We often write about denied or terminated disability insurance claims that claimants appeal to court under the federal law ERISA. ERISA usually applies when short- or long-term disability insurance policies are available to claimants through their employers.
If someone purchases disability insurance privately, however, it is likely that state law, rather than ERISA, will apply to a claim for denial or termination of STD or LTD benefits. Depending on the state, the claimant may be able to sue for bad faith insurance denial, breach of contract or other state law claims.
Private insurance claims
Some advantages of a state-law claim over an ERISA claim can be, for example, the availability of a jury trial, the right to collect damages for infliction of emotional distress and the available of punitive damages. Punitive damages are money damages awarded over and above the value of the benefits wrongly denied or other measurable monetary harm and are meant to punish the insurer for bad behavior as well as to deter other insurance companies from similar behavior.
Arizona bad faith insurance case
A recent example of a private LTD insurance claim based on Arizona state law is the case of Tyler v. United States Life Insurance Company in the City of New York in U.S. District Court in Arizona. On November 1, the judge released an opinion saying that the insurer was not entitled to summary judgment on the claimant’s bad faith claim or on her request for punitive damages.
Kelly Ann Tyler was a VA psychiatrist who stopped working because of chronic migraines, pain, neuralgia, meningitis and fatigue. She filed a claim under her disability policy, which defined total disability as the “complete inability to perform the substantial and material duties” of her current occupation. It defined “current occupation” as the “medical specialty” or occupation practiced just before disability began.
Her claim was approved and she received benefits for a couple of years. Then her benefits were terminated, based in part on a vocational specialist’s opinion that Tyler could return to work if she were given certain accommodations, namely, leave during symptoms, a dark place to rest during migraines at work and avoidance of severe stress.
Bad faith claim
Insurers must act in good faith and fairly. Arizona law asks whether the insurance company acted unreasonably and if so, did it know it was unreasonable. The court looks at whether the claim was “fairly debatable” and whether the insurer’s claim processing was reasonable.
Tyler’s job as a VA psychiatrist was demanding and the court believed that a reasonable juror could find that the three accommodations were not “realistically available.” This finding, if made, would mean that the denial was not in good faith, so the case should go to trial on this issue.
Arizona law says that punitive damages require “something more” than just bad faith. Clear and convincing evidence must show either that the insurer intended to harm the claimant or consciously acted with knowledge it was creating a “substantial risk of significant harm.” The presence of “any reasonable evidence” that could support punitive damages means the jury should decide the issue.
Because the court found a jury could reasonably find that the insurer “acted knowing that its conduct created a substantial risk of harming Tyler by depriving her of disability benefits,” the case should go to the jury for deliberation.
The case is available on Westlaw at 2018 WL 5722714.