In Rochow v. Life Ins. Co. of N. Am., 2015 U.S. App. LEXIS 3532 (6th Cir. 2015), the Sixth Circuit Court of Appeals (the Court) en banc overturned a previous decision of a 3 judge panel that had allowed plaintiff’s claim for the disgorgement of profits earned by the disability insurer.
Background: Under the ERISA statute and regulations the only traditional remedy for a claimant was the recovery of the monthly LTD benefits that were wrongfully denied. This remedial scheme has one very large problem-there is no incentive for the LTD insurance company to pay the benefits. In other words, if the LTD insurance company denies a claim for benefits, it gets to keep and use the money during the time period it takes for the claimant to file his or her claim, administrative appeal and lawsuit. During that time the insurance company can invest this money and earn a significant return. At the same time, the claimant is deprived of the use of the money. So, at the end of the day, if a claimant wins their ERISA suit for LTD benefits, the LTD insurer only pays the past due monthly benefits and gets to keep the return on the investment. In Rochow’s case the Life Insurance Company of North America was eventually ordered to pay about $700,000 in disability benefits, but it got to keep almost 3 million dollars it had earned on the money while the claim and lawsuit was pending.
In a splintered decision the majority of the 6th Circuit determined that the plaintiff was not entitled to have the LTD insurance company disgorge the profits it had earned on Mr. Rochow’s monthly LTD benefits.
So for a profit driven industry let me ask, where is the incentive for the disability insurance company to pay claims? I can fairly evaluate and pay the claimant his or her monthly benefit. Or I can deny the claim, make them sue me and even if I eventually lose the case and have to pay the claim, I get to keep the millions of dollars I earned while the process dragged out? Hmmm. Doesn’t seem like it would be a tough decision after all. What a great system! (for the insurance industry)