Monday, September 18, 2017

No. 235: Harvey and Irma—Often Neglected Business Insurance Implications of a Superstorm

Blogger's note: The late Eugene R. Anderson, a longtime close friend of mine, founded what is now Anderson Kill PC, a policyholders' law firm. In No. 146 (posted February 25, 2016), I wrote a memorial tribute to Gene. I also dedicated the October 2010 issue of The Insurance Forum to him shortly after he died in July 2010 at age 82.

Finley Harckham is an attorney in the Insurance Recovery Group at Anderson Kill. On August 30 Harckham issued a memorandum in the wake of Superstorm Harvey about the implications of contingent business interruption insurance. The title is "In Harvey's aftermath, contingent business interruption insurance claims should have broad reach." The subtitle is "Businesses nationwide that rely on plastics or chemicals may have claims for supply chain disruption." The contents of the memorandum are also relevant to Superstorm Irma. Here I show the memorandum, with light editing and with the firm's permission.

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Beyond the toll in human suffering that Superstorm Harvey is exacting this week, severe impact on the U.S. and even the global economy may emerge in the coming weeks and months. The Houston Ship Channel passes not only many of the nation's largest refineries but also major chemical manufacturing plants. As Grist (a nonprofit publication) noted last year, the Channel is "a crucial transportation route for crude oil and other key products, such as plastics and pesticides." A shutdown could disrupt supply chains nationwide and globally, affecting factories in a wide range of industries.

Businesses suffering from Harvey-induced supply chain disruptions throughout the U.S., and with global operations, should look to their property insurance policies for contingent business interruption coverage, triggered when policyholders do not themselves suffer physical damage but still lose revenue after a property loss sidelines a major supplier or customer base. Contingent BI is a standard provision in many property insurance policies, though many businesses are not aware of it.

In the affected areas of Texas, businesses will need to assess not only physical damage to their property but also income losses stemming from flooded and blocked roads and bridges, interrupted shipping and air transport, evacuations, and closures by civil authority. In the aftermath of a storm, physical damage to property stares a business owner in the face. For the future health of the business, though, it is vital to think beyond the cost and challenges of physical repair and begin right away to tally losses of business income and expenses incurred to mitigate that loss. Here are the relevant coverages to consider in a storm's aftermath.

Business interruption or BI insurance covers businesses for losses stemming from unavoidable interruptions in their daily operations. BI coverage may be triggered by circumstances including a forced shutdown, a downturn in business due to damage to premises, or a substantial impairment in access to a business's plant or premises.

Contingent business interruption coverage is triggered when policyholders lose revenue after a property loss sidelines a major supplier or customer base. For example, businesses that rely upon specialty chemicals from the affected area may have to pay more for supplies, and companies which sell into the area, such as consumer products manufacturers, will suffer lost sales. While the business itself need not be physically damaged, it does need to have coverage for the type of damage that affected its suppliers, business partners, or customers. For example, a business must have flood coverage to file a contingent business interruption claim for losses triggered when a supplier is incapacitated by flood.

Evacuation by order of civil authority coverage is triggered when authorities close off access to a damaged area. Relatedly, ingress/egress coverage insures lost profits due to difficulties in accessing the insured premises due to the storm. Here too, damage to the insured's property is not required to trigger coverage—though typically, the losses must result from property damage of a type covered by the insurance policy.

Extra expense coverage applies to additional costs incurred by the policyholder as a result of damage to its property, and to costs incurred to mitigate economic losses.

Too many businesses do not think about insurance unless their premises are damaged or, if they do, they fail to calculate the full range of loss. Some may not even be aware of their civil authority, ingress/egress, and business interruption coverage, let alone contingent business interruption coverage for those far from the damage site.

Many commercial property insurance policies provide different sublimits for losses caused by "flood," "storm surge," and "named storms." How the policy defines these key terms can be critical in determining the amount recoverable for the policyholder's loss. For most businesses in the Houston area, Harvey wrought its worst under the aegis of "tropical storm" rather than "hurricane,"—and that could affect coverage terms in some policies. Check your policy's definition of "flood," "storm surge," and "named storm," and hold your insurance company to the terms of the contract.

In the aftermath of a major storm, damage caused by wind or wind-driven rain and damage caused by storm surge—flood—can be difficult or impossible to distinguish. For policyholders lacking flood coverage, insurance companies often invoke "anticoncurrent causation clauses" to deny any coverage at all if flooding occurred. Many state courts, however, have held that if the "efficient proximate cause" of damage is covered—that is, the dominant cause—then the claim is covered. While most damage in the Houston area was flood-induced, several billions of dollars worth of damage incurred in the storm's early hurricane phase may be attributable to other causes. Denials based on anticoncurrent causation provisions should in many cases be contested. They should in any case be carefully scrutinized and analyzed in light of case law in the state in question.


Thursday, September 14, 2017

No. 234: Suicide—Comments by Mark DeBofsky about the Collins Case

Blogger's note: In No. 232 (posted September 6, 2017), I discussed the recent case of Collins v. Unum Life relating to the intractable problem of suicide in the context of life insurance. In that post I mentioned Mark D. DeBofsky, a Chicago attorney widely recognized as an expert on the Employee Retirement Income Security Act of 1974 (ERISA). When he saw No. 232, he wrote to me about the Collins case. I requested and obtained his permission to share his comments with my readers. Here are his comments, lightly edited to improve readability. For DeBofsky's more detailed discussion of the subject, see pages 74-75 of the complimentary 85-page PDF I offered to readers in No. 232.

DeBofsky's Thoughts on the Collins Case

Your post is a tragic story. Part of the tragedy, though, is that Unum included a "discretionary clause" in its policy, which triggered the courts' application of an "abuse of discretion/arbitrary and capricious" standard of judicial review. The result is that the courts were forced to defer to Unum's determination, which the Collins family could overcome only if they could prove the determination was not just wrong, but also unreasonable. Had the "de novo" (anew) standard of review applied, the evidence contrary to suicide could have won the day.

Many states have enacted versions of a model law developed by the National Association of Insurance Commissioners prohibiting inclusion of discretionary clauses in health and disability policies. To the best of my knowledge, only California's law encompasses life insurance as well. Since I started practicing in this area, I have been confounded by the notion that ERISA—a law enacted for the protection of plan participants and their beneficiaries—would permit the administrators of those plans to incorporate self-serving discretionary clauses tilting the playing field in their favor in the event a dispute arises over payment.

Congress should pass legislation that prohibits the inclusion of discretionary clauses in "welfare benefit" plans such as life, health, and disability. I have personally lobbied for such a law, but it is not going to happen because of the unholy alliance among the U.S. Chamber of Commerce, the American Council of Life Insurers, and other insurance lobbying groups, and unions, which also sponsor plans. That is why tragedies such as the Collins case occur, where a national hero who was overwhelmed by mental illness on account of his service was unable to provide the support his family was counting on.


Friday, September 8, 2017

No. 233: Long-Term Care Insurance—Senior Health Insurance Company of Pennsylvania Settles a Claim

In No. 229 (posted August 8, 2017), I wrote about the case of Mary "Molly" White, an Ohio resident. In 1996 she purchased long-term care (LTC) insurance from a company that became Senior Health Insurance Company of Pennsylvania (SHIP). In 2013 Ruth White, a Maine resident who is Molly's daughter and holds power of attorney for her, filed a claim with SHIP for benefits under the policy; SHIP denied the claim. Ruth filed additional claims, most recently in 2016; SHIP denied the claims.

In June 2017 Ruth filed a breach of contract lawsuit against SHIP in an Ohio state court. On July 20 SHIP removed the case to federal court and filed its answer to the complaint. On July 21 the case was assigned to U.S. District Court Judge John R. Adams. He immediately scheduled a case management conference for July 31, ordered Ruth to make a settlement offer by July 27, and ordered SHIP to make a settlement offer by July 28. Ruth offered to settle for $118,300 including expenses. SHIP offered to settle for $17,500. (See White v. SHIP, U.S. District Court, Northern District of Ohio, Case No. 5:17-cv-1531.)

The Conference
On July 31 Judge Abrams held the conference. Because of the speed at which the case was moving, I felt that the judge must have taken a keen interest in the case. For that reason I wanted to know what happened at the conference. I purchased from the court reporter the 41-page transcript of the one-hour conference. Here I mention only three of many interesting aspects of the conference.

First, Judge Adams tried to be neutral. However, he was clearly concerned about the manner in which SHIP had handled Ruth's claims.

Second, at the beginning of the transcript, there is no list identifying all those in attendance. Instead, there is a list of only Ruth's attorney, SHIP's attorney, and the court reporter. The body of the transcript reveals that Ruth, who lives in Maine, attended by telephone.

Third, Kristine Tejano Rickard, SHIP's general counsel, attended. She said only one word, near the end of the conference:
THE COURT: I'll expect, counsel, you and—ma'am, do you have full settlement authority in this case?
THE COURT: Thank you for being here. We appreciate you doing that and being present during the course of the discussion. It's very helpful to the Court.
The Settlement
On August 8 Judge Adams scheduled another conference, for August 21. On August 10 the parties filed a joint motion to adjourn that conference, indicating they had reached a settlement and expected to finalize it within ten days. On August 11 the judge granted the motion, canceled the August 21 conference, and ordered the parties to file a joint status report by August 21 if the settlement has not been finalized. On August 14 Ruth executed a full and final release of all claims in exchange for a check from SHIP in the amount of $77,600. On August 21 the parties filed a joint status report indicating the case was settled. On September 1 the judge dismissed the case with prejudice (permanently). On September 6 he issued an order to that effect, and indicated that each party is to bear its own costs.

General Observations
I have written about this case because I think SHIP's handling of Ruth's claims was outrageous. In No. 229 I expressed the hope that the parties would settle quickly. I also hoped that the amount of the settlement would be close to Ruth's offer. However, I recognize the difficulties in settlement negotiations.

The role of Judge Adams in moving the case so quickly should be noted. For the settlement check to be in Ruth's hands only a few weeks after the judge was assigned the case is remarkable.

Unfortunately the case does not help other claimants who encounter SHIP's unconscionable LTC insurance claims practices. However, helping other claimants would have required a class action lawsuit. That could have involved such major steps as a motion to dismiss, summary judgment motions, a motion for class certification, a discovery process, settlement negotiations, mediation, a trial, and appeals. Thus a class action would have taken years rather than weeks.

Available Material
I am offering a 43-page complimentary PDF containing the transcript of the case management conference (41 pages) and the release Ruth executed (2 pages). Email and ask for the September 2017 package about the White v. SHIP case.


Wednesday, September 6, 2017

No. 232: Suicide—A Recent Court Case Illustrates the Tragic Consequences of an Intractable Life Insurance Problem

Blogger's note: S. Travis Pritchett is Distinguished Professor Emeritus of Finance and Insurance at the University of South Carolina—Columbia. He is one of my closest friends. Before he began his outstanding professional career in education and research, he worked for several years as an investigator in the claims division of a major life insurance company. In that capacity he handled many cases of suicide or suspected suicide. I sought his comments on a draft of this post. He does not agree with my bottom line. Therefore, with his permission, I present his thoughts at the end of this post, thus allowing readers to draw their own conclusions.

Belth's Thoughts on the Collins Case

The nature of life insurance creates certain intractable problems. One, for example, is the disappearance problem, which is beyond the scope of this post. Another is the suicide problem, which is at the heart of a recent court case illustrating the tragic consequences of the problem. Here I discuss the recent case, which involves rulings by a federal district court and a federal appellate court. (See Collins v. Unum Life, U.S. District Court, Eastern District of Virginia, Case No. 2:15-cv-188, and U.S. Court of Appeals, Fourth Circuit, Case No. 16-1636.)

Background on the Suicide Problem
Suicide in the context of life insurance always has been a problem. If a life insurance policy contract were to pay the death benefit following the insured's suicide at any time during the entire period of the contract, the contract would be viewed as encouraging suicide and therefore contrary to the public interest. On the other hand, if a contract were to exclude payment of the death benefit following the insured's suicide at any time during the entire period of the contract, the contract would be viewed as inadequate protection for the beneficiaries.

Early in the history of life insurance in this country, the typical policy excluded suicide altogether. The reason was that companies felt they needed to protect themselves against those who buy life insurance when they were contemplating suicide. However, the companies came to believe that such a total exclusion was not necessary to protect adequately against adverse selection. Companies, state insurance regulators, and state legislators worked out an admittedly imperfect compromise solution to the problem. Today policies invariably contain a suicide exclusion (and return of the premiums paid) in the event of the insured's suicide during the first two years (sometimes one year) of the policy, and payment of the full death benefit in the event of the insured's suicide at any time thereafter.

Background on the Collins Case
David M. Collins served as a U.S. Navy SEAL for almost twenty years. He endured grueling deployments in Kuwait, Iraq, and Afghanistan. As a result of numerous and continuing traumatic experiences during his deployments, he developed Chronic Traumatic Encephalopathy (CTE), Post-Traumatic Stress Disorder (PTSD), and/or Major Depressive Disorder (MDD).

When Collins left the service in 2012, he went to work for a private firm. It had a basic group life insurance plan providing a death benefit of $104,000 that was paid for in its entirety by the firm. The firm also had a supplemental group life insurance plan providing a death benefit of $500,000 that was paid for by the employee. Collins enrolled in both plans on September 10, 2012. The plans were underwritten and administered by Unum Life Insurance Company of America, and were subject to the Employee Retirement Income Security Act of 1974 (ERISA). Both plans had the same two-year suicide exclusion. Here is the wording:
Your plan does not cover any losses where death is caused by, contributed to by, or results from:
— suicide occurring within 24 months after your initial effective date of insurance; and
— suicide occurring within 24 months after the date any increases or additional insurance becomes effective for you.
The suicide exclusion will apply to any amounts of insurance for which you pay all or part of the premium.
The suicide exclusion also will apply to any amount that is subject to evidence of insurability requirements and Unum approves the evidence of insurability form and the amount you applied for at that time.
Unum approved the $104,000 of coverage under the basic plan effective October 1, 2012. Unum approved the $500,000 of coverage under the supplemental plan effective February 14, 2013.

The complaint in the lawsuit filed later describes in excruciating detail the deterioration in the ability of Collins to function normally, especially in early 2014. The complaint also describes his many medical examinations and the treatments he received.

Developments in 2014
On March 12, during the two-year suicide exclusion period, Collins was found in the driver's seat of his car with a bullet wound in the head and a handgun lying between his legs. That day he had texted Jennifer Mullen Collins, his wife: "Pick up sorry baby I. Love u all." He also had emailed a Navy SEAL friend: "I'm in bad times bro...please make sure my lovely wife Jennifer and children Sam and Grace are taken care of please...hate to do this to you but you know how to get things done. Take care friend." His death was ruled a suicide.

On April 3 Jennifer filed death claims under the basic and supplemental plans. She included the death certificate and a detailed letter from one of her husband's physicians.

On April 8 Unum denied the $500,000 claim under the supplemental plan. Collins had paid for the coverage.

On April 9 Unum approved the $104,000 claim under the basic plan. The employer had paid for the coverage. Unum remitted the payment to Jennifer.

Jennifer filed an appeal with Unum concerning the denial of the $500,000 claim. She submitted extensive evidence from physicians and experts demonstrating that her husband did not commit suicide, was suffering from CTE, PTSD, and MDD, was not able to form the intent to commit suicide, and/or was not sane at the time of his death.

Unum requested all medical records and emails. Jennifer provided the material, which included five medical opinions from different medical centers that her husband did not commit suicide, was suffering from CTE, PTSD, and MDD, was not able to form the intent to commit suicide, and/or was not sane at the time of his death. Unum denied Jennifer's appeal of the denial of the $500,000 benefit.

Later Developments
On April 29, 2015, Jennifer filed a lawsuit against Unum. On May 26 Unum answered the complaint. On December 23 Jennifer filed a motion for summary judgment. On the same day Unum filed a motion for summary judgment.

On May 6, 2016, the district court judge filed an opinion and order denying Jennifer's motion for summary judgment and granting Unum's motion for summary judgment. On June 2 Jennifer filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit. On July 6, 2017, a three-judge appellate panel issued a unanimous unpublished opinion affirming the district court judge's rulings.

A Harsh Allegation
The Collins complaint contains a harsh allegation. Paragraph 96 of the complaint reads:
Unum has paid the Basic Policy benefits of $104,000 and denied the Supplemental Policy benefits of $500,000. It appears that this decision may have been strategic, designed to keep Mrs. Collins from challenging its decision to deny benefits under the Supplemental Policy ($500,000) for fear that Unum would reverse its decision and demand repayment of the benefits paid on the Basic Policy ($104,000).
The allegation may have been unjustified. With regard to paragraph 96, Unum said this in its answer to the complaint:
Unum admits the allegations in the first sentence of Paragraph 96 of the Complaint. Unum denies the remaining allegations in Paragraph 96.
Unum also addressed the allegation in a footnote on page 7 of its memorandum in support of its motion for summary judgment. Unum said the suicide exclusion in the basic plan and in the supplemental plan "will apply to any amounts of insurance for which you pay all or part of the premium." Unum also said the employer paid the premiums for the basic plan and Collins paid the premiums for the supplemental plan.

The district court judge addressed the allegation on page 8 of his opinion and order. He cited the footnote mentioned in the preceding paragraph. He said the employer paid the premiums for the basic plan, the suicide exclusion did not apply to the basic plan, Collins paid the premiums for the supplemental plan, "and so Unum denied the claim" under the supplemental plan. The appellate court panel did not address the allegation in its affirmation of the district court judge's rulings.

The Judges
The Collins case was assigned to Senior U.S. District Court Judge Robert G. Doumar (a 1991 Reagan nominee). The Fourth Circuit panel consisted of Chief Judge Robert L. Gregory (a 2000 Clinton nominee), Circuit Judge Paul V. Niemeyer (a 1987 Reagan nominee), and Circuit Judge Pamela A. Harris (a 2014 Obama nominee).

Leimberg's Comments on the Collins Case
I learned about the Collins case when Steve Leimberg, who operates an important email newsletter, posted an article about the appellate court opinion. He gave me permission to include his article in the complimentary package I offer in this post.

General Observations
In making the following observations, I am aware of the "slippery slope" problem. If exceptions are made to the provisions of the insurance contract, the contract might serve no useful purpose.

I am also aware of the "fine print" problem. In this case the suicide clause is buried on page 16 of the 29-page basic plan, and on page 33 of the 58-page supplemental plan. Also the title of the section in both plans is "What Losses Are Not Covered Under Your Plan?" In other words, the titles do not mention "Suicide." Thus it is unlikely that the insured would see or comprehend the significance of the suicide clause.

The judges found that Unum, the underwriter and administrator of the ERISA plan, did not abuse its discretion by denying the claim, and that there was ample evidence to support the reasonableness of the denial. However, if Unum had exercised its discretion and honored the $500,000 claim, there would have been no appeal to Unum, no lawsuit, no appeal to the Fourth Circuit, no attorneys, and no judges.

In 1973, when there was a change in the top management of Unum's parent company and subsidiaries, the organization moved "from a claim payment approach to a claim management approach." In other words, its focus changed from paying claims to denying claims. Over the years I have written extensively about the Unum companies' disability insurance claims practices. My most important examination of the subject was the special 12-page February 2003 issue of The Insurance Forum. The issue includes an internal company memorandum about the change from the claim payment approach to the claim management approach. The issue also includes an article by Mark D. DeBofsky, an expert on ERISA. The article, which I had requested from him, is entitled "Using ERISA Against Those It Was Designed To Protect." DeBofsky explains how ERISA "has been misused and misinterpreted to create a virtually impenetrable shield against redress for misconduct by employers and insurers."

Connecticut Mutual Life Insurance Company (CML) is one of the great names in the history of life insurance. Sadly CML no longer exists. In the January and July 1976 issues of the Forum, I wrote about CML's claims practices. The facts of the cases led me to believe that CML tried to figure out how to pay a claim rather than how to deny a claim. When I corresponded with CML, an official said:
Our claim policy, to the extent it can be expressed in a few words and in general terms, is simply that we expect to pay all benefits that are supposed to be paid when they are supposed to be paid. Whether or not a benefit has been claimed is beside the point—if we have information to suggest that a benefit might be due, we pursue the situation and determine whether or not it is. Our claim practice does not include maximizing profit as one of its objectives—that's the job of other parts of the Company.
One of my readers, in response to one of my blog posts about claims practices, said he was aware of a life insurance company in which for many years the president of the company had to approve personally every denial of a death claim. With the passage of time and the growth of the company, it became impractical to continue the tradition.

In the January and August 1978 issues of the Forum, I wrote about a tragic situation involving an insured's suicide. An agent of Bankers Life Company (now Principal Life Insurance Company) allowed a client to buy a new policy to replace four existing policies that were beyond the two-year suicide exclusion period. The death benefit of the four policies combined was $52,000. When the insured committed suicide less than two years later, the company refunded the premiums paid on the new policy but denied payment of the death benefit. The beneficiary went to court and later entered into a confidential settlement, out of which the beneficiary probably had to pay attorney fees. I think it would have been better for everyone (except the attorneys) if the company had figured out a way to justify paying the full death benefit.

I feel the same way about the Collins case. I realize judges are supposed to follow the law and the facts wherever they lead, and are supposed to ignore the circumstances of the parties. In this case, I think Unum could have figured out a way to justify paying the $500,000 claim. Had Unum done so, it would have saved the time, effort, and expense of the legal battle. At the same time, Unum would have assisted the family of an American hero who gave his life for our country.

Available Material
I am offering an 85-page complimentary PDF consisting of the text of the Collins complaint (18 pages), the district court opinion and order granting the Unum motion for summary judgment and denying the Collins motion for summary judgment (34 pages), the appellate court opinion affirming the district court opinion and order (8 pages), the Leimberg article about the appellate court opinion (6 pages), the February 2003 special issue of The Insurance Forum (12 pages), the January and July 1976 articles in the Forum (4 pages), and the January and August 1978 articles in the Forum (3 pages). Email and ask for the September 2017 package about the case of Collins v. Unum Life.

Pritchett's Thoughts on the Collins Case

The fact that David Collins developed CTE, PTSD, and MDD as a result of his service as a U.S. Navy SEAL is so very sad, to say the least. Yet I do not see how these service-connected conditions are relevant to the decision made by Unum on the supplemental plan where the suicide exclusion applied because Collins had paid the premium for the coverage.

I have had a long time to think about the application of the suicide exclusion. During my five years with a major life insurance company in the 1960s, I investigated many deaths involving the possibility of suicide. I say "possibility" because investigations were not requested by the home office in cases where death was clearly due to suicide during the suicide exclusion period. A fair number of death certificates listed the cause of death as accidental or due to some health condition when in fact the deceased committed suicide. It was these cases that I helped investigate.

My reports to the home office always ended with a recommendation. However, final decisions were made by the home office's claims division, where the staff included attorneys. My boss, the divisional claims manager, always insisted that our primary objective was to try to help claimants (similar to your quote from a CML official). However, we also paid close attention to contract language. Having said this, I saw exceptions by the home office to making decisions strictly on contract provisions.

However, these uncommon exceptions supported the sales force, rather than being based on anything about the insured or the beneficiary. For example, I investigated a case where a marine officer trainee was killed when, while returning from a late date, he drove his convertible under the rear of a tractor trailer. He had signed a life insurance application the previous week but had not paid the premium. Instead the agent had personally paid the premium planning to collect from the insured later. The claim was paid to the insured's father (a respected physician) three days after the death; the agent received a lecture.

In another case, involving a prominent auto dealer, I established during the contestability period that in his application the insured had not told the truth about material health conditions, including the use of drugs for depression. The home office agreed the claim should be denied. However, upon appeal from the insurance agency manager, who claimed that future sales in the area would be hurt if a claim were denied on such a well-known person, the claim was paid. Marketing departments at that time were king in life insurance companies.

I believe strongly that a life insurance policy is a legal contract, and that claim decisions necessarily need to be consistent with policy provisions when facts surrounding a claim are clear. In other words, claim decisions should be objective and consistent with policy provisions—period.

With respect to claim decisions concerning suicide I am not aware that it is or should be relevant whether one is sane or insane, has significant health conditions (regardless of how such conditions materialized), is an American hero, a scoundrel, a rabbi, a priest, moral or immoral. I would venture to say that the typical person who dies due to a non-accidental self-inflicted injury is not thinking rationally at the time of suicide. Having said this, I have not looked at literature in, for example, sociology or medicine, that tries to define suicide and whether external issues ever factor into whether or not they believe a death is due to suicide. The plaintiff apparently tried this approach in the Collins case. It seems to me that Unum's suicide exclusion language rules out consideration of such factors by saying "Your plan does not cover any losses where death is caused by, contributed to by, or results from suicide." I believe that Unum and the judges, in the Collins case, made the proper decisions on the supplemental life insurance.

In my opinion, this claim would have been denied under the application of the old CML practice you quoted because I doubt that a suicide during the suicide exclusion period would have met their test of "simply that we expect to pay all benefits that are supposed to be paid..." I imagine the words "supposed to be" related to CML contract language.

The text message Collins sent to his wife and the email sent to his fellow SEAL on the date of his death are clear evidence that he intended to kill himself. In cases I worked on, such messages (then, notes or other actions, well before the days of texts and emails) were evidence that death was due to suicide.

I would not conclude as you do that Unum should have found a way to justify paying the $500,000 claim. Unum is not a charity or a governmental agency. They should not feel—even though the claim decision maker might personally like to—any more obligation to help a specific American hero than you or I should—today—write large checks to help the family of David Collins. Literally hundreds of thousands (maybe millions) of veterans now unfortunately have service related health conditions like those from which Collins suffered! The prevalence of suicide among these veterans is significantly higher than that for others. The effects of modern warfare are terrible. Perhaps the Veterans Administration, with the authorization of Congress and the President, should do more for Collins and other veterans. However, I do not think life insurance companies should bend contract provisions to do so. That would not just affect shareholders, but also dividends to participating policyholders, experience-rated group premiums and premiums for new individual policies.

I share the opinion that Unum disability insurance claim practices have been deplorable. Yet I question whether that has any direct relevance to the Collins case involving supplemental group life insurance. I think you should reconsider the implication that claim decisions should factor in the likelihood of the insurance company being sued and the time and expense a legal battle might entail.

I fully agree with you that suicide is an intractable problem for life insurance companies. My overall feeling is that it is so sad that Collins suffered due to his service to our country. I hope his family is receiving adequate military retirement, Veterans Administration, Social Security, and other survivor benefits. However, I do not believe that Unum should have paid benefits under the supplemental plan.


Friday, August 25, 2017

No. 231: Life Insurance Fraud—A Case Involving Incredible Criminal Allegations

On June 22, 2017, the U.S. Attorney's office in the Southern District of Ohio filed a 33-count grand jury indictment against three individuals, along with a motion to seal the indictment. On August 9 the office filed a motion to unseal the indictment, and the judge unsealed it the same day. Often there are only a few days (the time needed to arrest the defendants) between the filing under seal and the unsealing. In this case extra time was needed to complete the investigation. On August 10 the office issued a press release about the case. (See U.S.A. v. Stevenson, U.S. District Court, Southern District of Ohio, Case No. 2:17-cr-134.)

The Defendants
The defendants are Mitch G. Stevenson, his wife Patricia Stevenson, and their daughter Candace G. Stevenson. The indictment charges each defendant with one count of money laundering conspiracy. The indictment also charges Mitch with twenty-two counts of money laundering, Patricia with two counts of money laundering, and Candace with eight counts of money laundering. Money laundering conspiracy is a crime punishable by up to twenty years in prison. Money laundering is a crime punishable by up to ten years in prison.

On August 10 Patricia and Candace made their initial appearances before a magistrate judge. A private attorney represented Patricia. The magistrate judge appointed a federal public defender to represent Candace. On August 11 Mitch made his initial appearance before the magistrate judge. A private attorney represented Mitch. The defendants were released after their initial appearances. The docket reflects the filing of orders describing the conditions of release and the filing of financial affidavits. However, those documents are not publicly available, at least not yet.

The Policies
In early 2009 West Coast Life Insurance Company issued two life insurance policies on the life of Person A, a Cincinnati resident and relative of the defendants. The policies had a combined death benefit of $2.9 million. Mitch was the initial owner and beneficiary of one policy, for $1.5 million. Person B, another relative of the defendants, was the initial owner and beneficiary of the other policy, for $1.4 million. In early 2011 Patricia became owner and beneficiary of the first policy, and Candace became owner and beneficiary of the second policy. The indictment does not identify the agent who submitted the application, and does not comment on West Coast Life's underwriting.

The Impostor
The application for the policies required Person A's medical history and a medical examination. An examination of an impostor took place on February 6 or 7, 2009, in Sugar Land, Texas, a Houston suburb. The identity of the impostor (she represented herself as a relative of the defendants) is not known. The impostor weighed 176 pounds, and said her address was in Sugar Land. The impostor said she had not been treated for dizziness, diabetes, or high blood pressure, and had not been a hospital patient for five years. The indictment does not identify the physician or paramedic who examined the impostor.

Three weeks before the medical examination of the impostor in Texas, the real Person A was in the emergency room of a Cincinnati hospital. At that time Person A weighed 387 pounds. During the previous two years, Person A had made at least 17 visits to hospital emergency rooms. Also, Person A had been taking medications for diabetes, high blood pressure, and other conditions. On February 6, 2009 (the day of, or the day before, the examination of the impostor in Texas), Person A was in the emergency room of a Cincinnati hospital.

The Death Claims
On January 9, 2012, Person A died at a Cincinnati hospital. On January 25 Patricia and Candace filed death claims with West Coast Life. On January 30 the company issued checks for the death benefits. Each check was about $4,000 larger than the death benefit, perhaps reflecting interest from the date of death to the date of the checks.

Use of the Money
On February 8, 2012, Patricia and Candace deposited the checks into four newly opened bank accounts. On February 21 Candace used a $248,000 cashier's check to buy a 2012 Bentley GT Convertible and registered it in her name. On February 24 Patricia used $700,000 in cashier's checks to transfer funds to Mitch. He and Patricia used some of the money for a land contract for a home in Mason, Ohio, near Cincinnati.

The defendants moved money from bank to bank. The indictment alleges that the transactions were "designed in whole or in part to conceal and disguise the nature, location, source, ownership, and control of the proceeds of criminal activity." The indictment seeks forfeiture of the proceeds derived from the illegal activity.

General Observations
The indictment presents overwhelming evidence supporting incredible criminal allegations. I do not understand how the defendants could have thought they would be able to get away with such a brazen scheme to defraud a life insurance company.

It seems likely the case will not go to trial. I think it will end with plea agreements and sentencing of the defendants to significant prison time. I plan to report further developments.

Available Material
I am offering an 18-page complimentary PDF consisting of the U.S. Attorney's press release (2 pages) and the indictment (16 pages). Email and ask for the August 2017 package about the U.S.A. v. Stevenson case.


Monday, August 21, 2017

No. 230: Long-Term Care Insurance—Another Lawsuit Involving Claims Practices at Senior Health Insurance Company of Pennsylvania

In No. 229 (posted August 8, 2017), I reported on a 2013 long-term care (LTC) insurance claims practices lawsuit against Senior Health Insurance Company of Pennsylvania (SHIP). While working on that post, I learned of a 2011 claims practices lawsuit against SHIP. Here I report on the earlier case. (See Gottlieb v. Conseco, U.S. District Court, Central District of California, Case No. 2:11-cv-2203.)

U.S. District Court Judge George H. King handled the Gottlieb case. President Clinton nominated him in April 1995, and the Senate confirmed him in June 1995. He served as chief judge from September 2012 to June 2016, and retired in January 2017. U.S. Magistrate Judge Victor B. Kenton was also involved in the case.

In January 1988, Beatrice Orkin Gottlieb, a California resident aged 57 at the time, acquired LTC insurance coverage from AIG Life Insurance Company (AIG). The insurance was evidenced by a certificate issued by the AIG Long Term Care Trust. The master contract became effective in June 1987. In group insurance, a "master contract" covers the entire group, and a "certificate" is issued to each member of the group. The certificate in this case had an Extended Home Care Benefit Rider in which "home" was defined. Some definitions of "home" are mentioned later.

In December 1991 American Travellers Life Insurance Company (ATL) informed Gottlieb by letter that ATL had "reinsured and assumed" the coverage from AIG. ATL said that "you can be assured that the benefits of your policy will remain exactly the same." (The underlining was in the original.)

In December 1999 ATL informed Gottlieb by letter that the company's name had changed to Conseco Senior Health Insurance Company (CSHI) because Conseco, Inc. had acquired ATL. The letter said: "The name change will in no way affect the terms and conditions of your policy." In November 2008, when Conseco transferred CSHI to an oversight trust, SHIP became the company's name.

In April 2010 Gottlieb entered a skilled nursing facility. In July 2010 she moved to another skilled nursing facility. Her daughter, Debbie Ferman, filed a claim against SHIP, which denied the claim. The denial appeared to be based on an endorsement added to the policy changing the definition of "home." Gottlieb had never agreed to the endorsement and had never even received it.

The Lawsuit
In March 2011 Gottlieb filed a class action lawsuit against CSHI doing business as SHIP. Gottlieb filed a first amended complaint in May 2011, a second amended complaint in September 2011, and a third amended complaint in September 2012. The four complaints and the exhibits attached to them differ significantly.

The Settlement
In October 2012 the parties reached a settlement. In December 2012 Judge King issued an order preliminarily approving the settlement, conditionally certifying a class for the purposes of the proposed settlement, approving the class notice, and scheduling a final approval hearing. The class notice offers the entire settlement agreement (63 pages including exhibits) to class members interested in seeing it. Here is a paragraph of the class notice summarizing the case:
This lawsuit [name of case] is about whether the term "home" in certain insurance policies includes Assisted Living Facilities or Residential Care Facilities. Plaintiff has alleged that in certain instances, it does. Under the Proposed Settlement, SHIP agrees that if a Long Term Care Policy defines "home" as a "private home, a home for the aged, a residence home, or a similar residential institution, or your home" and does not specifically exclude benefits for Home Health Care provided in an Assisted Living Facility or Residential Care Facility for the Elderly, claims for benefits will not be denied on the basis that said facility is not an insured's "home."
The class notice also contains a paragraph summarizing the terms of the proposed settlement. Here is a portion of that paragraph:
Under the Proposed Settlement, SHIP agrees to consider an Assisted Living Facility as an insured's "home" under a Long Term Care Policy owned by a member of the Settlement Class. SHIP will notify all State Departments of Insurance or their regulatory equivalents, in writing, of the terms of the Settlement.... There are no provisions for money damages to be paid to Class Members. The Class Representative, or Mrs. Gottlieb, did, however, include individual claims for relief against SHIP for its alleged failure to pay certain benefits to her under her own Long Term Care Policy. Therefore, SHIP has agreed to pay her the full contract value of her policy in the amount of $182,500, along with an additional $5,000 for representing the Class, which required her to incur travel and other expenses related to maintaining the lawsuit.
In March 2013 Judge King issued a final order and judgment approving the settlement. In April 2013 Gottlieb filed a motion for attorneys' fees in the amount of $250,000. In July 2013 Magistrate Judge Kenton granted the motion. SHIP appealed Magistrate Judge Kenton's order to the U.S. Circuit Court of Appeals for the Ninth Circuit. In August 2015 the appellate court affirmed Magistrate Judge Kenton's order.

The remainder of the class notice paragraph describing the terms of the proposed settlement explains an "audit process" SHIP agreed to implement. SHIP was required to submit quarterly audit reports to attorneys for the class for two years following the settlement's effective date. The reports show nothing of significance. For example, here is one of the reports from a law firm representing SHIP:
This letter provides you with information from defendant SHIP under the terms of the March 12, 2013 Final Order and Judgment, and, in particular, information pertaining to Paragraph 4(c) and (d). This pertains to the quarter ending September 30, 2014. Through this office, SHIP advises that under the audit process described in the order there have been no claim denials for health care benefits wherein the stated reason for the denial included a determination that the insured resided in an ineligible setting. SHIP has further advised that it has audited at least 25% of review notes to ensure that the ALF Op Memo was applied in a manner consistent with the terms of the Settlement and Order. [Blogger's note: "ALF Op Memo" is a memorandum describing the standard operating procedure when a policy includes a provision relating to Assisted Living Facilities.]
General Observations
There were three insurance company name changes in the Gottlieb case. The first resulted from the transfer of coverage from AIG to ATL by way of so-called assumption reinsurance. Neither company gave Gottlieb an opportunity to consent to the transfer. Rather, ATL merely informed her of the transfer by letter. See No. 220 (posted June 1, 2017), which explains why the transfer of coverage without Gottlieb's consent arguably violated her constitutional rights. The subject is treated in detail in chapter 23 of my 2015 book entitled The Insurance Forum: A Memoir.

The second name change—ATL to CSHI—resulted from Conseco's acquisition of ATL. The third name change—CSHI to SHIP—resulted from Conseco's transfer of CSHI to an oversight trust. Policyholder consent is not required when an entire company is sold, or when a company merely changes its name. In other words, policyholder consent is required only when a block of policies is transferred from one company to another.

One of the exhibits attached to the third amended complaint is interesting. It is a transcript of a tape recording of part of a telephone conversation between Ferman (Gottlieb's daughter) and Robert Bryant, who represented a firm that was handling claims administration for SHIP. The transcript illustrates what a claimant is up against when he or she contacts the company about a claim denial. It also makes clear that Ferman was not easily brushed off.

Available Material
I am offering a 52-page complimentary PDF consisting of the text of Gottlieb's third amended complaint (17 pages), the appendix to the third amended complaint showing the transcript of the Ferman/Bryant telephone conversation (10 pages), Judge King's final order (8 pages), Magistrate Judge Kenton's order (13 pages), and the Ninth Circuit's affirmation of Magistrate Judge Kenton's order (4 pages). Email and ask for the August 2017 package about the Gottlieb v. Conseco case.


Tuesday, August 8, 2017

No. 229: Long-Term Care Insurance—Senior Health Insurance Company of Pennsylvania Shows How Not To Handle a Claim

In January 1996, Mary ("Molly") White, an Ohio resident aged 67 at the time, purchased a long-term care (LTC) insurance policy from American Travellers Life Insurance Company (ATL). The company later became Conseco Senior Health Insurance Company, and still later became Senior Health Insurance Company of Pennsylvania (SHIP).

In May 2013, Ruth White, who is Molly's daughter and holds power of attorney for her, filed a claim with SHIP for benefits under the policy. SHIP denied the claim. In August 2013, Ruth filed an appeal with SHIP, which denied the appeal. Since 2013, Molly's mental and physical conditions have deteriorated. Ruth filed additional claims, most recently in October 2016. SHIP denied the claims. In June 2017, Ruth filed a lawsuit against SHIP in state court in Ohio. In July 2017, SHIP removed the case to federal court.

U.S. District Judge John R. Adams is handling the case. President George W. Bush nominated him in January 2003, and the Senate confirmed him in February 2003. (See White v. SHIP, U.S. District Court, Northern District of Ohio, Case No. 5:17-cv-1531.)

The APC Rider
The ATL policy provides for benefits when the insured is in a "Long Term Care Facility" or "Assisted Living Facility." The policy also has a complimentary rider that provides benefits under an "Alternative Plan of Care" (APC) recommended by a physician.

The crux of the dispute is whether the APC rider provides benefits when Molly is at home rather than in one of the above facilities. ATL promoted the APC rider in marketing material. The company said such things as "Unlimited Coverage for Custodial, Intermediate and Skilled Care PLUS Alternate Care Benefits!" It also made it sound as though the APC rider provided a way to receive benefits at home without being admitted to one of the above facilities. The APC rider reads:
If you would otherwise qualify for benefits, we will consider paying for the cost of services you require under a written alternative plan of care. Such alternative care must be a medically acceptable alternative to Long Term Care or Home Health Care.
The alternative plan of care must be initiated by you. It must be developed and written by your physician and consistent with generally accepted medical practices. Those parts which are mutually agreeable to you, your physician and us will be adopted.
Alternative care may include but not be limited to: (1) special treatments; (2) different sites of care; or (3) modifications to your residence to accommodate your needs. Suggested services and benefit levels may be different from, or not otherwise covered by, the policy. If so, they will be paid at the levels specified in the alternative plan of care.
Agreement to participate in an alternative plan of care will not waive any of your rights or our rights under the Policy. However, the total of all benefits paid under this Rider will be an offset to those otherwise payable under the Policy to the extent that is agreed to by you and us in the written alternative plan of care. [Blogger's note: The final sentence above is in boldface type.]
Denial Letters
As mentioned earlier, SHIP denied the claims and appeals that Ruth submitted. For example, in a June 2013 letter to Molly's physician, a SHIP "care manager" said:
In order to evaluate Mary White's eligibility for benefits, we reviewed care plan assessment, care notes, and the results of a recent onsite nursing assessment, have spoken to Ruth White and have determined that Mary White needs assistance with bathing, dressing, toileting, transferring, mobility, and continence.
It is our understanding that Mary White does not desire to receive services in a nursing home setting and wishes to receive care at home. However, Mary White's policy covers Long Term Care Facility or Assisted Living Facility care, only.
In an August 2013 letter to Ruth, the same care manager said it differently. Here are the two key paragraphs:
You requested benefits under your Alternative Plan of Care rider. In order to determine your eligibility, both you and your physician submitted information on whether admission to a nursing home would otherwise be required for your condition, that your care needs can adequately be met at home and a plan of care describing the type of services sufficient to support your care needs at home. We will not pay benefits for any type of Alternative Care unless we are first reasonably satisfied that you would otherwise require nursing home confinement.
We have carefully reviewed the circumstances of your claim, as well as the information your physician submitted on your behalf. Your physician did not recommend nursing home confinement or indicate that you require a level of care that requires nursing home confinement. In addition, we have carefully considered the circumstances of your claim, including the type, level and frequency of care you have received, as well as the reasons you submitted for making this request. We have determined that we are unable to approve your request for coverage of care outside of an eligible Long Term Care Facility or Assisted Living Facility. This denial is based on the lack of proper medical documentation to support the request that covered benefits, under the policy, are not suitable for you.
The Lawsuit
On June 15, 2017, Ruth filed a breach of contract lawsuit against SHIP in the Summit County (Ohio) Court of Common Pleas (Case No. CV-2017-06-2489). On July 20, SHIP removed the case to federal court and filed its answer to the complaint. The next day, the case was assigned to Judge Adams, who immediately issued a case management conference scheduling order. Here are some but not all the elements of the order:
  • Judge Adams set the case management conference for July 31.
  • He ordered lead counsel and parties with full settlement authority to be present and have calendars available for scheduling.
  • He ordered any undue hardship motions or motions to continue to be filed by July 26.
  • He ordered, in the event of a motion for continuance, that counsel confer and agree on three alternative dates not later than August 7.
  • He ordered the plaintiff to make a settlement offer by July 27, and he ordered the defendant to respond with a settlement offer by July 28.
On July 26, the parties filed a joint report on their planning meeting. On July 27, Ruth filed initial disclosures, a demand for $87,000, plus estimates of $20,000 in attorney fees and $11,300 in costs. The next day, SHIP filed an offer of $17,500. On July 31, at the case management conference, the case was placed on the expedited track. On the same day, Ruth filed additional documents.

I asked the insurance department in Pennsylvania, SHIP's state of domicile, how many consumer complaints it received in recent years against the company. A spokesman said the department received 25 complaints in 2013, 20 in 2014, 19 in 2015, 26 in 2016, and 11 thus far in 2017.

According to SHIP's statutory statement for 2016, Pennsylvania is the fourth largest state by LTC premiums (after Texas, California, and Florida). By extrapolation from Pennsylvania's 26 complaints in 2016, I estimate there were 300 consumer complaints filed against SHIP in 2016 with all the state insurance departments combined. I think 300 is a large number for a company with capital and surplus of only $28 million at the end of 2016.

In SHIP's statutory financial statements, page 4, line 13 shows "Disability benefits and benefits under accident and health contracts." The figures (in millions) in SHIP's four most recent annual statements are $415 in 2013, $412 in 2014, $414 in 2015, and $309 in 2016. I think the 2016 figure is a sharp drop from the figures in the three prior years.

Long Term Care Group
Long Term Care Group (LTCG) is an LTC insurance administration company. I believe that LTCG administers claims against SHIP. All the SHIP letters I have seen in this case show SHIP at P.O. Box 64913, St. Paul, MN 55164. One of LTCG's locations is in Eden Prairie, a suburb of the Twin Cities. The SHIP/LTCG contract probably says SHIP bears sole responsibility for the claims practices described in this post.

My Inquiry to SHIP
In view of the SHIP data and the LTCG situation mentioned above, I decided to ask SHIP a few questions. I sent them to the New York firm that handles media relations for SHIP. I asked:
  1. Is Long Term Care Group handling claims for SHIP? If so, which office of LTCG? If not, who is handling claims for SHIP?
  2. Is SHIP in the process of denying all claims? Irrespective of your answer, please indicate the number of new claims approved and the number of new claims denied in 2013, 2014, 2015, 2016, and thus far in 2017.
  3. Is SHIP in the process of discontinuing as many previously approved claims as possible? Irrespective of your answer, please indicate the number of previously approved claims discontinued (other than by death of the insured) in 2013, 2014, 2015, 2016, and thus far in 2017.
An official of the media relations firm responded promptly. He said SHIP has no comment on the questions.

General Observations
I am writing about this case because I think SHIP's claim denial letters are outrageous. They are not only gibberish but also seem to conflict with the language of the APC rider. However, I decided not to go into further detail here. Instead, interested readers are invited to obtain the complimentary package I offer at the end of this post. The package contains the ATL policy, including the APC rider, and seven denial letters.

I think the case grabbed the attention of Judge Adams, because he has been moving it along with lightning speed. I hope that the parties settle the case quickly to avoid lengthy delays that would be caused by discovery efforts and a jury trial.

In addition to the White case, I am aware of only two other lawsuits ever filed against SHIP relating to claims practices. I wrote about one of those cases in the May 2012 and November 2013 issues of The Insurance Forum. (See Hall v. SHIP, Superior Court, State of California, County of San Bernardino, Case No. CIVRS 1200996.) I have not written about the other case, which initially was against a SHIP predecessor but eventually involved SHIP. (See Gottlieb v. Conseco Senior Health, U.S. District Court, Central District of California, Case No. 2:11-cv-2203.)

If there were about 300 consumer complaints filed nationally in 2016 against SHIP, it seems reasonable to ask why there have not been many lawsuits. I think the answer is that we are talking about caregivers who are busy tending to the needs of some of our most vulnerable citizens. After the caregiver loses the claim struggle with SHIP, after a state insurance department's consumer complaint division tells the caregiver the insurance department cannot act as the insured's attorney, and after a private attorney approached by the caregiver says a lawsuit against SHIP would be a long legal battle with a doubtful outcome, the caregiver simply gives up.

As I have reported, SHIP is an LTC insurance company in runoff (not selling new policies) and is in fragile financial condition. Indeed, SHIP would have been insolvent at the end of 2016 without a $50 million surplus note on which it has not paid any interest.

Yet the four officers whose names appear on the first page of SHIP's 2016 statutory financial statement appear to be getting by. According to data filed with the insurance department in Nebraska, Paul Lorentz received total compensation of $411,886 in 2016, Ginger Danough $396,423, Barry Staldine $325,403, and Kristine Rickard $239,154.

Available Material
I am offering a 53-page complimentary PDF consisting of the state court complaint (3 pages), SHIP's answer including exhibits (24 pages), seven denial letters (10 pages), the case management conference scheduling order without exhibits (5 pages), Ruth's demand for $87,000 (2 pages), Ruth's preliminary budget estimate (1 page), SHIP's offer of $17,500 (3 pages), and the two articles in The Insurance Forum about the Hall v. SHIP case (5 pages). Email and ask for the August 2017 package about the White v. SHIP case.