Case Closed: Overview of Life, Disability, and Long-Term Care Insurance Litigation

Life Insurance – Cost of Insurance Increases

In a split decision, the Tenth Circuit Court of Appeals recently affirmed summary judgment in PHT Holding I LLC v. Security Life of Denver Insurance Co., rejecting the plaintiff’s claim that the defendant-insurer breached the nonparticipation provisions of universal life policies by increasing cost of insurance (COI) rates to recoup losses.

The plaintiff initially pursued three breach theories, arguing that the defendant: (1) considered factors outside the policy terms when raising COI rates; (2) increased COI rates to recover past losses, violating nonparticipation provisions that excluded policyholders from sharing in profits; and (3) raised COI rates nonuniformly among policyholders. The district court granted summary judgment on the first two theories, finding that the COI provisions granted the defendant substantial discretion in setting COI rates and that nonparticipation provisions addressed only sharing in profits, not COI rates. The parties reached a settlement with respect to the third theory.

The plaintiff appealed only the second theory regarding nonparticipation. The Tenth Circuit ruled that nonparticipation did not apply to COI rates and thus did not restrict the factors the insurer could consider when setting COI rates. The court emphasized that whether an insurer’s losses are permitted to affect COI depends on how much discretion the policy provides for setting the rates, not whether the policy is participating or nonparticipating. As the plaintiff did not challenge the district court’s finding that the COI provisions allowed the insurer to consider past losses, the court affirmed summary judgment for the defendant.

 Life Insurance – ERISA Preemption

In Figari v. United Parcel Service Inc., the U.S. District Court for the Southern District of Florida granted the employer’s motion to dismiss, finding that the plaintiffs’ state law contract and tort claims were preempted by ERISA.

The plaintiffs were the beneficiaries of a former employee who had participated in his employer’s ERISA-covered benefits plan, which provided basic life insurance, along with supplemental insurance that he purchased through the plan. Upon his leaving the company, the former employee’s plan was terminated, and thereafter the former employee died. The plaintiffs then filed a complaint in state court against the employer and life insurer, asserting claims for negligence, breach of contract, and breach of fiduciary duty and alleging that the employer was required to have notified them of their interest in the former employee’s life insurance and to have continued the policies after his departure. The defendants removed the case to federal court, asserting that these state law claims were preempted by ERISA.

The plaintiffs argued that the plan fell within ERISA’s safe harbor provisions — which exempt certain group insurance programs from ERISA’s regulatory requirements — due to the supplemental insurance being “separate” from the basic insurance the employee received under the plan. The court disagreed, ruling that the supplemental insurance was “part and parcel with the whole insurance plan.” The court reasoned that the employer subsidized the purchase of insurance by paying the full cost of the basic life insurance and endorsed the plan by purchasing the basic policy and serving as plan administrator. Under such circumstances, the plan was subject to ERISA even though the employee paid all premiums that went beyond the basic life insurance coverage.

Ultimately, the court found that ERISA defensively preempted the plaintiffs’ claims, as they were based on the failure to pay benefits according to the terms of an ERISA plan. The court dismissed all of the state law claims, noting that the case should have been brought under ERISA and that the plaintiffs had not sought leave to amend.

Disability Insurance – Return to Part-Time Work

In Raymond v. Unum Group, the Fifth Circuit Court of Appeals affirmed the district court’s denial of the policyholder’s motion for summary judgment and sua sponte granted summary judgment in favor of the insurer in a disability insurance dispute.

The policyholder, a pharmacist, purchased disability insurance and, eight years later, was diagnosed with multiple sclerosis. She applied for benefits under her policy, which were approved, and the insurer began paying her monthly disability benefits and social insurance supplemental income. After the policyholder returned to work as a “pharmacy consultant” and “on-call floating pharmacist” on a part-time basis, the insurer informed her that benefits would continue if she was not working in her “regular occupation” and was working in a “limited capacity.” However, she later took a new position as a pharmacist with increased hours, duties, and pay. Upon investigation, the insurer discovered that the policyholder had underreported her hours and income.

The insurer terminated the disability benefits and sought repayment of more than $200,000 in overpaid benefits. The policyholder sued, claiming she remained eligible for total disability benefits. The insurer counterclaimed for the overpaid amounts. The district court granted summary judgment to the insurer, dismissing the policyholder’s claims but allowing the insurer’s counterclaim to proceed.

On appeal, the policyholder argued that the district court misinterpreted the definition of total disability. The court disagreed, finding that the policyholder, despite her reduced hours and inability to work full 12-hour shifts, was still able to perform the substantial and material duties of a pharmacist in her new role. The Fifth Circuit affirmed the district court’s decision, agreeing that the insurer properly terminated benefits and that further discovery would not alter the outcome.

Disability Insurance – Interplay of Physical and Mental Health Policy Provisions

In McEachin v. Reliance Standard Life Insurance Co., the Sixth Circuit Court of Appeals addressed “the interplay of the physical and mental-health components” of an ERISA-governed long-term disability insurance policy.

The insurer terminated the participant’s total disability benefits in April 2021 after an independent review indicated significant improvement in her physical health, allowing her to perform her job. While the insurer acknowledged ongoing psychiatric issues that prevented her from working full time, it applied the policy’s 24-month limitation on benefits for mental disorders that contributed to the total disability.

The Sixth Circuit affirmed the district court’s decision, agreeing that the participant was no longer totally disabled due to her improved physical condition, and could work full time with appropriate limitations. The court also applied its 2016 decision in Okuno v. Reliance Standard Life Insurance Co., which held that a mental health disability does not “cause or contribute to” a total disability if physical disabilities alone are sufficient. The record indicated that the participant’s physical condition alone prevented her from working until April 2021, making the 24-month limitation “irrelevant” until that point.

Finally, although the participant did not raise the argument below, the Sixth Circuit remanded the case to the district court to consider whether medical evidence post-dating the April 2021 denial could “toll the 24-month mental disability clock” and extend her eligibility for benefits.

Long-Term Care Insurance – Premium Rate Increases

The Eighth Circuit Court of Appeals affirmed a district court's decision to grant an insurer’s motion to dismiss for failure to state a claim.

The plaintiffs purchased long-term care insurance policies with an inflation protection rider, which stated that premiums would not be expected to increase as a result of inflation-based benefit amount increases. However, after 10 years, the insurer raised annual premiums significantly.

The plaintiffs filed a putative class action, claiming fraud and a breach of the implied covenant of good faith and fair dealing. The insurer filed a motion to dismiss, which was later granted.

On appeal, the court rejected the plaintiffs’ fraud claim based on the insurer’s statement that premium increases would not correspond to benefit increases, noting that the insurer did not represent that it would never raise premiums, and the rider allowed for premium adjustments on a class basis.

Additionally, the court found no breach of the implied covenant of good faith and fair dealing because the rider expressly permitted premium increases. Accordingly, the court affirmed the dismissal of the case.