Disability – How Disability Agents Can Avoid Litigation

by Stacy Monahan Tucker

As an agent or broker, what are your duties to your clients and the insurance companies in a disability claim? How can you navigate those duties while advising your clients in the claim process and protecting yourself from litigation? Let’s start with the Employee Retirement Income Security Act of 1974 (ERISA).

This federal statute governs benefits provided to employees through their employers. There are exceptions; it does not cover employees of the state, which includes state universities, etc. ERISA permits that all litigation for benefits provided under the statute be conducted in federal court. ERISA imposes strict limitations on discovery conducted for such claims, often limiting discovery to the claim administrative record.

In ERISA litigation, an employee is generally suing the employer’s insurance plan and/or the claims administrator, which is the insurance company providing the policy and administering the insurance.

Why Does This Matter To An Agent Or Broker?

Under ERISA, an employee is suing for benefits under a policy sold to its employer. The policy was not sold directly to the employee. It is, therefore, highly unlikely that an employee will ever have a basis to involve the insurance agent in their disability litigation. If you sell a group disability policy to an employer, there is almost no chance that you will be involved in subsequent litigation from an employee. You have no duty to the employee, and made no promises or representations to the employee. If an employer ever chose to sue based on claimed problems with the coverage it received in its group disability policy, this would not be covered under ERISA and the insurance agent or broker could become involved in the litigation.

When an agent or broker sells a policy to an individual, that policy does not fall under ERISA. The following scenarios apply to non-ERISA individual disability insurance policyholders:

An agent or broker is usually included in litigation under the following circumstances:  

• When the agent/broker made representations to the insured that the insured contends were inaccurate or misleading: Either the insured or the insurer could include the agent/broker as a party in litigation based on allegedly false representations made to the insured about their coverage. An insurer may also cross-complain against an agent/broker if an insured seeks to hold an insurer liable for failing to provide coverage promised by the agent/broker that is not available in the policy sold to them.

• When the agent/broker failed to include correct information on an insurance application, opening the door to rescission or reformation: The policy is issued based on the information provided to the agent/broker and included in the application. If the application is incorrect, the entire policy may be void. If the insured intentionally gave you wrong information, it could be grounds for rescission. If the insured claims that they gave you correct information and you incorrectly recorded it, it could be grounds for reformation, and/or suit against you.

• When the agent/broker made suggestions to the insured that the insurer contends resulted in a fraudulent insurance claim: If an agent/broker suggests to an insured that they should file a claim that the agent knows or suspects is false, or that the insured should “find” evidence to support such a claim, the agent/broker will not only become a material witness in the disability litigation, but could also be liable for fraud along with the insured.

• When the plaintiff wants to keep the case in state court: Plaintiffs often prefer state court, where judges are reputed to be more plaintiff-friendly and less sophisticated. Insurers generally prefer federal court, where the judges are reputed to be more sophisticated and friendlier to businesses. If an insurance company is based in a different state than the plaintiff, (as is often the case, under federal law) the insurance company can seek to move the litigation to federal court under a doctrine called “diversity jurisdiction.” Diversity jurisdiction requires that none of the defendants are from the same state as the insured plaintiff. If the insurance agent or broker is from the same state as the insured, as often occurs, their counsel may seek to defeat diversity by finding another defendant in the same state as the insured – usually the agent. While this practice is known as involving a sham defendant, it is difficult to prove. Often an agent/broker is kept in litigation for a year and a day, after which the case can no longer be removed to federal court. Then the agent/broker is dismissed from the case by the insured.

• When the parties seek documents in the broker/agent file or testimony from the agent/broker: Agents and brokers are not always brought into litigation via lawsuit. They may be called as a witness to testify as to what the insured told them about their claim or their application, or what the agent/broker told the insured about their coverage. They may also have their documents subpoenaed in addition to, or in lieu of, providing live testimony. Insurance agencies and brokerages often involve attorneys when subpoenaed, to ensure that they produce only the documents they are required to produce, and not additional documents.

How to Protect Yourself from Litigation? 

Document, document, and document the following:

• Make sure the application is signed.

• Make notes of the information provided when obtaining the application, so you can confirm what you were told.

• Make notes of each interaction with your client, any time they call with questions, any claims they make, any meetings, and what each of you said.

• Consider sending follow-up letters after meetings or important or contentious phone calls to document the interaction.

• Preserve documents, including emails.

• If you have any uncertainty about coverage in a specific instance, check with the insurer and document that fact.

• If you provide any advice to your client about a claim, consider putting it in a letter.

Understand Your Legal Duties 

Are you an agent or an independent broker? Your legal duties as an agent/broker differ depending on the state or states in which you sell policies, as well as whether you are an independent broker or an agent selling policies for only one insurance company. In California, if you are an agent selling only the policies of one insurance company, you are legally the agent of the insurance company and you owe a contractual duty to them. If you are an independent broker, you owe your duty to your client, not the insurance company.

The term “fiduciary duty” is often used to describe your duties, but this is a legal term. A fiduciary duty is higher than a common law contractual duty and means that you have a duty to put your client first, including a duty of loyalty to that client and a duty of care to handle that client’s matter with the same responsibility you would take for your own. As an agent or broker, you owe a common law duty to either the insurance company or the insured to meet the terms of your contract, but that does not rise to the level of a fiduciary duty. Most states, including California, have held that you do not have fiduciary duties as an insurance agent or broker absent a special relationship with your client, but some states, such as New York, have held that a fiduciary duty is presumed to exist.

A special relationship with an insured is created when the broker serves not just as a procurer of insurance, but also as an advisor over a long period and has held themselves out as a trusted partner, especially if the broker is compensated for that advice above and beyond the premiums paid for the policy. A special relationship can be created by misrepresenting facts about coverage or by assuming additional duties beyond the provision of a policy. In California, a special relationship rising to the level of a fiduciary duty also exists if the agent or broker collects premiums or premium refunds for the insured.

Understand Your Client’s Legal Duties in Making a Claim

When making a claim, an insured has a duty to provide documents as required in the insurance policy within the timeframes specified. If an insured refuses to do so or is excessively tardy in providing the proof requested, the claim can be denied. This is also true during continuing investigation of an approved claim.

Under most policies, an insured has a duty to be under the appropriate and continuing care of a physician. That means that the insured must obtain regular medical care for the condition at issue, not a letter of disability with no treatment thereafter.

An insured has a duty per the language of the insurance policy to submit to an independent medical exam. Depending on the medical issues involved in the claim, this can involve a psychiatric evaluation, a functional capacity evaluation, lab tests or radiology scans, etc. If the contract requires it, the insured has a duty to apply for Social Security disability benefits.

An insured has a duty to provide truthful information and to disclose all relevant information. This includes information about offsets to the benefits provided under the policy. Offsets can include workers compensation income, Social Security income, state disability payments, retirement income, part time employment or self employment income, settlement agreement payment related to employment, and severance payment.

The insured has a duty to disclose entering into a severance agreement, entering into litigation with their employer, enrolling in school, obtaining new certification for employment, bankruptcy filings, etc.

The insured has a duty to be truthful in the information provided to physicians, if those physician records are then provided as evidence in a claim.

In an ERISA claim, an insured must appeal a denial or termination of a claim before filing suit. This is not the case in non-ERISA claims; the insured may file suit without appeal.

How to Set Expectations for an Insured During a Claim or Litigation

Remember, if you are an independent broker, your duty is to the insured. If you are an agent of an insurance company, your duty is to the insurance company. And if you are an agent of an insurance company, your statements may be imputed to the insurance company.

If you are a broker and your insured asks to discuss the claim process with you, make sure that they understand the following:

• They have a duty to provide medical documents as often as requested, even long term disability claims are consistently reviewed to determine if the condition has changed.

• They have a duty to submit to medical exams.

• They should not dictate notes to their physicians or request specific diagnoses.

• They may be under surveillance.

• Their online activity may be reviewed.

• New work-related licenses or certificates may be discovered.

If you are a broker and your insured asks to discuss the litigation process with you, make sure that they understand the following:

• You are not an attorney and they should obtain legal counsel.

• They may still be under surveillance.

• Their online activity will still be reviewed.

• New work-related licenses or certificates may be discovered.

• A failure to be awarded Social Security disability insurance benefits makes it extremely unlikely that they will prevail in litigation, but an award of such benefits does not automatically mean that they will win in court, as the test for disability under Social Security is different and involves a lower bar than those laid out by private insurance policies.

• Prior positions taken in other litigations or bankruptcy may bar their suit against their insurer.

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Stacy Monahan Tucker is a partner with Ropers Majeski Kohn & Bentley. For more information, call 650-364-8200, e-mail: stacy.tucker@rmkb.com, or visit www.rmkb.com.