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US Senate Examines Concerns with Disability Insurance

Author: Disability Insurance

Published: 2010-09-29

Synopsis and Key Points:

Courts have transformed ERISA into a shield that protects insurance companies from having to face the consequences of unprincipled benefit denials.

Main Digest

The U.S. Senate's Finance Committee dug into the business of long-term disability insurance with a hearing, at which an industry representative defended the current system and critics claimed it isn't working.

The Employee Retirement Income Security Act regulates this area, and Mark D. DeBofsky, an attorney and law professor at John Marshall Law School, testified at the hearing that ERISA has betrayed its original goals. "Contrary to the clearly expressed legislative intent, the courts have transformed ERISA into a shield that protects insurance companies from having to face the consequences of unprincipled benefit denials and other breaches of fiduciary duty," DeBofsky told the committee. Court practices in disability disputes give deference to insurers, he said.

"The current framework of federal and state consumer protections affords the all-important balance of providing a reasonable cost of coverage and appropriate handling of claims," said Paul Graham, senior vice president for insurance regulation and chief actuary at the American Council of Life Insurers. In Graham's testimony, he pointed out that a recent industry study indicated 78.8% of submitted claims were approved. ACLI also explained that less than 1% of claims are appealed to the federal courts.

The committee's chairman, Sen. Max Baucus, D-Mont., wasn't satisfied with the industry position. "This has been kind of a disturbing hearing, frankly," said Baucus. "There's clearly a huge problem here. ... We've got a lot of work ahead of us." He said he would be consulting with the health committee on the topic. "This is not good. And I just very much hope that we could find a better solution."

DeBofsky asked the committee to reform the system, allowing jury trials with witnesses and evidence and the potential for damages in cases of long-withheld benefits. Allowing such a system would not produce a "legitimate fear of markedly increased costs," according to his testimony. "The only available actuarial study on this issue reveals that potential cost increases resulting from the elimination of insurer discretion would lead to at most a modest 4% rise in premiums." And he added that "such changes can help rebuild public confidence in insurance companies that have, for too long, been able to hide behind legislative shields and judicial protections that no other industry receives."

Answering arguments that the companies have too much power, and an independent review should be installed, Graham said these claims examinations require layers of expertise provided by experienced staff looking at all aspects of a claim. Insurers have that expertise at their disposal, he said, though he granted it is difficult to ensure a bias-free approach. "No matter how it's structured, it's impossible to remove all bias from the system," he said.

At the hearing, Senior U.S. District Court Judge William M. Acker Jr,. of the Northern District of Alabama, talked about the confusion under ERISA and the difficulty of working with these cases. "ERISA jurisprudence will stay as messed up as it is unless Congress reworks it," he argued in his testimony. "The courts have not rescued ERISA and cannot be expected to do so."

ACLI officials are unsure what will come of this examination of disability insurance. "We definitely are interested to see where the committee is going to go as a result of the hearing," said Alane Dent, a vice president for federal relations at ACLI, who pointed out the challenge of digging into the massive ERISA to change its disability provisions. "Looking at ERISA is a much bigger proposition," she said.

"Any attempts to change ERISA really need to be done with a broader understanding of the potential impact it would have on benefit plans at large."

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