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When does an LTD insurer abuse discretion in claim processing?

At our law firm, we represent long-term disability claimants whose claims have been denied or whose benefits have been terminated. If the LTD coverage is provided through a group policy taken out by the claimant’s employer, normally, the claim’s process is governed by ERISA, a federal law that imposes standards of fairness on the insurer’s claims-processing practices and procedures. 

Under ERISA, if the policy language properly provides the plan administrator with “discretion” to decide LTD eligibility, a U.S. District Court reviewing a denial or termination will often ask the legal question: Did the administrator abuse its discretion?

In a new federal case out of Colorado, the judge elaborated on what the abuse-of-discretion standard means. 

The Paquin case 

Paquin v. Prudential Insurance Company of America (available on Westlaw at 2018 WL 3586397) involves Michael Paquin’s LTD claim based on a West Nile virus infection in 2003 from a mosquito bite that left him with cognitive impairments and brain damage from resulting encephalitis. 

After he became unable to work in 2004, Prudential approved his claim for LTD benefits and paid them until 2015 (except for one termination during that time after an unsuccessful work attempt that was reversed on review). Paquin’s extensive file at Prudential included numerous medical records spanning the entire eligibility period documenting that several medical professionals found permanent cognitive decline and other disabling effects of the virus. 

In 2015, Prudential abruptly terminated Paquin’s benefits based on a neuropsychological test, called an NPT, that the insurer arranged. This doctor hired by Prudential suggested that Paquin did not “perform to his true capacity” in the testing, making the result invalid and compromising the reliability of the entire medical record. She concluded that “no valid or compelling evidence” supported “clinically significant cognitive impairment.” 

After the insurance company denied the claim on review twice, Paquin filed his lawsuit. 

Abuse of discretion 

The judge disagreed with Prudential’s determination. First, he explained that these factors are relevant to an abuse-of-discretion analysis: 

  • Whether the denial was “arbitrary and capricious;”
  • Whether it was “reasonable and made in good faith;”
  • Whether the decision was based on “substantial evidence,” meaning that a “reasonable mind might accept” the available evidence as adequately supporting the denial;
  • Whether there were “procedural irregularities” like “cherry picking” through the evidence to only credit what might support a denial, ignoring evidence of disability and limitation; and
  • Whether there was a conflict of interest because the insurer was both the decisionmaker and the party that would pay benefits, if awarded. 

When an insurance company terminates benefits after initially finding the claimant disabled, there must be new information that changes the disability determination in “some significant way.” 

Second, the judge explained that the insurer abused its discretion and “reviewed the evidence with blinders on” for the following reasons: 

  • The evidence was “overwhelmingly” in Paquin’s favor. Except for a handful of doctors hired by Prudential, several medical and vocational experts found significant, disabling impairment.
  • Over 11 years, Prudential’s reviews found that the disability continued.
  • Prudential could not show new material evidence that supported a finding that disability was no longer supported. It relied on the doctor it had hired who found the claimant was intentionally underperforming on tests, but no other doctor found any evidence of “malingering.” In fact, three doctors wrote letters explaining that the Prudential doctor’s evaluation method was inappropriate for a West Nile patient.
  • Two other supplemental medical opinions that found Paquin not disabled were by doctors Prudential had hired. 

The court ordered past due benefits paid with interest, plus reinstatement of ongoing payments. 

We do not know at this time whether Prudential will appeal this strongly pro-claimant decision.