Court Recognizes Insurance Company’s Conflict of Interest
Stephan v. Unum Life Insurance Company of America

In the majority of long term disability insurance claims, the insurer that pays out benefits also decides whether the disabled employee is entitled to benefits – a distinct conflict of interest, since the benefit comes out of the insurer’s pocket. A recent California case illustrates how courts are beginning to recognize this conflict of interest and grant claimants opportunity to challenge settlement terms.

In the above case, an employee was offered a job that paid $200,000 per year, with a $300,000 performance bonus. Shortly after accepting the job, he became disabled in a bicycle accident, but was still paid his $300,000 performance bonus. The employee applied and was approved for long term disability insurance benefits. Unum, the long term disability insurance company, however, only paid his benefits based upon his $200,000 salary, as opposed to the combined $500,000 salary and bonus.

The disabled employee sued Unum for his full benefits. The District Court found that Unum had acted reasonably, and upheld the long term disability insurance benefits payment based upon the $200,000 salary. The employee appealed, arguing that Unum, as both the payor of the claim and the reviewing entity, had a conflict of interest. The Court of Appeals found that the District Court should have considered the conflict of interest and ordered that the injured employee be allowed to present evidence on this issue. The parties apparently settled out of court following this decision.

Although this case took place in California, this ruling will have national impact because many long term disability benefits claims are litigated in federal court and are bound to federal law. As in this case, many of my clients’ long term disability insurance claims are governed by the federal Employee Retirement Income Security Act of 1974 (ERISA) and their claims are often denied and reviewed by the same company that ultimately pays them. While the court has mixed feelings about insurance companies and conflicts of interest, the fact courts are beginning to recognize this obvious conflict of interest gives disabled employees a better chance to secure their benefits because they have more tools available when appealing denied disability benefits. For example, it may now be possible to gain access to internal documents from the insurance company to prove that it wrongfully denied your benefits claim.

If you or someone you know has been denied long term disability insurance benefits, please contact me today for a free consultation. We can discuss your rights and develop a strategy to get you the benefits you deserve.

Bill Parsons

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