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Once ERISA, Always ERISA: How and why to avoid having your disability insurance policy controlled by The Employee Retirement Income Security Act of 1974

Disability Claim Denials, ERISA, Filing Disability Claims

Disability insurance carriers have increasingly used The Employee Retirement Income Security Act of 1974 (ERISA) to their advantage.  While ERISA was supposed to be for the protection of employees, it is actually being used to protect insurance companies and employers.  ERISA leaves insurance policyholders little leeway, because it preempts more stringent state insurance laws and allows insurance companies to insert language into the policies they issue that makes it easier to deny claims.  Despite these disadvantages, the policyholder is not necessarily doomed to fail provided that he or she takes appropriate measures before filing suit—often, consulting with an attorney before filing a claim can substantially increase the odds of receiving benefits.  It is important to understand your policy now, so as to prevent the double disaster of incurring a disability and not being able to recover the benefits that you deserve.

Why ERISA should be avoided

ERISA significantly affects the administration and litigation of disability insurance claims. Unfortunately, ERISA deprives insureds of significant rights to which they would normally be entitled under state law. These include the right to a trial by jury and the possibility of punitive damages where the insurance company has acted unreasonably or maliciously. The most an aggrieved claimant can recover in an ERISA lawsuit is the amount of the benefits due, interest, costs and a discretionary award of attorneys’ fees.

ERISA policies have other disadvantages as well. For example, with limited exceptions, such policies require that the claimant proceed with an administrative appeal before bringing litigation.  Even if the claimant ultimately wins, he or she can never receive attorneys’ fees for legal services rendered during the administrative review process. Further, court review of an administrative decision in an ERISA case can be quite differential.  If the plan provides the administrator with discretion to determine the propriety of the claim, courts may only overturn that decision upon a finding that the administrator acted “arbitrarily and capriciously.”  Thus, so long as the administrative decision reflects a rational basis, even if the overwhelming weight of the evidence favors the claimant, the court will uphold the decision.  Finally, it is important to understand that an insurance policyholder is typically not able to offer as evidence at trial anything that was not first presented to the administrator.  As a result, the policyholder may not have an opportunity to offer additional documents, present testimony or submit expert reports in court if they were not first presented as part of the administrative appeal.  This is where policyholders are most often prejudiced, as they often attempt the administrative appeal without first consulting with an attorney and, after an adverse decision is rendered, they are stuck with nothing more than the record that they already created.

How ERISA Works

ERISA ordinarily applies only to employee benefit plans.  An employee benefit plan within the meaning of ERISA only exists when at least one employee is covered under the plan. Employee status does not apply to an individual who is the sole owner of or partner in a business. It does, however, apply to a shareholder of a corporation when there is more than one shareholder.  Thus, a doctor who is the sole owner, a partner, or sole shareholder of his or her practice will not be considered an employee, but a doctor who is one of several shareholders in a practice will be.

ERISA is triggered when an employer establishes an employee benefit plan.  This can be accomplished just by purchasing a group insurance policy.  Thus, if a doctor’s office buys group disability insurance for the physicians and the other staff, the practice has established an employee benefit plan, and any claim made under the disability insurance policy will be subject to ERISA.  Even if a doctor has only one employee, buying insurance for that employee will establish a group plan for ERISA.

However, courts have extensively broadened the parameters of ERISA to include even individual policies if insurance premiums are paid by the business.  Although courts have not been entirely consistent, there are rulings holding that disability claims brought by business partners or even sole shareholder organizations purchasing individual insurance coverage for the owner of the business are covered by ERISA.  Thus, it is critical for doctors to determine at the time they apply for an insurance policy whether they are more interested in tax savings (by purchasing benefits through the business) or in significantly expanded coverage (by making sure the policy is not covered by ERISA).

The Insurance Industry’s Strategy

Disability insurance companies are notorious for targeting certain claims, like those of doctors and other healthcare professionals, for termination with the hope that ERISA will limit its liability for bad-faith and punitive damages.  If an insurance company can prove that a policy is governed by ERISA, its liability for unfair claim practices can be slashed dramatically.  In a January 16, 2003 Wall Street Journal article entitled “UnumProvident Memo Highlights Intent to Use Law to Save Money,” the reporter discusses the fact that one disability insurance company, UnumProvident, targets certain claims for termination with the hope ERISA will limit its liability.  The article quotes an October 2, 1995 internal Unum memorandum as stating that “[t]he economic impact . . . from having policies covered by ERISA could be significant.  As an example, [Unum employee] Glenn Felton identified 12 claim situations which we settled for $7.8 million in the aggregate.  If these 12 cases had been covered by ERISA, our liability would have been between zero and $0.5 million.”

How ERISA can be avoided

The best strategy for avoiding unwittingly converting a private disability insurance plan to an ERISA plan is very straightforward.  The simplest way to avoid any question of ERISA applying for a self-employed doctor, partner or shareholder is to never pay disability insurance premiums through the business.

Even a doctor has paid his or her disability insurance premiums through the practice, it may still be possible to escape ERISA if the doctor can meet all of the requirements of ERISA’s “safe harbor” provision.  This provision excludes from ERISA employee benefit plans for which (1) no contributions are made by the employer, (2) participation in the program is completely voluntary for employees, (3) the sole role of the employer is to permit the insurer to publicize the program to the employees, to collect premiums through payroll deductions, and to remit them to the insurer, and (4) the employer receives no consideration from the program other than reasonable compensation for its administrative services in connection with the payroll deductions.  If all four of these factors are met, the insurance plan will not be subject to ERISA.  Thus, if a doctor must pay for insurance through the practice, it is crucial to take steps to ensure each of the safe harbor qualifications are met.  First, the doctor should make sure that the business is only serving as a conduit for payment, simply deducting insurance premiums from an employee’s pay and remitting them to the insurance company, not contributing to the premiums as part of an employee’s benefits package. Second, the doctor should make sure that he or she does not endorse the plan or require employees to participate.  If an insurance company representative comes to speak to employees, the doctor should not do anything to affirmatively encourage the employees to purchase a policy, such as advertising that he or she purchased one from that company.  Finally, the doctor should not accept any compensation from the insurance company for his or her role in administering the policies.  This includes not accepting a “group discount.”  Though there are no guarantees when it comes to ERISA, following these steps can help make sure a doctor doesn’t run afoul of the safe harbor requirements.

Conclusion

Though incredibly vast and complex, the determination of whether or not a plan falls under ERISA boils down to a few simple tests; however, application of these tests proves to be less than simple.  Courts have used different standards and definitions when interpreting the governing regulations, and the use of these contrary definitions has caused confusion among the courts and created a pool of law that often has completely opposite holdings on similar fact patterns.  The only surefire way to avoid ERISA applying to a doctor’s disability insurance policy is to purchase the policy individually, not through the business.  However, if a doctor is unsure about whether or not his or her policy is ERISA-governed or needs help trying to avoid ERISA, the best course of action is consult an attorney.

Edward O. Comitz, Esq. heads the Health and Disability Insurance Practice Section at Comitz | Beethe, 6720 N. Scottsdale Rd., Suite 150, Scottsdale, Arizona 85253, (480) 998-7800. Mr. Comitz has extensive experience in disability insurance coverage and bad faith litigation, primarily representing medical and dental professionals in reversing denials of their disability claims. For more information about disability insurance issues, please visit our disability insurance attorney website at http://www.disabilitycounsel.net.

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