State Fines Insurer, Orders Reforms in Disability Cases

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October 3, 2005 latimes.com

State Fines Insurer, Orders Reforms in Disability Cases

By G. Gosselin, Times Staff Writer

California insurance regulators today will announce that they are

fining the nation's largest disability insurer $8 million, requiring

the company to reopen as many as 26,000 California cases and

demanding that it alter the policies it sells in the state to include

greater consumer protections.

The regulators said they intend to impose similar policy changes on

all firms licensed to sell disability insurance in the state.

Independent legal authorities said the changes will give disability

claimants new rights to win court review in disputed cases, a

precedent they said could spread to other kinds of insurance, such as

healthcare coverage.

The action, which will come as a settlement with Chattanooga, Tenn.-

based UnumProvident Corp., could substantially alter how insurance is

regulated in California — and perhaps the nation as well if other

regulators follow the state's precedent.

The action will be substantially stiffer than a settlement last fall

between the company and regulators in 48 other states in which

officials made no formal findings of wrongdoing but only

identified " areas of concerns. "

By contrast, California regulators will charge UnumProvident with

more than 25 violations of state law, allegations that the company

will neither admit nor deny in favor of settling the case.

Among the charges: that the company knowingly applied the wrong legal

definition of disability in denying claims or ruling claimants were

able to go back to work, targeted high-cost claims for denials to

save the firm money, misused claimants' medical records and even the

opinions of in-house medical personnel to deny benefits and wrongly

sought to file cases under a federal benefits law that severely

limits claimants' ability to successfully sue their insurers.

Regulators said they uncovered violations of state law in nearly one-

third of a random sample of about 1,000 claims handled by

UnumProvident.

" UnumProvident is an outlaw company. It is a company that for years

has operated in an illegal fashion, " said California Insurance

Commissioner Garamendi. " Our settlement is designed to make it a

poster child of a legal company. "

Garamendi is scheduled to announce his agency's settlement with the

company at two news conferences in Los Angeles and San Francisco

later today.

Reached Sunday, UnumProvident Chief Executive R. Watjen said

he could not comment on California's allegations because details of

the firm's settlement with the state were still being worked out. But

Watjen suggested that the regulators' action is based on an outdated

examination of company operations from 2000 through 2003.

" We've gone through an enormous amount of change in the past few

years. Any review that was done a few years ago doesn't reflect the

new UnumProvident, " he said.

The changes include Watjen's replacement of longtime UnumProvident

Chief Executive J. Harold Chandler in 2003.

News of California's tough action comes two months after a Los

Angeles Times story detailed extensive problems at UnumProvident and

other major disability insurers. The paper traced many of the

problems to a series of court decisions concerning federal benefits

law, which have blocked states from providing consumer protection for

a wide array of employerprovided benefits including healthcare, and

have limited claimants' right to sue.

Disability insurance is designed to replace half or more of a

person's wages if they are incapacitated by illness or injury. More

than 50 million Americans are covered, most through their employers.

UnumProvident, with half the U.S. market, covers 25 million.

Under the firm's settlement with the state, UnumProvident

policyholders in California whose claims were denied or whose

benefits were terminated since Jan. 1, 1997, will be able to request

that the company reassess their case with an eye to starting or

resuming benefit payments.

But unlike a similar reassessment process set up by the 48-state

settlement last fall, those dissatisfied with the company's review of

their claims can appeal to an independent reviewer to be chosen

jointly by the state Insurance Department and the company.

The settlement will require UnumProvident to change the language in

all new — and some existing — California policies in several ways

that favor consumers. For example, it will force the company to

remove limitations on benefits for " self-reported " conditions such as

migraine headaches and fatigue, which are impossible to measure

objectively but can severely disable people.

It also will restrict the firm's use of a 24-month limitation on

benefits for " mental and nervous conditions. " UnumProvident

repeatedly has been accused of wrongly categorizing claimants as

suffering from such conditions, rather than physical ailments, to

reduce what it must pay them.

The settlement will require the company to drop its court challenge

to Garamendi's order outlawing so-called " discretionary authority " in

policies. Discretionary authority language effectively makes the

insurer the final arbiter of most disputes involving policies, and

means that claimants' suing the firm have had to prove not simply

that the company's decisions were wrong, but arbitrary and

capricious — a difficult standard to meet.

State Insurance Department officials said they will call a meeting of

other disability insurers for early November to discuss the new

requirements, and will take regulatory action against those who

refuse to adopt the policy changes.

" What we're saying to any company operating in this area of

insurance, " Garamendi said, " is it has to stop screwing its

customers. "

Additionally, the planned settlement " will undoubtedly bleed over

into healthcare and give claimants a better chance to make their case

for coverage, " said Mark D. DeBofsky, a partner with the Chicago law

firm of Daley, DeBofsky and .