabled. Curiously, on this record with its noted inadequacies the court did not reverse with directions to award the benefits to the plaintiff, but ordered a further hearing “because the record does not clearly establish that MetLife should necessarily have awarded Mr. Demer benefits.” Apparently, only an “arbitrary and capricious” denial of benefits warrants a straight reversal. Here the court found that the insured had produced credible evidence through the treating physicians’ charts and opinions in support of his demand for benefits, and the conclusions of the plan manager’s review were judicially rejected as the result of inherent conflicts of interest and of judicial “skepticism” about the integrity of the review process. In such a case, why should the disabled claimant be denied relief, and why should the plan manager be entitled to try to deny the claim once again, with a new, de novo review?

Judge Bybee concurred in the result but dissented from what he called “the majority’s new concept of skepticism.” In his view, a plan administrator can “cleanse” its conflict of interest by erecting ethical walls between payor staff and evaluators and by using outside physicians as evaluators. He also had “great reservations about the use of ‘skepticism’ as a standard of review,” but “because that section [of the opinion about a skeptical approach] is not otherwise necessary to the majority’s opinion,” he concurred in the judgment. I understand him to mean that he agrees to have the case further evaluated by MetLife. I saw no other grounds for that disposition in the decision, beyond the majority’s skepticism.

In my opinion, this decision takes a big step toward fairness in disability evaluations by ruling that a read-only, don’t-examine-the-patient evaluation of a disability claimant’s application must be viewed with skepticism — where the reviewing physician is engaged to make judgments about the patient’s disability strictly from reading the file, and no effort is made to allow the claimant to rebut or reconcile such readings with the findings of his or her treating physicians. The treating physicians must have found the patient disabled, or the file would not have got that far. Insurers view claims with a skepticism of their own, and chances are strong that they would condition their often-used reviewers to that perspective. The law needs to go further: it must give the applicant an opportunity to rebut the findings of any non-observing paper-only evaluator, or it must require that any “independent reviewers” used by the plan administrator to question the treating physicians’ findings must actually examine the patient, and must base their disagreement on observed facts.

Only then will the new-found “skepticism” of the courts toward these inside-job denials have any real meaning.