Most life, health and disability  policies may be written either on an individual or group basis. Individual policies are underwritten with respect to the individual being covered and are not obtained in the employment setting.  Group policies are not individually underwritten and are typically provided to employees in the employment setting by employers or unions.  Another important distinction between individual and group policies is that enrollment and claims for benefits under group policies are often administered by a third party administrator (“TPA”) rather than by the insurer.  For example, in an employee group policy, the employer is often the plan administrator, responsible for enrolling new members and for submitting claims on their behalf for policy benefits.  Whether a policy is an individual or group policy can make major differences in an insureds legal rights.  It is therefore critical to evaluate what law applies to a policy.

Under California law, MCOs are called “health care service plans” and are more commonly referred to as HMOs, PPOs, and POSs.  The Department of Managed Health Care has jurisdiction over these types of policies.  The Department of Insurance regulates all other types of policies.

MCOs are required to maintain grievance procedures approved by the Department of Managed Health Care.  They are required to resolve grievances within 30 days or explain in writing the reasons for any delay or denial of health care services.  The grievance procedure is voluntary and in addition to any other available remedy provided by law. However, utilization of independent administrative review is a condition to an MCO's statutory liability under Civ. Code § 3428.  Insurers are required to provide an “independent medical review” if the claim denial involves a determination whether a service is medically necessary.  If a dispute is not subject to independent medical review, the Department of Managed Health Care may order the plan to promptly offer and provide covered benefits or order reimbursement by the plan.

Medical Necessity: Many policies have limitations for “reasonable and medically necessary” expenses.  What is “medically reasonable and necessary” care is often disputed. A frequent issue is whether the insurer is bound by the treating physician's determination that treatment was “medically necessary.”  If the policy itself does not clearly address this issue, insureds usually argue that the uncertainty should be resolved in favor of coverage and the insurer must pay for whatever treatment is ordered by the treating physician. Utilizing an overly-restrictive standard of “medical necessity” may constitute “bad faith” by the insurer.  If a group policy is provided by an employer and is governed by ERISA, such plans usually confer discretion on the plan's medical administrator to determine what treatment is “medically necessary.” Such decisions may be upheld so long as it is not an abuse of discretion.

“Usual and Customary” Medical Expenses: Insurers may deny a health claim because the procedure is not “usual and customary.” Courts are likely to side with insureds as to what fees are “usual and customary” in order not to interfere with the insureds' access to physicians of their choice. Courts are not likely to sympathize with an insurer’s objections to the amount of fees after an insured has already incurred the debt without notice from the insurance company as to what amounts would be accepted as “usual and customary.” Before suing an insurer for medical benefits which the insurer has denied as medically unnecessary, the insured must exhaust the “independent medical review system” established by the Department of Insurance and Department of Managed Health Care. “Coverage decisions” are not subject to such review (the approval or denial of health care services substantially based on a finding that the provision of a particular service is included or excluded as a covered benefit under the terms of the insurance contract.).

Preexisting Conditions: Individual health policies are normally designed to cover only losses due to illness contracted and commenced while the policy is in force. Various types of provisions are therefore used to avoid coverage for preexisting health conditions.  These provisions are strictly construed against the insurer and in favor of the insured.  However, group health insurance policies and managed care plans limit the scope and length of exclusions for preexisting conditions.

Experimental or Investigative Treatment: Many health insurance policies exclude coverage for treatments or procedures that are “experimental or investigational.” Add: Under these policy provisions, the attending physician's opinion that a treatment is “medically necessary” is persuasive but not determinative.  See Dowden v. Blue Cross & Blue Shield of Texas, Inc., 126 F.3d 641, 644  (5th Cir. 1997) (applying ERISA).

An insurer is required within 30 working days to pay a covered health insurance claim or send written notice to the insured (and to the health care provider that provided the services at issue) that the claim is contested or denied, stating the factual and/or legal basis for its action.  Interest accrues at the rate of 10% per annum on claims not paid or contested within the 30–working-day period.  Ins. Code. §§ 10123.13, 10123.147.

False statements made by the insured in applying for health insurance do not entitle the insurer to rescind “unless such false statement was made with actual intent to deceive or unless it materially affected either the acceptance of the risk or the hazard assumed by the insurer.” Ins. Code. § 10380. The insured is not bound by any statement made in an application for disability insurance unless a copy of such application is attached to or endorsed on the policy.  Health insurers are prohibited from engaging in “postclaim underwriting,” defined as “rescinding, canceling or limiting of a plan contract due to the plan's failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the plan contract.” Health & Saf. Code § 1389.3.

Long-term care insurance covers health care and treatment in extended care facilities (convalescent homes, etc.) rather than in an acute care unit of a hospital. Ins. Code § 10231.2.

“First party” coverage is for losses suffered directly by the insured. Examples include life, health, disability and ERISA group policies.  If the insured is seeking coverage against loss or damage sustained by the insured, the claim involves first party insurance. “Third party” coverage is for losses suffered by other persons for which the insured may be legally responsible.  If the insured is seeking coverage against liability of the insured to a third-person, the claim involves third party insurance.  Examples include homeowners, commercial general liability, and directors and officers policies.

Disability insurance refers to coverage against loss of income or ability to earn income resulting from accident or illness.   It is designed to provide a substitute for earnings when, because of bodily injury or sickness the insured is deprived of the capacity to earn his living.  Disability income policies typically provide that an insured is totally disabled if he or she is unable to perform the substantial and material duties of the insured’s own occupation in the usual and customary manner.  Some policies provide for “specialty coverage” for various types of occupations which involve specialties (e.g., medical doctors and attorneys).  Additionally, some policies, especially group insurance policies, have “any gainful occupation” provisions after one or two years after the insurer has paid disability benefits.

• “Total disability” provision: these provisions typically provide that an insured is totally disabled if he or she is unable to perform the substantial and material duties of the insured’s own or usual occupation in the usual and customary manner. “‘(T)otal disability’ does not signify an absolute state of helplessness but means such a disability as renders the insured unable to perform the substantial and material acts necessary to the prosecution of a business or occupation in the usual or customary way. Recovery is not precluded ... because the insured is able to perform sporadic tasks, or give attention to simple or inconsequential details incident to the conduct of business .... ” Erreca v. Western States Life Ins. Co., 19 Cal. 2d 388, 396 (1942).  Note that ERISA policies issued as part of an employee benefit plan governed by ERISA are interpreted under federal common law standards, rather than state law.

• “Residual/Partial disability” provision: these provisions typically provide that if the insured is not totally disabled and can perform “one or more” of the substantial duties of his or her employment, they may be entitled to benefits. This coverage protects against loss of income rather than the inability to work.  These provisions typically define “partial” or “residual” disability in terms of the percentage of duties the insured is able to perform and the percentage of lost earnings. For example: “‘Residual Disability’ means that due to Injury or Sickness: a. (1) You are unable to perform one or more of the important duties of Your Occupation; or (2) you are unable to perform the important duties of Your Occupation for more than 80% of the time normally required to perform them; and b. Your Loss of Earnings is equal to at least 20% of Your Prior Earnings while You are engaged in Your Occupation or another occupation ....”  Partial or residual disability benefits are usually set at a percentage of total disability benefits (in proportion to the degree of disability) and are payable so long as the disability continues or until age 65.

• “Any occupation” provision: “Any occupation” means disability benefits must be paid if the insured is disabled from working “in his customary occupation or in any other occupation in which he might reasonably be expected to engage in view of his station and physical and mental capacity and given his education, training and experience.  The occupation must be “gainful,” which usually means that it pays the insured at least 50%-60% of his pre-disability income.  It is common for insurers to misapply this definition. For example, in determining whether the insured is “totally disabled” (under an “own occupation” or “any occupation” policy), the job market for his or her services must be considered.  If employers are generally unwilling to hire persons with such a disability, the lack of employment prospects is evidence of disability.  See Moore v. American United Life Ins. Co., 150 Cal. App. 3d 610, 630  (1984).

• “Offset” provisions:  Disability policies (especially group policies) often provide for offsets (usually dollar for dollar reductions in benefits) where income is received from other sources on account of the same disability (e.g., income from other disability income policies, Social Security disability income benefits, state disability income or workers' compensation benefits, and settlements in lawsuits for the injury causing the disability). By far the most important of these offsets is for Social Security disability income.  Often times, the policies provide that insureds must sign reimbursement agreements and apply for such benefits, otherwise, an estimate can be made.

• “Elimination period” provision:  almost all policies establish an “elimination period” following onset of a disability (e.g., 30, 60, 90, 180 days) during which no benefits are payable.  Under such a policy, the insured must establish that he or she is “totally disabled” continuously during the elimination period. If he or she returns to work during the elimination period, there is no coverage.  See Moore v. American United Life Ins. Co., 150 Cal. App. 3d 610, 618 (1984).

• “Illness vs. Accidental Injury” provisions: Disability insurance policies often distinguish between disabilities caused by illness and those resulting from accidental injury.  Typically, a shorter period of benefits is provided for disability based on sickness (e.g., 2 or 3 years, maximum); while longer benefits are payable for disabilities resulting from accidental injury (e.g., lifetime payments, or until age 65).  A disability results from “accidental injury” if the accident is a proximate cause of the disability.  It is enough that the accident “triggered” or set in motion the chain of events that ultimately resulted in the insured's total disability.

• Limitation on Benefits for Mental Illness: Disability policies often provide more limited benefits for a disability based on “mental illness.” These provisions may or may not be enforceable depending on the language of the limitation provision and depending on the nature of the condition at issue.  For example, conditions commonly thought to be primarily psychiatric in origin but that are organically based (e.g., autism, schizophrenia, bipolar disorders) will not be subject to the provision.  See Bosetti v. United States Life Ins. Co. in City of N.Y., 175 Cal. App. 4^th 1208 (2009).

• Preexisting Condition Exclusions: Disability policies often limit or exclude coverage for disabilities attributable to preexisting illness or disease.  These provisions differ substantially and it is important to review the applicable language.  Some policies require the illness “first manifest” during policy period.  In order for this provision to apply, typically the insured must have been correctly diagnosed and treated for the condition causing disability before the policy was issued.  If this language is used to contest the policy, it may not be enforceable, depending on the contestability period. Note that a preexisting condition exclusion applies only if the insured's disability is substantially and directly caused by the preexisting condition.  If a condition is not diagnosed before the policy issuance date, the exclusion may not apply.

• “Receiving Physician's Care” and “Appropriate Care” provisions: Disability policies often require, as part of the disability provision, that the insured must be “receiving a physician's care” or is receiving “appropriate care” for the condition causing disability.

Insurers engage in numerous actions to investigate claims.  All will initially require that an insured complete claim forms and certifications from doctors.  Once they obtain these forms and authorizations to obtain medical and financial records, they commence the claim investigation by requesting the claimant's medical information and records.  They will also typically contact employers to obtain employment information such as occupational duties, time of employment, hours worked, supervisors, etc.  Insurers may also engage in the following activities: background checks, medical examinations, medical and financial consultations, surveillance, telephonic or in-person interviews, workplace interviews, internet searches, among other things.  Very often, careful scrutiny of these actions will reveal unreasonable actions.

Insurers engage in numerous actions to investigate claims.  All will initially require that an insured complete claim forms and certifications from doctors.  Once they obtain these forms and authorizations to obtain medical and financial records, they commence the claim investigation by requesting the claimant's medical information and records.  They will also typically contact employers to obtain employment information such as occupational duties, time of employment, hours worked, supervisors, etc.  Insurers may also engage in the following activities: background checks, medical examinations, medical and financial consultations, surveillance, telephonic or in-person interviews, workplace interviews, internet searches, among other things.  Very often, careful scrutiny of these actions will reveal unreasonable actions.

It is an acronym for Employee Retirement Income Security Act of 1974.  It is a federal statute that governs certain types of employee benefits, including life, health and disability policies issued to employees by their employers.  See 29 USC § 1001 et seq.).  Insurance policies written for members of employee groups are subject to the ERISA remedies to enforce such policies which typically preempt all state law claims.  This means that California’s remedies for breach of the implied convenant of good faith and fair dealing (e.g., consequential damages, future damages and punitive damages) do not apply.

Only a plan participant, beneficiary or fiduciary may sue.

No.  There is generally no right to a jury trial in ERISA actions.  Rather, the “trial” is generally a hearing before the court based on the Administrative Record and, in some cases, evidence the court allows outside of the Administrative Record.

ERISA provides an exclusive remedial scheme for insureds who have been denied benefits.  A plan participant may sue “to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B). In addition, they may be entitled to attorney fees and interest, but these are discretionary.  29 USC § 1132(g).  There is a presumption in favor of a fee award to successful ERISA plaintiffs “unless special circumstances would render such an award unjust.”  McElwaine v. US West, Inc., 176 F.3d 1167, 1172 (9th Cir. 1999).

Yes. A suit for breach of fiduciary duty is authorized: “Any person who is a fiduciary ... who breaches any of the responsibilities, obligations, or duties imposed upon fiduciaries by this subchapter shall be personally liable to make good to such plan any losses to the plan resulting from each such breach, and to restore to such plan any profits of such fiduciary ….” 29 USC § 1132(a)(2).  Damages are however limited to damages suffered by plan and the action must be maintained for damages caused to the plan itself, rather than to individual participants.  The fiduciary is liable only for restitution (to make up any losses suffered by the plan, and to restore to the plan any ill-gotten profits obtained through use of plan assets) and “such other equitable or remedial relief as the court may deem appropriate.”  29 USC §§ 1109(a), 1132(a)(2).

A plan fiduciary is a person or entity who renders investment advice for a fee or other compensation or has any discretionary authority or discretionary responsibility in the administration of an ERISA plan.  See 29 USC § 1002 (21)(A).  An insurer is an ERISA fiduciary if it has discretionary authority in the control of plan assets.  In most cases, insurers who act as claims administrators are fiduciaries.

• Initial claims handling decisions must be completed within 90 days, or 45 days for disability claims.  29 CFR § 2560.503–1(f).
• If a claim is denied or adversely decided, the plan administrator must give the beneficiary written notice stating the specific reasons for the denial, and “written in a manner calculated to be understood” by the beneficiary.  It is improper for the administrator to add a new reason for denial in its final decision without allowing the claimant to present evidence.  See Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 872 (9th Cir. 2008).
• The plan must also afford a reasonable opportunity to any beneficiary whose claim has been denied for a “full and fair review by the appropriate named fiduciary.”  29 USC § 1133; 29 CFR § 2560.503–1(h).  This means that at least one appeal must be provided to plan participants and beneficiaries and 180 days must be provided within which to file the appeal.  The administrator must decide the appeal in 60 days, or 45 days for disability claims.  29 CFR § 2560.503–1(i).
• If an ERISA plan fails to establish or follow the above claims procedures, the claimant is deemed to have exhausted the administrative remedies available under the plan and may pursue the remedies available under ERISA § 502(a).  29 CFR § 2560.503–1(l); see Gatti v. Reliance Standard Life Ins. Co., 415 F.3d 978, 981, fn. 1 (9th Cir. 2005).

Yes.  A plan participant must pursue his ERISA appeal rights before filing suit.  This is known as the doctrine of exhaustion of administrative remedies.  29 USC § 1133.  This also applies to plans administered by insurance companies.  See 29 CFR § 2560.503–1(g)(2).  However, this defense is subject to waiver, estoppel, futility and similar equitable considerations.  Vaught v. Scottsdale Healthcare Corp. Health Plan, 546 F.3d 620, 627, fn. 2 (9th Cir. 2008).

The scope of judicial review depends on whether the plan confers discretion for determining eligibility on the claim administrator.  Metropolitan Life Ins. Co. v. Glenn, __ U.S. __, 128 S. Ct. 2343, 2348–2349 (2008).  Whether the plan confers such discretion is one of the most important determinations that can be made in these actions.  Federal courts must conduct a de novo review on any adverse decision of ERISA plan benefits, unless the plan “unambiguously” conferred discretionary authority on the plan administrator or fiduciary to make such decisions.  Such de novo review applies both to the administrator's interpretation of the plan's coverage and to factual determinations upon which the administrator denied the claim.  This means that the court must look at the information in the Administrative Record without giving any deference to the claims administrator’s decision.

On the other hand, if the abuse of discretion standard of review applies, the court must give some level of discretion to the claim administrator’s decision.  However, if the claims administrator has a conflict of interest, the court must decide to what extent its actions are consistent with the conflict of interest such that the discretion afforded should be reduced.  Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 971 (9th Cir. 2006) (en banc)  The conflict of interest does not make the administrator's denial of benefits subject to de novo review.  The abuse of discretion standard of review continues to apply, but the reviewing judge must take the conflict into account when determining whether the trustee, substantively or procedurally, abused its discretion.  Glenn, supra.

Yes. On de novo review, the court may consider evidence outside the administrative record, such as the deposition testimony. See Jebian v. Hewlett-Packard Co. Employee Benefits Organization, 349 F.3d 1098, 1110 (9th Cir. 2003).

• Procedural violations of ERISA “when a plan administrator's actions fall so far outside the strictures of ERISA that it cannot be said that the administrator exercised the discretion that ERISA and the ERISA plan grant.”  Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 971 (9th Cir. 2006) (en banc)
• Keeping the policy details secret from the employees, offering them no claims procedure, and not providing them in writing the relevant plan information.  Id.
• Employing game of “hiding the ball” against the claimant by failing to advise claimants of documents needed to obtain approval of claim, and failing to submit forms to claimant or his doctors that would have elicited the information needed. Boyd v. Aetna Life Ins. Co., 438 F.Supp. 2d 1134, 1153–1154 (C.D. Ca. 2006).
• Overstatement of and excessive reliance upon claimant’s activities in the surveillance videos; decision to conduct a paper review rather than an “in-person medical evaluation;” and insistence that claimant produce objective proof of his pain level.  Metropolitan Life Ins. Co. v. Glenn, __ U.S. __, 128 S. Ct. 2343, 2348 (2008); Montour v. Hartford Life & Accident, __ F.3d __, 2009 WL 2914516 (9th Cir. 2009).
• Encouraging participant to file for SSDI benefits and, when benefits are awarded by Social Security Administration, failure to deal with and distinguish the contrary disability decision. Montour v. Hartford Life & Accident, __ F.3d __, 2009 WL 2914516 (9th Cir. 2009)
• Failure to provide the claimant a description of any additional material or information “necessary” to “perfect the claim,” and to do so “in a manner calculated to be understood by the claimant.”  29 CFR § 2560.503–1(g); Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 870 (9th Cir. 2008).
• Failure to make “full and fair” assessment of claims and clearly communicate to claimants the “specific reasons” for benefit denials.  White v. Sun Life Assur. Co. of Canada, 488 F.3d 240, 246 (4th Cir. 2007).
• Erroneous interpretation of the terms of the ERISA plan.  Taft v. Equitable Life Assur. Soc., 9 F3d 1469, 1472 (9th Cir. 1993).
• Erroneous factual findings that constitute “clearly erroneous findings of fact” in making benefit determinations.  Id.
• Failure to obtain a physician's recommendation, reliance on medical reports that are not credible, and mischaracterization of its rationale for denying benefits. McCauley v. First Unum Life Ins. Co., 551 F3d 126, 132 (2d Cir. 2008).
• “Tainting” medical file reviewer in the medical review process by giving the reviewer inaccurate negative information regarding the claimant.  DeLisle v. Sun Life Assur. Co. of Canada, 558 F.3d 440, 445 (6th Cir. 2009).
• Failure to “consult with a health care professional who has appropriate training and experience in the field of medicine involved in the medical judgment” which is being rendered.  See 29 C.F.R. § 2560.503-1(h)(3), 3(iii).
• Taking new positions or adding new reasons for denying benefits in a final decision, thereby precluding the plan participant from responding to that rationale for denial at the administrative level.  Abatie v. Alta Health & Life Insurance Company, 458 F.3d 955, 969 (9th Cir.2006) (en banc).
• Failure to follow failure to comply with ERISA’s procedural requirements. Abatie v. Alta Health & Life Insurance Company, 458 F.3d 955, 969 (9th Cir.2006) (en banc).
• Rendering a decision without explanation, construes a provision of the plan in a way that conflicts with the plain language of the plan, or relies on clearly erroneous findings of fact.  Boyd v. Bell, 410 F.3d 1173, 1178 (9th Cir.2005); Eley v. Boeing Co., 945 F.2d 276, 279 (9th Cir. 1991)(“[A]n administrator also abuses its discretion if it relies on clearly erroneous findings of fact in making benefit determinations.”)
• Ignoring the plan language which requires a review of actual job duties and instead referencing occupational duties as they might be performed in the national economy.  See Lasser v. Reliance Standard Life Ins. Co., 344 F.3d 381, 385-86 (3d Cir. 2003)
• Emphasizing a report that favored a denial of benefits while deemphasizing other reports suggesting a contrary conclusion, and failure to provide its independent experts with all of the relevant evidence.  Metropolitan Life Ins. Co. v. Glenn, __ U.S. __, 128 S. Ct. 2343, 2348 (2008).
• Failure to provide participant with all bases for its denial and suggesting alternate reasons for denial after the fact. See 29 C.F.R. § 2560.503-1(g)(1)(i); Jebian v. Hewlett-Packard Co. Employee Benefits Organization, 349 F.3d 1098, 1104 (9th Cir. 2003); Rodden v. Jefferson Pilot Financial Ins. Co., 591 F. Supp. 2d 1113, 1126 (N.D. Cal. 2006).
• When denying a claim based on lack of objective evidence, not providing “a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary.”  29 C.F.R. § 2560.503(g)(iii); Booton v. Lockheed, 110 F.3d 1461, 1463 (9th Cir.1997)(“if the plan administrators believe that more information is needed to make a reasoned decision, they must ask for it.”); Boyd v. Aetna, 438 F. Supp. 2d 1134, 1154 (C.D. Cal. 2006).
• Failure to “[p]rovide claimants the opportunity to submit written comments, documents, records, and other information relating to the claim.”  29 C.F.R. § 2560.503-1(h)(2)(ii); Volynskaya v. Met Life, 2007 WL 3036110 (N.D.Cal. 2007).
• Insurer’s doctor not analyzing whether participant was disabled from performing her own occupation, as required by the plan, and instead only opining generally that participant could perform light or sedentary work. See Sabatino v. Liberty Life Assurance Co. of Boston, 286 F. Supp. 2d 1221, 1231 (N.D. Cal. 2003).
• Adding new terms to the Plan, particularly when those terms are both imprecise and impose a higher evidentiary burden on a claimant, requiring that disability be proved by “compelling objective” evidence.  See Saffle v. Sierra, 93 F.3d 600, 608 (9th Cir.1996) (“Imposition of conditions outside the plan amounts to arbitrary and capricious conduct.”) (quotation omitted); see also Saliamonas v. CNA, 127 F. Supp. 2d 997, 1000 (N.D. Ill. 2001)
• Construing the Plan's definition of total disability to exclude persons who could work a full-time, or forty hour work week, when there is evidence that a participant worked longer hours than a forty hour work week.  See Rosenthal v. The Long-Term Disability Plan of Epstein, Becker & Green, P.C., 1999 WL 1567863 (C.D. Cal. 1999); Garrison v. Aetna Life Ins. Co., 558 F. Supp. 2d 995 (C.D. Cal. 2008).
• Construing the Plan's definition of total disability to factor “accommodation” into the criteria for total disability.  Saffle v. Sierra Pacific Power Co. Bargaining Unit Long Term Disability Income Plan, 85 F.3d 455, 460 (9th Cir.1996); Garrison v. Aetna Life Ins. Co., 558 F. Supp. 2d 995, 1004 (C.D. Cal. 2008).

ERISA provides that all plan participants shall be entitled to:

• Receive Information about Your Plan and Benefits;

• Examine without charge at the plan administrator’s office and at other specified locations such as worksites and union halls all documents governing the plan, including insurance contracts, and collective bargaining agreements and copy of the latest annual report (Form 5500 Series) filed by the plan with the U.S Department of Labor.

• Obtain upon written request to the plan administrator copies of documents governing the operation of the plan including insurance contracts, amendments thereto, summary plan descriptions and collective bargaining agreements and copies of the latest annual report (Form 5500 Series).

• Receive summary of the plan’s annual financial report.  29 U.S.C. § 1024(b)(1)-(5).

With respect to adverse claims decisions, ERISA provides that all plan participants shall be entitled to:

• Receive written or electronic notification of any adverse benefit determination, including: the specific reason or reasons for the adverse determination; Reference to the specific plan provisions on which the determination is based; A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; A description of the plan's review procedures and the time limits applicable to such procedures, including a statement of the claimant's right to bring a civil action under section 502(a) of the ERISA Act following an adverse benefit determination on review. 29 C.F.R. § 2560.503-1(j); 29 C.F.R. § 2560.503-1(g)(1)(i); 29 U.S.C. § 1133.

• Receive all documents upon which the claims administrator 1) relied in making its adverse claims decision, or 2) was submitted, considered, or generated in the course of making the benefit determination, without regard to whether such document, record, or other information was relied upon in making the benefit determination.  These documents include the Administrative Record regarding the claim, all surveillance reports and videos, investigative reports, emails, medical reports, activity logs, telephone logs, expert and consultation reports, vocational reports, correspondence to or from physicians, attorneys, accountants or other service providers employed or retained to render advice on behalf of the plan or its fiduciaries. 29 C.F.R. § 2560.503-1(m)(8)

• Receive any internal rule, guideline, protocol, or other similar criterion that was relied upon in making the adverse claims decision. 29 C.F.R. § 2560.503-1(m)(8)

• Receive a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary. 29 C.F.R. § 2560.503-1(h)(2)(iii)

“Bad faith” signifies a tortious breach of the covenant of good faith and fair dealing that is implied by law in every contract.  Breach of this implied covenant involves something beyond breach of the specific contractual duties or mistaken judgment.  To establish a bad faith claim in first party cases (such as those involving life, health, disability, property and casualty, auto liability, and homeowner’s insurance), an insurer’s delay or withholding of benefits under the policy was unreasonable or without proper cause.

The most common causes of action against insurers in the non-ERISA context are breach of contract and bad faith.  The breach of contract claim allows an insured to recover policy benefits owed under the insurance policy plus applicable interest at the rate of 10% on delayed disability payments in California.

The bad faith claim potentially allows an insured to recover future damages owed under the policy (in disability cases), attorneys’ fees, consequential damages (economic damages caused by the bad faith conduct, such as medical bills as a result of emotional distress, interest paid on borrowed funds, loss on investment where there was a forced sale caused by insurer’s denial, lost investment opportunities because personal funds had to be used to pay expenses), emotional distress and punitive damages.  In addition, alternative claims are fraudulent and negligent misrepresentation, intentional and negligent infliction of emotional distress, invasion of privacy, and intentional interference with economic advantage.

In the context of a third party claim, it is possible to assign a bad faith claim under certain circumstances.  This is most typically done in connection with a failure by an insurer to defend and indemnify an insured for third party liability.  However, because purely personal tort claims are not assignable, the insured's claims for emotional distress damages and punitive damages are not assignable. Essex Ins. Co. v. Five Star Dye House, Inc., 38 Cal. 4th 1252, 1263 (2006).  An assignment allows the third party claimant to obtain more than the policy limits from the insurer.  Without the assignment, a third-party can only sue the insurer for the amount of the judgment as third party beneficiary of those liability policies.  Ins. Code § 11580(a).

A concept known as “privity of contract” is required.  This means that an insured under an insurance policy typically may sue for bad faith if the insured is entitled to benefits under a policy and if those benefits are wrongfully withheld.  This includes the contracting parties (persons named as insureds) as well as others entitled to benefits as “additional insureds” or as express beneficiaries under the policy.  In insurance parlance, this means that the “named insured” and any “additional insureds” may sue.  For example, an auto liability insurance policy covering a vehicle may extend coverage to permissive users as additional insureds.

Furthermore, a designated beneficiary of an insurance contract has standing to sue for both the policy benefits and extra-contractual damages if the benefits are wrongfully withheld.  An express beneficiary need not be specifically named.  An insured may have standing to sue if a member of a class for whose benefit the contract was made.  Someone not a party to the contract has no standing to sue.  Thus, in the disability insurance context, even though a spouse may have suffered emotional distress, if she is not an insured, she cannot sue the insurer for bad faith.  However, if an insurer breaches an independent duty it owes to a spouse, it is possible for that spouse to sue for damages (e.g., intentional infliction of emotional distress).

The same privity of contract requirement applies in determining who may be sued.  Generally, only the insurer(s) on the risk as the party to the contract can be sued.  This included “primary,” “excess” and “umbrella” insurers.  Moreover, it is possible to sue an insurer's alter ego or joint venturer, typically a parent company.  It is also possible under certain circumstances to sue a “managing general agent” who is appointed by the insurer to manage all or part of its insurance business.

To establish a bad faith claim in first party cases (such as those involving life, health, disability, property and casualty, auto liability, and homeowner’s insurance), an insurer’s delay or withholding of benefits under the policy was unreasonable or without proper cause.  The courts have determined that many types of conduct may constitute insurance bad faith:

• Failure to accept a insured’s reasonable settlement offer.  Rappaport-Scott v. Interinsurance Exch. of Auto. Club, 146 Cal. App. 4th 831, 837–838  (2007).

• Biased investigation or factual determination.
  • Misrepresenting the nature of the investigatory proceedings and the insurer's employees lied during the depositions or to the insured. See Tomaselli v. Transamerica Ins. Co., 25 Cal. App. 4th 1269, 1281 (1994).Demanding an Examination Under Oath (“EUO”) where not needed or dissuading the insureds from having their attorney present, misleading them as to its purpose and intimidating them during the EUO.  Tomaselli v. Transamerica Ins. Co., 25 Cal. App. 4th 1269, 1277, 1281 (1994).
  • Focusing on facts justifying denial, ignoring evidence that supported the claim, and failure to utilize objective standards in making its claims decisions. Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 724 (2007); Hughes v. Blue Cross of No. Calif., 215 Cal. App. 3d 832, 845–846 (1989)(Denial of health insurance claim on the ground hospitalization was not “medically necessary.”  Insurer relied exclusively on a consultant who had not investigated the claim thoroughly and ignored opinions given by other doctors.  Insurer’s standard of “medical necessity” held “sufficiently at variance with community medical standards to constitute bad faith.”)
  • Retention of biased doctor to conduct an independent medical exam and to prepare a report that falsely minimized insured's injuries.  Brehm v. 21st Century Ins. Co., 166 Cal. App. 4th 1225, 1239–1240 (2008).

• Failure to conduct a thorough investigation.  Guebara v. Allstate Ins. Co., 237 F.3d 987, 996 (9th Cir. 2001).
  • Failure to interview necessary witnesses.  See Downey Sav. & Loan Ass'n v. Ohio Cas. Ins. Co., 189 Cal. App. 3d 1072, 1084 (1987).
  • Failure to investigate beyond facts and coverage theories asserted by insured.  Jordan v. Allstate Ins. Co., 148 Cal. App. 4th 1062, 1072 (2007) (Insurer must “fully inquire into possible bases that might support the insured's claim.”)
  • Failure to consult with medical experts in appropriate cases.  See Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 724 (2007); Mariscal v. Old Republic Life Ins. Co., 42 Cal. App. 4th 1617, 1624–1625 (1996)(Failure to consult with insurer's own doctor or treating physician).

• Unduly restrictive interpretation of claim form.  Delgado v. Heritage Life Ins. Co., 157 Cal. App. 3d 262, 277 (1984).

• Denial based on improper standards.  Moore v. American United Life Ins. Co., 150 Cal. App. 3d 610, 621 (1984)(Insurer's denial of a claim based on wrong legal standard may subject it to extra-contractual liability); Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1162–1163 (9th Cir. 2001).

• Unreasonable delay in payment of claim.  Brehm v. 21st Century Ins. Co., 166 Cal. App. 4th 1225, 1237 (2008)(“A delay in payment of benefits due under an insurance policy gives rise to tort liability only if the insured can establish the delay was unreasonable”).

• Deceptive, abusive or coercive practices to avoid payment of claim:
  • Misrepresenting coverage.  Delos v. Farmers Group, Inc., 93 Cal. App. 3d 642, 664 (1979).  Note: the Insurance Commissioner's Fair Claims Regulations require, “Every insurer shall disclose to a first party claimant all benefits, coverages, time limits or other provisions that may apply to the claim.”  10 Cal.Code Regs. § 2695.4(a).
  • Intimidating prospective witnesses.  Rios v. Allstate Ins. Co., 68 Cal. App. 3d 811, 817 (1977).
  • Threats to close file without payment to pressure settlement.  Mustachio v. Ohio Farmers Ins. Co., 44 Cal. App. 3d 358, 362(1975).
  • Groundless accusations against insured to pressure settlement.  See Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 575 (1973).
  • Arbitrary termination of benefits.  See Sprague v. Equifax, Inc., supra, 166 CA3d 1012, 1020 (1985)(Termination of disability benefits without proper cause supports a finding of bad faith.)

• Inadequate communication with insured.  Delgado v. Heritage Life Ins. Co., 157 Cal. App. 3d 262, 278 (1984).

• Failure to notify insured of certain policy rights.  Davis v. Blue Cross of No. Calif., 25 Cal. 3d 418, 427–428 (1979).

• Unreasonably incorrect accountings.  Johnson v. Mutual Benefit Life Ins. Co., 847 F.2d 600, 603 (9th Cir. 1988)

• Unreasonable Litigation Conduct.  See White v. Western Title Ins. Co., 40 Cal. 3d 870, 886 (1985).

California enacted what is known as the Unfair Insurance Practices Act (“UIPA”). See Ins. Code § 790 et seq.  In 1972, California enacted the Unfair Claims Settlement Practices Act (“UCPA”) which is part of the UIPA and is based on a Model Act adopted by the National Association of Insurance Commissioners.  See Ins. Code § 790.03(h). Section 790.02 prohibits any person from engaging in “an unfair or deceptive act or practice in the business of insurance” as defined in Ins. Code section 790.03.  The UCPA prohibits the following enumerated “unfair claims settlement practices” by insurers, if knowingly committed or performed with such frequency as to indicate a general business practice:

“(1) Misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue.

(2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.

(3) Failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.

(4) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured.

(5) Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.

(6) Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by the insureds, when the insureds have made claims for amounts reasonably similar to the amounts ultimately recovered.

(7) Attempting to settle a claim by an insured for less than the amount to which a reasonable person would have believed he or she was entitled by reference to written or printed advertising material accompanying or made a part of an application.

(8) Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of, the insured, his or her representative, agent, or broker.

(9) Failing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment has been made.

(10) Making known to insureds or claimants a practice of the insurer of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration.

(11) Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either, to submit a preliminary claim report, and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contained substantially the same information.

(12) Failing to settle claims promptly, where liability has become apparent, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.

(13) Failing to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromise settlement.

(14) Directly advising a claimant not to obtain the services of an attorney.

(15) Misleading a claimant as to the applicable statute of limitations.

(16) Delaying the payment or provision of hospital, medical, or surgical benefits for services provided with respect to ... AIDS-related complex for more than 60 days after the insurer has received a claim for those benefits, where the delay in claim payment is for the purpose of investigating whether the condition preexisted the coverage.”  Ins. Code § 790.03(h).

No.  However, violations of the UIPA may constitute evidence of an insurer's bad faith.  See Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 916 (2000); Eddy v. Sharp, 199 Cal. App. 3d 858, 866(1988).