Vol. 28, No. 1 #1 (February 2005). Bad Faith in Wyoming Long-Term Disability Disputes.

• Author: By Kathryn J. Hensley

Wyoming Bar Journal

2005.

Vol. 28, No. 1 #1 (February 2005).

Bad Faith in Wyoming Long-Term Disability Disputes

WYOMING LAWYERFebruary 2005/Vol. XXVIII, No. 1Bad Faith in Wyoming Long-Term Disability DisputesBy Kathryn J. Hensley

Disability is generally defined as the "inability to pursue an occupation because of a physical or mental impairment."(fni) Long-term disability insurance policies are intended to provide income benefits in the event that a person becomes disabled. Typically, such policies include two separate definitions of disability. During the first 24-months of disability, policies most often determine eligibility for benefits using the "own occupation" definition, meaning that if a person cannot perform his current occupation due to an injury or illness he will receive a portion of his income for a specified time, usually up to 24 months. After the initial 24-month period, policies often require that the insured must be disabled from "any occupation"(fnii) for benefits to continue. It is here that many disabled insureds face difficulty maintaining their benefits. Intuitively, a person who has purchased a long-term disability insurance policy should receive income benefits if he becomes disabled. As noted by the Supreme Court of Kansas: "Total disability does not mean utter helplessness, or inability to perform any task, or even in some cases, unusual tasks for a limited period. It is only necessary that the disability render him unable to perform the substantial and material acts of a business or occupation in the usual and customary way."(fniii) However, thousands of long-term disability cases making their way into courts leads to the supposition that many disabled Americans experience adverse benefit determinations.(fniv) This article is meant to address Wyoming's bad faith cause of action under plans that are not within the scope of the Employee Retirement Income Security Act (ERISA),(fnv) in view of the fact that bad faith actions are preempted by ERISA. It is written with the hope that attorneys representing disabled clients will explore exemptions to ERISA, which if present, provide an avenue for utilizing Wyoming's tort of bad faith in long-term disability actions. Is It an ERISA Plan or Isn't It?

In Pilot Life Insurance Company v. Dedeaux, the U.S. Supreme Court issued an insurer-friendly decision indicating that an insured cannot recover consequential damages, emotional distress damages, or punitive damages if his policy is subject to ERISA.(fnvi) This inevitably leads employers and/or insurance companies to zealously argue that every plan that is in any way related to employment is an ERISA plan. "It is predictable that insurers will go overboard to minimize claims that are preempted by ERISA since 'there is no practical or legal deterrent to unscrupulous claims practices' to dissuade insurers from such practices."v (fnii) An attorney for a plaintiff should act with equal zeal in searching for exemptions to ERISA.

ERISA preemptions apply only to "employee benefit" or "employee welfare plans." Thus, state law tort remedies are available in long-term disability disputes if the policy in question falls within an ERISA exemption. The Department of Labor guidelines recognize a safe harbor exemption to ERISA for group or group-type insurance programs offered by an insurer to

employees or members of an employee organization where (1) the employer does not pay for the plan; (2) participation in the plan is voluntary; (3) the employer or employee organization does little more than publicize the plan and allow for payroll deduction for employees to pay premiums; and, (4) the employer or employee organization receives no consideration other than reasonable compensation for administrative services actually rendered in connection with payroll deductions.(fnviii) Plans which meet each of these four factors are excluded from ERISA coverage.(fnix)

Safe harbor exemptions are most often found in long-term disability, short-term disability and life insurance plans which often are "add-on" or "limited scope" plans, sold under a separate policy or "rider" that limits coverage to a narrow range of benefits usually excluded from hospital/medical/surgical benefit packages.(fnx) Employers often use such plans as internal marketing tools, allowing employees to sign up through the employer and have...