Herb Denenberg Column for January 16, 2003


Here's more on the common practice of some insurance companies that deny claims arbitrarily to save money and boost their profits. The practice has always been all too common (as with HMOs, for example), as we've pointed out, but now it is reaching the point where the public confidence in the insurance industry may be destroyed. That would have grave implications for the public, the industry, and our economy.


The latest example involves the UnumProvident Corporation, which dominates the disability insurance market. Consider this lead from the October 6, 2002 edition of the San Francisco Chronicle: "The nation's largest disability insurance company has been accused of systematically denying legitimate claims from seriously ill customers, a corporate strategy allegedly concocted for one purpose: boosting profits." This practice has sometimes been called nullification of the insurance policy, as that is exactly what it does.


Here's the opening paragraph of a Dateline NBC television segment of October 16, 2002: "Insurance - we buy it for peace of mind to cover our homes, our health, our lives. Millions of Americans have disability insurance to help replace lost income in case of serious illness or injury. If you can't work, those benefits may be crucial for you and your family. But what if, suddenly, unexpectedly, your benefits were cut off? That's what happened to the people in this story. We found some startling charges against the biggest disability provider in the country."


CBS's 60 Minutes asked this key question in its November 17, 2002 report: "If you're one of the 50 million Americans who has money deducted from his or her paycheck to pay for disability insurance, or if you've purchased a disability policy on your own, you may think you're covered if you're injured or too sick to work. But don't be to sure."


The detailed case against UnumProvident has been put together in a special issue of The Insurance Forum (dated February 2003), a highly regarded newsletter, which reaches this conclusion: "UnumProvident may not be alone in the use of the claims practices described in this article. Some insurers that may have used acceptable practices have transferred blocks of unprofitable disability insurance to other insurers who may then use unacceptable practices in administering those blocks of business. While the widespread use of unacceptable claims practices may increase profits or reduce losses in the short run, it will be disastrous in the long run because it will destroy public confidence not only in disability insurance but in other lines of insurance."


This UnumProvident case study has many important lessons for policyholders, insurers and the makers of public policy. Here are some conclusions I'd draw going beyond those of The Insurance Forum:


(1) If insurance commissioners were doing their job, improper claims practices could be nipped in the bud, instead of being allowed to grow like a cancer that threatens public confidence in the insurance industry. Commissioners have ample authority to act on individual complaints as well as to investigate and prosecute companies with systemically bad claims practices.


(2) This case study shows the importance of preserving the rights of policyholders to sue. It tells policyholders to go to war against the current campaigns to restrict and destroy that right to sue. The UnumProvident scandal was brought to light by litigation and by plaintiff's lawyers doing their work. Without litigation, these problems would be far worse than it is. Historically, insurance commissioners have been lapdogs for the industry, and have not protected the public from improper insurance practices, most notably improper claims practices. So beware of all the current attempts to restrict or destroy the right to litigation, now most notably appearing in the medical malpractice area, but a constant threat to the rights of consumers because powerful interests are always putting forward legislative proposals to restrict the right to litigate in many different areas.


(3) The insurance industry should start insisting on tougher insurance regulation for its own good. Without tough regulation of claims and other insurance company activities, some bad apples can succeed in destroying public confidence in the entire industry, which will go along way towards destroying or irreparably damaging the insurance industry itself. Right now the whole disability insurance field has a dark shadow that will spread to other lines of coverage.


(4) The Congress of the United States has sent a gilt-edged invitation to insurance companies to fraudulently deny claims by letting stand, without amendment, the Employee Retirement Income Security Act of 1974. It has been interpreted by the courts to make it extremely difficult or impossible for policyholders (covered by employee benefit plans) to obtain a reasonable remedy when their claims have been denied by an insurer acting in bad faith or even fraudulently. So until Congress amends this law, it will encourage the kind of contractual nullification that should be punished most severely.

Herb Denenberg is a former Pennsylvania Insurance Commissioner and consumer advocate.

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