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Thousands of individual “own-occupation” disability insurance policies are in force in the United States. During the 1980s these policies were sold to physician specialists, dentists, chiropractors, attorneys, court reporters and other professionals. Benefits are non-cancelable, provided to age 65 or life and often include cost of living adjustments. The policies were marketed as providing total disability benefits when an insured became unable to perform the “substantial and material” duties of his or her specific occupation. Some policies even assured that as long as policy owners’ disabilities prevented them from working in their own occupation, they could work in another occupation and still receive full benefits. The coverage was often confirmed by “your occupation” letters sent to policyholders and by express representations from sales agents to purchasers. Due to industry consolidations, plummeting interest rates and ERISA pre-emption, some carriers started terminating valid claims. Typically, they did this by mischaracterizing and redefining the insureds’ duties and occupations, conducting biased medical reviews, relying on sham investigations and/or redefining policy provisions. There are numerous factual, legal and strategic factors to consider in litigating these cases. This article highlights some of the more important considerations, but is limited in scope. Additional research should be conducted on a case-by-case basis. THE DISABLING CONDITION A lawyer must fully understand the precise nature of the client’s disabling condition. Spinal injuries, fibromyalgia, organic brain damage, AIDS, vision impairment, repetitive strain injuries, psychiatric impairment and auto-immune diseases are frequently encountered. In evaluating the disabling condition, you need to consider the strength of the medical evidence and treating doctors’ opinions, treatment provided, objective evidence of the condition, any medication and its effects, corroborating evidence of percipient witnesses and the insured’s credibility. THE OCCUPATION AND DUTIES The claimant’s occupation is defined at the time of disability, but carriers often argue that the insured’s occupation has changed between the condition’s onset and the time of claim. As a result, if a claimant modified his or her work gradually in response to a worsening condition, the insurer may assert that the relevant occupation is the occupation when the claim was filed. This is incorrect. See Joyce v. United Ins. Co. 202 Cal.App.2d 654 (1962) (test for total disability not what the insured actually did in an effort to perform his duties, but what in the exercise of due prudence he was reasonably able to do); McMackin v. Great American Reserve Ins. Co., 22 Cal.App.3d 428 (1971) (futile attempt to return to work did not preclude disability benefits); Austero v. National Cas Co., 84 Cal.App.3d 1 (1978) (attorney with pre-senile dementia who kept going to office without performing substantial duties is totally disabled; sporadic, simple tasks do not negate). Claimants are asked to list their occupational duties in order of importance on the benefits application. Most claimants list every duty they can think of. The insurer later argues that the insured is ineligible for total disability benefits because he can perform some of the duties on the list. Telling a violinist who can no longer play that she is not totally disabled because she can still read music is absurd. In one case the insurer asserted that a court reporter who could no longer transcribe testimony due to debilitating hand and wrist injuries was not totally disabled because she could still proofread. McGregor v. Paul Revere, CV-97-02938-PJH/MEJ. This tactic is not uncommon. TOTAL VERSUS RESIDUAL Most “own-occ” policies have a two-part total disability definition: The insured must be unable to perform the “substantial and material (or important) duties” of his or her occupation and the insured must be under a doctor’s care. The policies do not specify whether the insured must be unable to perform one, most or all of the substantial and material duties. The idea in marketing these policies was that if you could no longer perform as, say, an orthopedic surgeon, court reporter or violinist, benefits would be paid even if you did something else. Erreca v. Western State Life Ins. Co., 19 Cal.2d 388 (1942), and Moore v. American United Ins. Co., 150 Cal.App.3d 610 (1984), are the seminal cases in this area. Erreca holds that if an insured is unable to perform the material and substantial duties of his or her own occupation in the usual and customary fashion, he or she is totally disabled. No “absolute state of helplessness” is required. Moore adds that the insured must be able to work with reasonable continuity. Some policies also require that the insured not be involved in any “gainful occupation.” If claimants work at all, they only qualify for partial, or “residual,” disability. Residual benefits are usually significantly lower than total benefits. Residual benefits are also usually only payable to age 65 while total benefits are often payable for life. The insurer won’t inform claimants that they can go back and forth between total and residual depending on whether they work during a particular month. Even where the total disability definition does not contain a “gainful occupation” prong, beware of any policy with a residual clause. While this benefit was sold as an extra benefit with an added cost, some insurers now claim that the only way an insured can be totally disabled under a policy containing a residual provision is to be unable to do all of the substantial and material duties of his occupation. Take the case of an orthopedic surgeon. He bought a policy to insure himself if he became disabled and unable to work as a surgeon. He received a “specialty” letter confirming his expectation of coverage. It told him he could even work in another field of medicine and still qualify for benefits. Now, due to severe diabetes and its complications, he is totally disabled as a surgeon. His hands and feet are numb, he has had many laser treatments to his eyes and he has only 50 percent kidney function. Nevertheless, because there is a residual benefits clause, the insurer claims he is only partially disabled because he can still perform some of the incidental work he did before. In other words, the extra benefit is used to apply a far more stringent definition of total disability than that promised when the policy was sold. This is not condoned by California law, as outlined in the Erreca, Moore and Austero rulings. EVALUATING DAMAGES The damages an insured may recover in a successful bad faith disability insurance case include: past benefits plus interest; present value of future policy benefits; consequential damages that can include both financial and emotional distress; attorneys fees and costs pursuant to Brandt v. Superior Court 37 Cal.3d 813, 210 (1985); and punitive damages when there is clear and convincing evidence of malice, fraud or oppression. Attorneys fees, it should be noted, are payable only on the amount of past and future policy benefits, and not on general or other damages. Pursuant to Campbell v. State Farm, 123 S.Ct. 1513, 2003, insurers argue that punitive damages must be capped at a 9-to-1 ratio (punitive to compensatory damages). There is at least one California appellate decision following Campbell, but the California Supreme Court has not ruled on this topic. Unlike other states, California’s punitive damage statute specifically isolates “the amount necessary to deter” as the proper measure for punitive damages. A company seeking to boost revenues by hundreds of millions or billions of dollars by defrauding its customers may be punished but is hardly going to be deterred by a punitive damages award of a few million dollars. STRATEGIC CONSIDERATIONS Disability bad faith complaints should include causes of action for breach of contract, negligent and intentional misrepresentation (in the sale of the policy and in the handling of the claim), intentional infliction of emotional distress, breach of the covenant of good faith and fair dealing and violation of California Business & Professions Code § 17200. Most complaints should be filed in state court. This is because state court judges tend to be more familiar with state insurance laws, regulations and court decisions. They also usually allow significant attorney voir dire. Unanimous verdicts are not required. On the other hand, some federal judges are less likely to tolerate the defense strategies and tactics common in these cases. Even if a case is filed in state court, the insurer will try to remove even when a California defendant is named. If you have legitimately named a non-diverse defendant (such as the insurance agent who sold the policy), the court will likely remand. Another benefit of litigating in state court is that you may force the insurer to bring individuals they identify as the person or persons most knowledgeable (“PMK”) regarding certain subjects of inquiry to California for deposition. This does not apply in federal court. When it comes to discovery, interrogatories are appropriate in these cases for getting key names, dates and documents and to authenticate records. However, interrogatories could also help the defense by providing a roadmap of where the plaintiff is going and why. Requests for documents are crucial. At the very least you must obtain the claim and underwriting files, any claims manuals and any surveillance tapes. Requests for admissions can be extremely helpful both to authenticate your documents, particularly if you have obtained documents used in other cases, and for use at trial. You must also depose any key witnesses who may not be within the court’s subpoena power for trial. These would include medical, functional capacity and percipient witness depositions. Expert witness, settlement strategies, law and motion practice and trial are all subjects beyond the scope of this article. Painstaking preparation and research are key to successful litigation. Ray Bourhis and Alice Wolfson are partners at San Francisco’s Bourhis & Wolfson, which specializes in disability insurance bad faith litigation. Jennifer Prusak, an associate at the firm, also contributed to this article.

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