Court Ruling Illustrates The Limits ERISA Places On Insurers’ Discretion To Decide Claims

Many ERISA plans give the claims administrator (often an insurance company) discretionary authority to interpret the evidence and the terms of the employee benefit plan in deciding claims. This discretionary authority makes it difficult for claimants to overturn claim denials because court defer to decisions made using this authority.

But ERISA recognizes that claims administrators have an incentive to abuse this discretionary authority and limits it in important ways. Where the facts of a particular claim suggest the insurance company or other claims administrator is abusing its authority, courts are required to view the administrator’s handling of the claim with skepticism.

The Ninth Circuit Court of Appeals’ recent decision in Gary v. Unum is a reminder of the importance that this skepticism has in ERISA disputes. Allison Gary had a medical condition called Ehlers-Danlos Syndrome (EDS). She had disability insurance through Unum as part of her employer’s benefit plan and made a claim. Unum denied her claim and she filed a lawsuit seeking benefits under ERISA.

The lower court sided with Unum and upheld the denial. The Ninth Circuit Court of Appeals reversed.

The Ninth Circuit determined the lower court failed to properly scrutinize Unum’s evaluation of the medical evidence about Gary’s condition. The ERISA plan at issue gave Unum discretion to interpret this evidence. But the Ninth Circuit emphasized that, even where ERISA plan administrators have that discretion, it is checked by common-sense limitations that prevent insurers like Unum from denying claims out of self interest.

The Ninth Circuit held that the facts of Unum’s handling of the claim should have led the lower court to view Unum’s exercise of its discretionary authority to interpret the evidence with skepticism. First and foremost, the Ninth Circuit emphasized that an insurer who, like Unum, is responsible for paying disability claims as well as investigating the claimant’s entitlement to benefits has a perverse incentive to save itself money by looking for evidence to deny claims while ignoring evidence that would support paying benefits. The court emphasized this structural conflict of interest should have been considered.

Second, the appellate court was concerned by Unum’s practice of “cherry picking” certain observations from medical records, i.e., ignoring evidence of Allen’s disability while focusing on evidence that would support denying her claim.

Third, Unum failed to have Gary examined by an EDS specialist. Fourth, Unum cut off Gary’s benefits after exactly six months, an arbitrary measure that was disconnected from the medical evidence.

The Gary decision is unpublished, meaning it is not binding authority but may be relied on at the discretion of lower courts to the extent a judge believes the ruling is helpful.

Court Ruling Emphasizes Importance of Reading the Insurance Policy as a Whole

Insurance policies contain technical language that often varies from its everyday meaning. When a case depends on the meaning of the insurance policy fine print, how you interpret these technical terms can decide the outcome of a case.

One way to define insurance policy terms is to see how those terms are used elsewhere in the insurance policy. The Ninth Circuit Court of Appeals’ August 17, 2020 ruling in Engineered Structures, Inc. v. Travelers Property Casualty Company of America is a good illustration.

Engineered Structures, Inc. (ESI) was a construction firm that purchased a “builder’s risk policy” from Travelers insurance. The policy covered risks of damage when ESI was building a Fred Meyer gas station in Portland, Oregon.

ESI made a claim under the policy when an underground fuel storage tank ESI’s subcontractor was installing was improperly placed in the ground. The tank was loaded with inadequate ballast. After a rainstorm, the tank floated in the excavation hole, causing damages.

Travelers denied coverage under a policy exclusion for “faulty, inadequate or defective workmanship or construction”. ESI sued Travelers claiming the denial violated the policy and was made in bad faith. The issue depended on what the word “construction” in the exclusion meant. ESI said “construction” meant the finished product it was building, so the exclusion only applied for defects in the finished product.

Certain rules come into play when an insurance term of art is ambiguous, but the court determined those rules didn’t apply because it could understand the term “construction” by reading other language in the policy.  The court examined other language in the insurance policy that treated “construction” as referring to the process of building the gas station. The policy defined certain “construction activities” in terms of the actions taken in the course of constructing the gas station. The court interpreted the word “construction” in the exclusion as referring to the process of constructing the gas station, as opposed to the final product that was built.

This emphasizes the principle that insurance policy language must be read in the context of the entire insurance policy. Where the policy uses technical language in one place, it can often be understood only by reviewing similar language elsewhere in the policy. A few other references to a disputed term elsewhere in the policy can decide insurance coverage for a huge loss.


Five Common Homeowner’s Insurance Policy Provisions and Why They Matter

Most folks have homeowner’s insurance (or its cousin renter’s insurance).  Homeowner’s insurance protects you from damage to your home (e.g., your house burns down) or from claims arising from someone’s injury on your property. (e.g., someone slips and falls in your backyard).

Homeowner’s insurance policies typically contain about 20 pages of fine print.  Depending on the specific language, your coverage and your duties after a loss can vary dramatically.  Here some common important provisions to look for and why they matter.

1.  Provisions defining the covered property. The address on the declarations page may not necessarily identify the property covered by the insurance policy.  For example, if you aren’t living in the property, the policy may not provide coverage even if the property is listed on the declarations page.  Some policies contain owner-occupancy provisions stating, for instance, “this policy covers the owner-occupied property listed on the declarations page.”

2. Provisions explaining what parts of the property are covered.  In addition to the main house, homeowner’s policies often provide additional coverage for ancillary structures on the property like sheds or garages.  Some policies provide coverage for all other structures on the property regardless of whether they were attached to the main house.  Other policies limit coverage to only structures that are physically connected to the house.

3. Business Use Coverage.  Insurers often deny coverage where the property has been used for business purposes.  The policy fine print is important to understanding whether and to what extent the property’s use for business purposes allows the insurer to deny claims.  Some policies exclude any use of the property for business purposes such as renting the property out to tenants or running an office at the property.  Others only exclude business use from specific coverage; for instances, renting the property to tenants might exclude claims if the tenant sues you because they slip and fall, but might not exclude coverage if the property burns down.

4. “Actual Cash Value” versus “Replacement Cost Value”.  If your house burns down, there are two ways to evaluate the dollar amount of your loss.  One way is to ask what the house was worth right before it burned down; this is the “Actual Cash Value.”  Another way to look at the loss is to ask what it would cost to rebuild the house; this is the “Replacement Cost Value.”  Typically, Replacement Cost Value is much higher than Actual Cash Value.  Your homeowner’s insurance policy will have detailed provisions for when the insurer pays Actual Cash Value versus Replacement Cost Value; often, the insurer will pay Actual Cash Value up front, then pay the remainder of the Replacement Cost Value once you complete repairs or replacement.  But insurers often miscalculate the Actual Cash Value, leaving you without sufficient funds to repair or replace the property and thereby stopping you from collecting the additional Replacement Cost Value.  It’s important to read these policy provisions carefully and make sure the insurer follows them.

5.  Additional Living Expenses.  Many homeowner’s policies cover your Additional Living Expenses, i.e., the extra costs you incur because you can’t use part of your home while it is damaged.  Additional Living Expenses might include living in a hotel while your home is repaired.  The specific policy language is critical because insurers often dispute whether an insured is entitled to Additional Living Expenses after a covered loss.  For example, if a fire is put out before it burns down your home but the home is full of smoke and water damage, is the property “liveable?”  What if the only damage is to the living room but you can’t use the entire first floor of your house during the repairs?  Understanding the specific policy language is important to knowing your rights in these situations.

Ultimately, the only way to know for sure what your rights under an insurance policy are is by consulting an attorney.  Hopefully, this guide can point you in the right direction.