Re: Objections to Settlement with UnumProvident Corporation, et al.

Dear [Attorney General] and [Insurance Commissioner]:

We are writing to you with respect to the consent agreements reached between your offices, other state insurance regulators, the U.S. Department of Labor, and UnumProvident Corporation and its subsidiary insurers. We appreciate that the agreements attempt to reaffirm basic principles of fair claim investigation and evaluation. Nonetheless, while the agreements represent a substantial amount of work and represent a good faith effort to address the systemic misconduct of these companies, the agreements themselves raise substantial concerns as addressed below. These concerns revolve around the following issues: 1) alteration of proof of loss requirements for non-ERISA governed claims; 2) abrogation of state law relating to the responsibility of insurers; 3) unfair requirements of the reassessment process with respect to litigated claims; 4) operation and reporting of the reassessment unit; and 5) inadequacy of the fine to accomplish its deterrent purpose. We address each of these concerns in turn:

1. Alteration of Proof of Loss Requirements With Respect To Non-ERISA Governed Claims

With the United States Supreme Court decision in Pilot Life v. Dedereaux, 481 U.S. 41, 107 S. Ct. 1549, 95 L. Ed. 2d 39 (1987), two classes of insureds were created, those who obtained their insurance through their employers and whose rights are limited by ERISA and those whose insurance is not subject to the pre-emptive effect of ERISA. As to the former class, these insureds do not have the benefit of state law. A key requirement of both common law and state regulatory systems is to put the burden of claim investigation onto the insurer. One effect of the consent agreements is to potentially alter the proof of loss requirements with respect to non-ERISA claimants to shift the burden of claim investigation to the insured. Thus, rather than insuring the companies' compliance with state law, one effect of the settlement agreement is to potentially relieve them of their obligation to conduct reasonable investigations of claims. We detail our reasoning as follows:

Under the Model Act it is the insurer's burden to conduct the investigation including the gathering of all available medical records reasonably related to a claimed condition. Similarly, common law requirements place the burden of claim investigation on the insurer. Egan v. Mutual of Omaha Ins. Co., 620 P.2d 141, 146 (Cal. 1979); Bankers Life & Casualty Co. v. Crenshaw, 483 So. 2d 254, 276 (Miss., 1985), affirmed 486 U.S. 71, 100 L. Ed. 2d 62, 108 S. Ct. 1645 (1988); Mariscal v. Old Republic Life Ins. Co., 50 Cal.Rptr.2d 224, 227 (Cal.App. 1996); Industrial Indemnity Co. of the Northwest, Inc. v. Kallevig, 792 P.2d 520, 526 (Wash. 1990) (en banc). Paul Revere's own internal documents reflect that a policyholder satisfies his contractual obligation to establish proof of loss by filling out and submitting a claim form along with certification from his treating physician. It is up to the insurer to investigate further.

The Initial Proof Of Loss provision in Exhibit 7 to the Regulatory Settlement Agreements alters these requirements by placing the burden of gathering medical records onto the claim making policyholder. As presently constituted the change in the Proof of Loss requirements contained in Exhibit 7 has the potential for increasing the burden on policyholders rather than decreasing them and increasing rather than decreasing the chance that the companies will deny claims based on failure of a disabled policyholder to provide adequate proof of loss. This potential for burden shifting to disabled policyholders in the Regulatory Settlement Agreements is particularly troubling in light of reports by the market conduct examiners that they "found evidence of the Companies' effort to 'shift' the burden of responsibility to the claimant to provide medical or other records in support of the claim, rather than obtain such records through the use of authorizations executed by the claimant. These practices are particularly of concern for claimants whose medical conditions may be interfering with their ability to interact with the Companies' staff in the handling of their claims." Market Conduct Examination Report at 9.

A second problem with the initial proof of loss provision in Exhibit 7 has the potential effect of abrogating other statutory or common law rights of policyholders. For example, under California law a policyholder is statutorily privileged to withhold tax records from an insurer. Cal Rev & Tax Code § 7056; Webb v. Standard Oil Co., 49 Cal.2d 509, 319 P.2d 621(1957); Schnabel v. Superior Court, 5 Cal.4th 704, 719-720, 21 Cal.Rptr.2d 200, 854 P.2d 1117 (1993); Sav-On Drugs, Inc. v. Superior Court (1975) 15 Cal.3d 1, 3, 6-7, 123 Cal.Rptr. 283, 538 P.2d 739. Altering proof of loss requirements in the Regulatory Settlement Agreements to require a policyholder to provide tax records arguably undercuts or eliminates the state statutory provision and provides the companies with an improper defense of failure to cooperate if an insured exercises his or her statutory privilege. While we have not done an analysis on a jurisdiction by jurisdiction basis we suspect other states may have similar protections either enshrined in statute or at common-law.

The problems with the initial Proof of Loss provision of Exhibit 7 could be remedied in the following manner:

a. A provision prohibiting payment at the discretion of the insurer or administrator provisions in the companies contracts;

b. By providing that initial proof of loss is satisfied when the policyholder submits a properly filled out claim form, attending physician's statement and employer statement;

c. Clearly indicating that the policyholder thereafter must cooperate in the companies' effort to obtain information necessary to validate the claim such as medical records, employment records or such other documentation as may be reasonably required in light of the coverage at issue, language of the policy, and applicable state law.

2. The Claim Reassessment Process is Unfair to Insured's Involved in Litigation

The second issue of concern is that which is created in section B.4.d. dealing with the reassessment process and its effect on litigation. See Agreements at 14. For policyholders who are engaged in litigation the proposed order provides that the companies may as a condition of reassessment require a policyholder to waive any non-contractual claims.

While this provision has little or no effect on policyholders whose claims are subject to ERISA, the effect of this provision on non-ERISA litigants is to force them to choose between the reassessment process and their rights to full and just compensation arising from the companies bad acts. If an insurer were to unilaterally require a policyholder to waive its bad faith claim as a condition of having their claim properly considered and settled it would be found to have engaged in a separate act of bad faith. Athey v. Farmers Ins. Exch., 234 F.3d 357, 363 (8th Cir., 2000). Such conduct might also be considered as holding coverage hostage under the Model Act.

It is equally inappropriate to relieve an insurer of legal liability for committing bad faith as a reward for doing what it should have done in the first place, conducting fair and objective investigations and evaluations of claims under the terms of the policy it issued. Given that many claimants suffer real and serious economic, physical and/or emotional injury as a result of these insurers misconduct, provisions that require insureds to waive non-contractual liability claims in order to have claims properly reassessed is indefensible. It is particularly disturbing in those jurisdictions which recognize an ongoing duty of good faith and fair dealing and where, in light of the market conduct examiners findings, these companies are already under an obligation to reassess their denied and terminated claims without the Regulatory Settlement Agreements.

3. Without A Management Change the Reporting Structure of the Claim Reassessment Unit Invites Future Abuse

The consent agreements provide that, "The Claim Reassessment Unit shall be managed by an experienced claim manager and shall report to the most senior executive in charge of claim operations."

The problem with this provision and the reassessment process is that those individuals in charge of setting standards for monitoring the program as well as the top of the reporting chain are the same individuals directly responsible for designing and implementing the course of claim handling misconduct engaged in by the companies. The essential problem is that the restructuring adopted in the Regulatory Settlement Agreements leaves the foxes guarding the chicken coop. Meaningful structural reform is unlikely to occur without the ouster of UnumProvident's claim management team from at least the site level on up. The individuals in charge of claim management at the companies have proven adept over time at facially changing claims operations while continuing to elevate the companies' interests over that of their claim making policyholders. This fact is proven, if by nothing else, then the fact that after the Initial Review and meetings with the company and representations of changes in the claim processes to meet regulators concerns, the examination team during the course of the Follow-up Review found "that the level of claim handling errors identified was sufficient to merit further regulatory action." Market Conduct Examination at 10. Because claims misconduct has proven so profitable for the companies, as described below, any regulatory settlement that leaves in place the architects of the improper claim practice policies is, over time, likely to fail. Any reasonable regulatory settlement would have required the companies to terminate the employment of senior claims staff.

4. The Actual and Contingent Fines Imposed are Insufficient to Punish Or Deter These Companies from Engaging in a Pattern and Practice of Claims Misconduct in the Future

The Lead Regulators and companies negotiated an actual fine of $15 million and a contingent fine of $145 million. Simply put the former is too small to deter misconduct by these companies and the latter is unlikely to ever be imposed. As to the first point, forensic accounting studies have shown that Paul Revere and Provident Life and Accident obtained nearly a billion dollars in unjust profits as a result of the claims processes that were the subject to the examiners criticisms, just in the period between 1996 and 2000. In light of this fact, a mere $15 million dollar fine spread across four companies, the parent and three subsidiaries, is unlikely to punish or deter. Indeed, spread among the fifty participating states UnumProvident and its insuring subsidiaries pay less to any one state than they paid to the State of Georgia in 2002 for substantially similar claim handling misconduct.

As to the second point, the 7% error rate at which the suspended portion of the fine will be imposed is unlikely to be met. Rather, the level set by the Lead Regulators simply invites the companies to cheat at a lower level. Since the companies themselves claim that less that 1% of their claims end up in litigation, and since the NAIC complaint logs, suggest that consumers are largely unaware of when they have had their claims improperly handled, we have to suspect that there is little if any chance that the suspended portion of the fine will ever be imposed despite ongoing claims misconduct. Moreover, even if the suspended portion of the fine were imposed, it is insufficient since the companies still retain hundreds of millions of dollars of unjustly obtained profits.

In sum, if one is fully aware of the history of these companies claim practices, one is left with the sinking feeling that the companies have entered into the Regulatory Settlement Agreement, not as an avenue to real change, but as a means to protect hundreds of millions of dollars of ill-gotten gains obtained over ten years from thousands of disabled policyholders. Rather than punishing and deterring future misconduct one must also suspect that the companies will view future misconduct as a financially viable and profitable method of doing business.

5. Lack of Public Comment/Short Review Period

Finally, we must criticize the Lead Regulators for the lack of opportunity for public comment and the short time period for review by participating regulators such as yourself. Had the Lead Regulators sought public comment prior to entering into negotiations or this agreement we believe a stronger agreement, more protective of the rights of disabled policyholders and the public at large could have and would have been achieved.

Concluding Remarks

The history of these companies reveals that over a ten-year period they designed and implemented a claims handling system that may have led to the improper denial of hundreds of thousands of claims. The regulatory systems in place in the Lead States as well as the participating states utterly failed to address this misconduct for most of that time period allowing the companies to profit astronomically. When called upon to finally act, the Lead Regulators negotiated fines with the companies that left them virtually all of the improper profits that they generated through their improper claims practices and may have made it easier for the companies to improperly deny claims through potentially enshrining the companies improper burden shifting tactics in the proof of loss provisions of Exhibit 7.

We are particularly concerned over the time it took for regulatory enforcement to occur given that complaints have been mounting about the companies claim practices as reflected in the increasing litigation from 1995 on. Indeed, we suspect that the regulatory action would not have taken place without the substantial volume of litigation that preceded it. We hope that this fact illustrates to regulators the complementary relationship between policyholder attorneys and the common law system and regulators in investigating and preventing industry abuse. We therefore hope that you as regulators will cast a skeptical eye upon and rebuff industry efforts at tort reform aimed at limiting policyholder's common law and statutory remedies for bad faith conduct.

Sincerely,

Friedman, Rubin & White