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Disability insurance, ERISA and state mental health parity laws

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DarrasLaw represents people across the United States who are facing severe mental and physical disabilities in claims for coverage under disability insurance policies.

Recently, we published a blog about the challenges of filing a claim for long-term disability based on depression. We discussed a common provision in these policies that restricts wage replacement payments to a finite period - usually 24 months - when the disability stems from a mental health diagnosis.

Significant federal ruling

On September 20, 2017, an important federal case was decided holding that a 24-month limitation for disability benefits based on mental impairment violated Montana's mental health parity law, after the court examined the interplay of the terms of the policy at issue, the state law and federal pre-emption.

As of today, the Montana law provides, among other things, that a group or individual disability insurance policy in the state must provide a "level of benefits for the necessary care and treatment of severe mental illness ... no less favorable than that level provided for other physical illness generally ..." Bipolar disorder is one of the mental illnesses specifically covered.

In Sand-Smith v. Liberty Life Assurance Company of Boston, U.S. District Judge Susan P. Watters of the U.S. District Court for the District of Montana in Billings answered a series of legal questions. The judge concluded that the state mental health parity law that requires equal benefits under disability policies for mental and physical medical conditions voids the 24-month limit on payment for mental health claims in the plaintiff's disability policy.

The scenario

The plaintiff worked as a claims adjuster for an insurance company through which she acquired group disability income insurance. The policy provides monthly payments when a claimant becomes unable to perform his or her job because of "injury or sickness."

Sand-Smith has bipolar disorder that eventually prevented her from working. Liberty Life approved her application for benefits to begin June 15, 2015, and told her about the 24-month limitation for mental health claims.

On the first day of 2016, the insurance company renewed the policy, but added a new clause that any provision in conflict with a state statute where the insured person lives is amended to conform to the state's statute.

In response to inquiries about the conflict between the 24-month limit and the state law, the insurance company maintained that the limited provision applied and that the state law was irrelevant because it was pre-empted or trumped by the federal Employee Retirement Income Security Act (ERISA). Accordingly, the insurer sent notice that it would terminate Sand-Smith's payments in June 2017.

The lawsuit

The insured sued Liberty Life in Montana state court, but the case was removed to federal court, where the parties each requested summary judgment. The judge wrote that the dispute was an "abnormal ERISA case" because the parties agreed that ERISA applied and that the plaintiff was eligible for long-term disability benefits. The issue addressed whether the state law nullifies the 24-month limit for mental health claims.

The court examined three issues:

  • Which version of the policy applied?
  • Does ERISA pre-empt the Montana mental health parity law?
  • If the parity law is not pre-empted by ERISA, does the state law cover the policy in question?

Question 1: Which policy applies?

The court said that if the 2016 amended policy applied, its new clause that provisions in conflict with state law are automatically amended to comply with that law would incorporate the mental health parity law, unless that law is pre-empted by ERISA.

The judge concluded that the 2016 policy version applied because under ERISA, the earlier disability policy as a welfare benefit had not vested because it could have been modified by the insurer. Instead, the 2016 version governed the claim because the benefits were "denied" in August 2016 when the insured requested through her lawyer extension of the benefits beyond 24 months.

Because the 2016 version controlled, the judge concluded that the provision applied to incorporate the state mental health parity law "so long as the law was not pre-empted."

Question 2: Did ERISA pre-empt the state law?

The court found that ERISA did not pre-empt the Montana mental health parity law so the provision became part of the policy. ERISA pre-empts state laws that "relate to any employee benefit plan," except those that regulate "insurance, banking, or securities."

The applicable test to determine if the exception applies asks first, whether the law is "specifically directed toward entities engaged in insurance," meaning "grounded in policy concerns specific to the insurance industry." The judge found that Liberty Life engaged in insurance when the company issued the policy in question.

The second prong of the test asks whether the state law "substantially affects the risk pooling arrangement between the insurer and the insured." In other words, the law must target "insurance practices" not specific companies. The judge said that the state law substantially affects the risk pooling (sharing of risk among a group of consumers) because the expansion of mental health coverage would cause more claims to be paid. Accordingly, the judge found that the ERISA pre-emption does not apply to the state law.

Question 3: Does the Montana law apply to the policy?

Ruling against the insurance company's arguments, the court found after considering the plain meaning of the words used in the statute that the policy is a "disability insurance" policy covered by the parity law.

In a somewhat closer call, the judge held that the statute covers the lost-wage benefit under the policy even though the statute focuses mostly on the cost of medical treatment because:

  • The legislature specifically included disability and not just health insurance.
  • The legislature said that the list of covered benefits that were mostly medical was not exhaustive.
  • The legislature did not specifically exclude disability insurance.
  • The law covers benefits for "necessary care" of mental impairments and wages are "indispensable" to that care.

The court therefore ordered that the policy must provide the same benefits to the plaintiff as if her illness had been a physical one. In other words, the benefits could not stop at 24 months, but must be indefinite.

Implications for the future

This is an extremely complicated area of disability insurance and the law. Anyone with questions about mental health coverage under disability insurance should seek immediate help from an experienced lawyer.

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