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INSURANCE LITIGATION |
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OWN OCCUPATION DISABILITY INSURANCE CLAIMS Protecting the Insured Against New Defenses Douglas K. deVries, Esq |
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I. INTRODUCTION: Individual disability insurance policies that insure against loss of earning capacity specific to an insured's own regular occupation are known as "own occ" policies. The insurance industry expanded the benefits in such policies and aggressively marketed them from the late 1970's, through the 1980's and into the early 1990's. This occurred as a result of intense competition by insurers in an effort to acquire premium dollars for investment in a high interest rate, high investment return economy. The target market for own occ insurance policies was high income earners who had more to lose from becoming disabled from their occupation, and who could afford the relatively high premiums - e.g., doctors, lawyers, accountants and other professionals as well as executives and business owners. In addition, California was one of the largest and most lucrative sales markets. The own occ policies were characterized by high monthly benefit amounts and liberalized disability definitions that protected against loss of highly specific occupations. For instance, a surgeon who could no longer perform surgery would be paid the disability benefits provided by the policy and could still work as a physician in a non-surgical practice. Further, since it was capacity to earn in a specific occupation, as opposed to loss of income itself, that was insured, the insured's income derived from working in another occupation was irrelevant to entitlement to collect the policy own occ benefits. Following the early 1990's, interest and other investment return rates dropped dramatically and flattened resulting in lowered income and profits for insurers, and at the same time claims on own occ policies accelerated. The own occ promises made by insurers were coming home to roost and placing a financial strain on the insurers. These trends have continued unabated resulting, in relevant part, in increasingly aggressive claims and litigation practices on the part of insurers specific to own occ disability claims. Plaintiffs who file suit to challenge denial of total disability claims made on disability insurance policies they purchased containing own occ benefit provisions are increasingly confronting insurer defenses that attempt to circumvent policy terms and otherwise controlling law. The major issues being raised by these defense tactics include the following:
This article sets forth the essential legal standards for interpreting " total disability" and " own occ" insurance policy provisions. These controlling standards demonstrate that the new defense tactics are not legally supportable. II. LEGAL STANDARDS FOR "TOTAL DISABILITY" DEFINITIONS IN DISABILITY INSURANCE POLICIES A disability insurance policy's failure to define a term renders the term ambiguous. See e.g., Patterson v. Hughes Aircraft Co., 11 F.3d 948 (9th Cir. 1993). (Editor's note: for a discussion of legal standards for interpretation of insurance policy terms in general see Jeffery Ehrlich's article in this issue of Forum). In the seminal case of Erreca v. Western States Life Ins. Co. (1942) 19 Cal.2d 388, 396, the California Supreme Court articulated the standard of total disability, as follows: "Total Disability" does not signify an absolute state of helplessness but means such a disability as renders the insured unable to perform the substantial and material acts necessary to the prosecution of a business or occupation in the usual or customary way. Recovery is not precluded...because the insured is able to perform sporadic tasks, or give attention to simple or inconsequential details incident to the conduct of the business..." California courts oppose strict adherence to a limited definition of total disability: Through this progression of cases, it is clear that California courts oppose the strict adherence to a highly limited definition of 'total disability' in both non-occupational and general occupational disability policies. Such policies should offer protection to the insured when he is no longer able to carry out the substantial and material functions of his occupation. Common sense dictates this. Certainly it would be far beyond the reasonable expectations of an attorney covered by a disability policy, to discover, for instance, if he were still able to return a client's telephone call or Shepardize a case but do nothing else, that he would not be considered totally disabled." Austero v. National Casualty Co. of Detroit, Michigan, 84 Cal.App.3d 1,22, 148 Cal.Rptr. 653, 667 (1978). The court in Moore v. American United Life Ins. Co. (1984) 150 Cal.App.3d 610, approved a jury instruction on "total disability," in relevant part as follows: The term "total disability," as applicable to the insurance policy involved in this case, is defined as a disability that renders one unable to perform with reasonable continuity the substantial material acts necessary to pursue his usual occupation in the usual and customary way...." 150 Cal.App.3d at 632. The test of "total disability" set forth in Erreca v. West. States Life Ins.. Co., supra, requires that the actual working circumstances of the plaintiff, and the real-world employment marketplace be considered in determining whether an insured is "totally disabled." Moore v. American United Life Ins. Co. (1984) 150 Cal.App.3d 610,629-30, 197 Cal.Rptr. 878. Under that test, "total disability" is one that prevents the insured from working with reasonable continuity in his customary occupation ("own occ") or in any other occupation in which he might reasonably be expected to engage ("any occ"). (Erreca v. West. States Life Ins.. Co., supra, 19 Cal.2d at pp. 394-395; followed in Culley v. New York Life Ins.. Co. (1945) 27 Cal.2d 187, 191. Evidence of an insured's actual employment prospects is relevant to show that, under the Erreca test, he could not, in fact, work with reasonable continuity. Moore v. American United Life Ins. Co., supra. "Total Disability" does not signify an absolute state of helplessness but means such a disability as renders the insured unable to perform the substantial and material acts necessary to the prosecution of a business or occupation in the usual or customary way. Recovery is not precluded...because the insured is able to perform sporadic tasks, or give attention to simple or inconsequential details incident to the conduct of the business..." It may be anticipated that defendant insurers will argue that the subject insurance policies should be interpreted to eliminate the "total disability" benefit in relation to the insured's regular occupation ("his occupation") based upon Dym v. Provident Life and Accident Ins. Co. (1998) 19 F.Supp.2d 1147. Defendant's argument will be that the total disability provision of the policy is modified by the residual disability provision such that if the claimant were able to perform any single duty involved in his regular occupation he would not be entitled to total disability benefits. Defendant's arguments in this regard, and its reliance on the Dym, are without merit for a number of reasons, as follows:
Based on the foregoing, Dym should be viewed as an aberration that was legally flawed from its inception, the unfortunate product of an uninformed opinion based on an inadequate record. It will no doubt be alternately followed and rejected at the federal district court level by one trial judge or another, as reflected above, but should ultimately be doomed by subsequent informed review at the state and circuit levels. III. MEANING OF "REGULAR OCCUPATION" OR "OWN OCCUPATION" The California Supreme Court, in Erreca v. Western States Life Ins. Co. (1942) 19 Cal.2d 388, extensively analyzed the meaning of occupation in disability insurance. Erreca was a "farmer engaged in grain and stock." 19 Cal.2d at 390. After being thrown from a horse and sustaining a multiple fractures of his right leg he suffered permanent instability of his knee, was able to walk with a cane but only to a limited extent, had varicose veins and ulcers. Ibid. Any extended walking brought about swelling in the legs, pain, shortness of breath and rapid heart rate. Ibid. Based on the foregoing, Dym should be viewed as an aberration that was legally flawed from its inception, the unfortunate product of an uninformed opinion based on an inadequate record. It will no doubt be alternately followed and rejected at the federal district court level by one trial judge or another, as reflected above, but should ultimately be doomed by subsequent informed review at the state and circuit levels. IIV. MEANING OF "REGULAR OCCUPATION" OR "OWN OCCUPATION" The California Supreme Court, in Erreca v. Western States Life Ins. Co. (1942) 19 Cal.2d 388, extensively analyzed the meaning of occupation in disability insurance. Erreca was a "farmer engaged in grain and stock." 19 Cal.2d at 390. After being thrown from a horse and sustaining a multiple fractures of his right leg he suffered permanent instability of his knee, was able to walk with a cane but only to a limited extent, had varicose veins and ulcers. Ibid. Any extended walking brought about swelling in the legs, pain, shortness of breath and rapid heart rate. Ibid. Erreca's principal duties before his injury were supervisory in nature, characterized by the court as being a "ranch executive." 19 Cal.2d at 391. His duties included negotiating and making leases of land, making annual arrangements for crop financing, signing notes and mortgages, buying livestock and supplies, determining the time for crop planting and harvesting, and selling his crops. Ibid. In terms of physical exertion, Erreca had to determine whether the land was ready for planting by walking over it and testing for ground moisture with a digging instrument. Ibid. He also followed behind plows on foot to assure that the proper depth of planting was attained, and he directed the even distribution of seed planting by walking over the land and inspecting it behind the seeder. 19 Cal.2d at 391-392. Erreca would then dig in the ground to see if the planted seed was penetrating, and he would examine the land later to determine when the grain was ready for harvesting. 19 Cal.2d at 392. Erreca walked behind the harvester to see that the grain was being properly threshed. Ibid. Sometimes he directed work by riding horseback and other times he traveled to remote ranches by automobile. Ibid. In addition to the foregoing, Erreca operated plows, drove tractors, repaired fences, buildings and machinery and aided in the construction of levies and ditches. Ibid. As a result of his injuries and resulting medical condition he could no longer engage in the activities requiring heavy physical exertion, but the injuries and medical condition in no way impaired his mental faculties. Ibid. He was still able to negotiate leases, arrange finances for crops, buy supplies, participate in selling his grain, and provide all other administrative functions associated with owning and operating his farm. Ibid. Based on these facts, Erreca was found to be totally and permanently disabled within the meaning of the policy. 19 Cal.2d at 393. The Erreca case involved a general or any occupation standard that included Erreca's own regular occupation at the time of onset of disability. The threshold issue was whether Erreca was deemed totally disabled from pursuing the occupation of farmer or farm supervisor. 19 Cal.2d at 395. The Erreca court observed that successful grain farming could not be properly conducted by a farmer from the doorstep of his home or from his automobile. 19 Cal.2d at 396. The court noted that the magnitude of Erreca's farming operation and the income he derived therefrom as a farm owner had no proper place in the determination of whether the insured was totally disabled from performing his regular work. 19 Cal.2d at 397. The court observed that his management and administrative activities, including negotiating loans and leases, signing notes and mortgages, talking with grain buyers, participating in buying supplies and also talking with his son who took over the day to day operations of the farms were neither trivial nor inconsequential, but overall they did not constitute the substantial and material duties of his regular occupation. Ibid. In Moore v. American United Life Ins. Co. (1984) 150 Cal.App.3d 610, the insured was a school bus driver who had suffered a heart attack. 150 Cal.App.3d at 616-617. In upholding a verdict for the insured for both breach of contract and insurance bad faith the court held that a disability insurance policy term defining total disability that is not in compliance with the standard set forth in Erreca v. Western States Ins. Co., supra, is "unlawfully restrictive." 150 Cal.App.3d at 620. Further, processing a California-based disability insurance claim applying a standard of disability not in compliance with California law justified a finding of insurance bad faith and an award of punitive and exemplary damages. 150 Cal.App.3d at 638. In Fitzgerald v. Globe Indemnity Company of New York (1927) 84 Cal.App. 689, the insured was a physician who also owned a walnut ranch, which the insurer considered to constitute a dual occupation. 84 Cal.App. At 691-692. The insured developed kidney disease, but was still able to drive his automobile on short trips and on occasion long trips; he drove to town nearly every day and made purchases of household supplies. 84 Cal.App. at 696. He executed contracts, received and examined monthly reports of the farming expenses, maintained bank accounts, drew checks, paid taxes, insurance and interest on money he borrowed. Ibid. He also performed other similar acts which the insurer contended constituted the transaction of the business duties. Ibid. The court concluded that just because an insured may do some work or transact some business duties during the time he claims disability benefits, or even the fact that the insured is physically able to do so, is not conclusive evidence that the insured does not suffer total disability "if reasonable care and prudence require that he desist." 84 Cal.App. at 698. The court further noted that occasional transactions in an occupation does not mean that an insured is performing the substantial and material acts of his business or occupation in the usual and customary way. 84 Cal.App. at 699. In Amadeo v. Principal Mutual Life Ins. Co. (9th Cir. 2002) 290 F,3d 1152, the insured had been employed in the securities industry for twenty years, including her last position as vice president of compliance for a securities company. 290 F.3d at 1156. She suffered severe post-traumatic stress disorder and depression, but did not make a disability insurance claim for two years after she stopped working do to her mental disorders. 290 F.3d at 1156- 1157. The insurer took the position that at the time she became disabled the insured's regular occupation was that of an unemployed person. 290 F.3d at 1157, 1162. The court, applying California law, found that such an interpretation of regular occupation would not meet the objectively reasonable expectations of an insured. 290 F.3d at 1162-1163. The court held that the insured's regular occupation was that occupation that she had engaged in as a career, an executive in the securities industry. Ibid. The insurer was found to be in bad faith and could not lawfully adopt an interpretation of its policy that was arbitrary or based on the subjective perceptions of its "unguided claims adjusters." 290 F.3d at 1163. In Dionida v. Reliance Standard Life Ins. Co. (N.D. Cal. 1999) 50 F.Supp.2d 934, the insured was a registered nurse employed at a hospital who became disabled as a result of severe low back pain. 50 F.Supp.2d at 936. The insurer erroneously applied an "any occupation" standard rather than the "regular occupation" standard. Ibid. Citing with approval Dawes v. First Unum Life Insurance Co. (S.D.N.Y. 1994) 851 F.Supp. 118, 122, the court held that the term "regular occupation" was to be construed to mean "a position of the same general character as the insured's previous job, with similar duties and training requirements." 50 F.Supp.2d at 939. The court observed that an insured's regular occupation cannot be fairly defined as an occupational group by arbitrarily grouping together different occupations. 50 F.Supp.2d at 939-940. The effect of an insurer broadening the definition of an occupation to include all individual types of occupations that have different duties and different training requirements has the impermissible effect of obliterating the distinction between the criteria for a regular or own occupation benefit and that of an any occupation benefit, which thus has the effect, contrary to contract terms and the law, of depriving the insured of the regular occupation benefit period. 50 F.Supp.2d at 939-941, 942. Under California law, an insured is not required to re-train or rehabilitate himself for an other occupation which he could physically pursue. See Erreca v. Western States Life Ins. Co., supra at 394; Pistorius v. Prudential Ins. Co. of America (1981) 123 Cal.App.3d 541, 546. Most other jurisdictions that have addressed the issue of regular occupation have promulgated rules similar to, and consistent with, California's approach. In Berkshire Life Ins. Co. v. Adelberg (1997) 698 So.2d 828, the insured sought disability benefits because he could no longer perform his occupation as a yacht salesman. The insurer denied the claim on the basis that the insured was generally able to perform work as a salesman in other fields. In rejecting this position, the court held as follows: Berkshire chose to state in this policy that total disability means "your inability to engage in your occupation." Berkshire likewise chose that, after 120 months of payments, total disability would mean "any gainful occupation." We conclude that the language chosen by Berkshire would lead a reasonable person reading this policy to conclude that for the first 120 months "your occupation" means the work in which he or she is engaged at the time of becoming disabled. In construing this policy, we simply give the term "your occupation" the meaning that an average buyer of an insurance policy would give to the term. Berkshire's contention that "your occupation" should be read to mean any sales position rather than the sales position Adelberg held at the time he was injured is not a distinction made by Berkshire in writing its policy. If this was Berkshire's intent, the company should have so stated in unambiguous language." 698 So.2d at 830. In Ogelesby v. Penn Mutual Life Ins. Co. (D.De. 1995) 877 F.Supp. 872, the insured, at the onset of disability, was an interventional and vascular radiologist. The insurer claimed that the doctor could perform the duties of a general, as opposed to an interventional and vascular, radiologist and thus was not disabled from his regular occupation. The court rejected the insurer's position, as follows: In the plain meaning of the insurance policy's explicit terms, regular occupation is explained as one's usual work when total disability starts; an insured is totally disabled when he or she cannot do the substantial and material duties of that usual work. Therefore, if Ogelesby's usual work was that of an interventional and vascular radiologist, and he no longer could perform the substantial and material duties of that usual work, he would be entitled to Penn Mutual disability insurance benefits. 877 F.Supp. at 881. There are numerous other examples, including the following: Continental Casualty Company v. Novy (1982) 437 NE.2d 1338 (Physician who could no longer perform his duties in private general practice, but obtained employment at a veteran's administration hospital found disabled from his regular occupation). McGrail v. Equitable Life Assurance Co. Etc. (1944) 55 NE.2d 483 (Surgeon who could no longer perform surgery but could prepare patient reports deemed disabled from regular occupation). Rahman v. Paul Revere Life Ins. Co. (N.D. Ill. 1988) 684 F.Supp. 192 (Emergency cardiologist, rather than general cardiologist, was deemed the regular occupation). Dixon v. Pacific Mutual Life Ins. Co. (2nd Cir. 1959) 268 F.2d 812 (Surgeon who developed hand tremor preventing him from performing surgery but who could still practice medicine generally deemed disabled from his occupation). Brosnan v. Provident Life & Accident Ins. Co. (E.D. Pa. 1998) 31 F.Supp.2d 450 (Insurer's assertion that claimant's occupation was medical doctor as opposed to anesthesiologist rejected "as disingenuous at best"). Carlyon v. Mutual of Omaha Ins. Co. (1996) 559 N.W.2d 407 (Emergency room physician who became employed as prison doctor following injury was deemed totally disabled from his regular occupation). Niccoli v. Monarch Life Ins. Co. (1974) 332 N.Y.S.2d 803, aff'd 356 N.Y.S. 2d 677 (Ob-Gyn doctor found totally disabled from regular occupation even though found employment as a hospital's director of family planning and sex education). V. CONCLUSION Plaintiffs should anticipate that insurers will attempt to reduce or eliminate own occ benefits whenever they see the opportunity by every means at their disposal. Increasingly, such efforts in defense of claimant lawsuits appear to be challenging the very purpose of own occ provisions as they were sold to consumers. On balance, the law favors the claimant insured. Extensive and consistent decisional law establishes that an own occ total disability benefit provision in a disability insurance policy constitutes a separate benefit for which the insured paid premiums. The purpose of the own occ benefit, as sold, is to protect the insured against loss of a chosen occupation (in other words, a career or a profession). Regardless of the ambiguities of varying policy terms, the interpretation and application of such own occ provisions cannot be more restrictive than the minimum requirements of applicable law that favors the claimant. Other policy benefit provisions, such as those for partial or residual benefits, are intended to provide separate, additional benefits and cannot be used to reduce or eliminate the own occ benefit. |
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