Disability Insurers Cannot “Sandbag” Disabled Employees With a “New” Reason for Claim Denials

What happens when a disability insurer denies a claim for one reason, then changes its reason during litigation??  That was the issue in a recent case considered by a federal appeals court. There, an employee who worked as an insurance sales agent began experiencing persistent pain in her neck, shoulders, arms and lower back that limited her ability to type and sit for long periods of time. Because of her condition, the employee was unable to work without the assistance of various job accommodations. 

After undergoing surgery to repair her shoulder, the employee returned to work but her pain persisted.  She continued with various forms of treatment including steroid injections and epidurals for pain, yet the symptoms did not go away.  Eventually, her condition worsened to the point where she had to stop working, leading the employee to seek disability benefits under her long-term disability policy. 

The employee’s disability claim was administered by Lincoln Life Assurance Company. Upon receiving her claim, Lincoln had the claim reviewed by one of its reviewing doctors as well as a vocational analyst. Based on those reviews, the insurer denied the employee’s claim.  The employee filed an internal appeal, however, the insurer stood by its denial.  Having exhausted all her administrative remedies, the employee sued the insurer in federal court. 

After the filing of the lawsuit, the court ordered a bench trial where the employee and insurer both made various arguments for and against coverage under the disability policy. When they originally denied the employee’s disability claim, Lincoln based its denial on the employee’s alleged failure to satisfy her policy’s definition of disability. The initial denial letter made no mention of the fact that the employee was not a credible claimant, nor did the denial mention a lack of objective medical evidence to support the employee’s claim.

At trial, Lincoln argued for the first time that it denied the employee’s claim due to her not being credible in the reporting of her pain symptoms.  The insurer also argued that the objective medical evidence did not support the employee’s claim. This too was a new argument not yet made by Lincoln during its initial denial of the employee’s claim. 

Having considered the evidence, the trial court ruled in the insurer’s favor, finding that the employee was not disabled as defined under the long-term disability policy.  The trial court supported its decision by adopting the arguments made by the insurer, namely, that the employee’s symptoms were not credible and that the employee’s objective medical evidence did not support her claim.

The employee filed an appeal with the United States Court of Appeals for the Ninth Circuit. That court, having reviewed the record evidence and the decision of the trial court, reversed the decision of the trial court.  In doing so, the appellate court found that it was wrong for the initial trial judge to base its decision on new evidence being presented by Lincoln.  As the court explained, the “district court erred because it relied on new rationales to affirm the denial of benefits - rationales that Lincoln did not assert during the administrative process.” 

The appellate court listed several reasons why the trail court’s acceptance of new evidence was improper. Of particular importance, the court noted that ERISA, the federal statute governing many long-term disability claims, is undermined when an insurer like Lincoln presents a new reason for its denial to the federal court yet failed to initially provide that reasoning when considering the employee’s claim. The court continued “we have expressed disapproval of post hoc arguments advanced by a plan administrator for the first time in litigation.”  By requiring the insurer to remain consistent with its arguments, the court explained that it prevents insurers from “sandbagging” disabled employees with new arguments at trial.

The court’s rejection of new evidence presented at trial appears to be the consensus when it comes to disability claim litigation. The court cited other appellate decisions also rejecting an insurer’s attempt to rely on new arguments during trial.  The court explained that by preventing new arguments from insurers at trial, district courts are protected from becoming substitute plan administrators. Lincoln violated this rule by holding its new arguments “in reserve” until the parties proceeded to a bench trial.  This, the court found, was unacceptable.

The decision is Collier v. Lincoln Life Assurance Company of Boston, 53 F.4th 1180 (9th Cir. 2022).