Several months after 50-year-old anesthesiologist Sidney A. Smith suffered a severe hand injury in October 1996, it became obvious, he says, that he could no longer place arterial lines, perform lumbar punctures, or handle other duties of his specialty.

Surgery to repair severed tendons in the right index and middle fingers was only partially successful, the Texas City, TX, doctor notes, and he's never recovered full function of his fine motor skills. He's unable to completely straighten the fingers or make a fist. His diagnosis is reflex sympathetic dystrophy.

After the injury, bills, including a $5,000 monthly mortgage payment, began piling up. Luckily, Smith figured, he'd be covered by two disability policies purchased in the 1980s. He filed claims on both.

The doctor expected to fill out forms, talk to claims people, and receive his benefits. He didn't expect a battle. In fact, Smith has been receiving $5,000 a month since March 1997 through one policy, purchased through his state medical association. The other insurer, Provident Life, began paying a monthly benefit of $9,850 in May 1997.

Five months later, however, the physician discovered he was under surveillance during his daily three-mile walk. After a Provident-ordered functional capacity test in December 1997 and an independent medical exam in June 1998, Provident cut off his benefits, saying he'd failed "to meet the criteria needed to qualify."

Smith sued Provident for breach of contract, fraud, and bad faith. In May 2000, almost four years after his injury, Provident settled with Smith for $750,000.

Damage control: Clamping down on claims
There's little doubt that disability insurers have gotten tougher on claims in recent years. One reason is that, in their haste to compete for premium dollars during the 1980s, many carriers offered policies rich with extras—they couldn't be canceled, premiums would never increase, and own-occupation clauses would pay fixed benefits not linked to loss of income. If a surgeon, for example, could no longer operate, he might collect benefits no matter what he might continue to earn in medicine or elsewhere.

Underwriting was lax. "A lot of people got a lot more coverage than they should have or were qualified for," says Frank N. Darras, a Claremont, CA, attorney who represents plaintiffs in disability suits.

Those policies were actuarial time bombs that exploded in the '90s, when claims from physicians—who'd bought a lot of the insurance—suddenly soared. Insurers suspected that doctors, demoralized by managed care and possibly earning less, were no longer as motivated to work through illnesses and disabilities. Many companies found themselves in financial trouble. In 1993, for instance, Provident (UnumProvident since a merger in 1999) took an earnings hit when it had to set aside an additional $423 million to cover anticipated disability claims.

So insurers started looking more closely at claims, using questionable strategies, some observers charge. A former high-level executive with Provident said in deposition that the company was looking for ways to "disprove the credibility of . . . claimants" and deny benefits. A memo to Provident CEO J. Harold Chandler from one of his executives estimated savings of $30 million to $60 million annually as a result of "claim improvement initiatives."

In time, the company's stock soared. But lengthy delays in benefit payment, denials of new claims, and terminations of established claims sent some policyholders to their lawyers, who accused the company of breach of contract and bad faith.

UnumProvident isn't alone in its legal troubles. Currently, there are "hundreds and hundreds" of individual suits against disability insurers, says Darras. Some class-action suits have also been filed.

In fact, the proliferation of legal actions against disability insurers has spawned something of a cottage industry of attorneys specializing in this field. Mealey's, the legal publisher, launched a twice-monthly publication devoted to the topic in June 2000. And since 1999, American Conference Institute, in New York City, has held annual conferences on litigating disability claims. They attract virtually sold-out crowds of both plaintiffs' and defense attorneys.

General American Life Insurance was hit with the largest decision to date—a $58 million punitive-damages award, reduced to $18 million, which went to Ronald Diamond, a Phoenix dentist, in 1998. Diamond, who suffers from carpal tunnel syndrome, sued the insurer when, in 1991, it stopped the benefits it had been paying him since late 1988. The company claimed, incorrectly, that his benefits had expired.

Pretrial discovery uncovered documents indicating that General American had put together a "hit list" of 58 high-benefit claimants, including physicians, who were subjected to hardball tactics designed to end their benefits. Those included threatening or berating them, sending them for multiple independent medical exams, increasing paperwork requirements, and offering buyouts for a fraction of a policy's value. Nearly half of those on the list lost their benefits within about 18 months, says Diamond's attorney, Charles J. Surrano III of Phoenix. The company lauded its director of claims in performance reviews for "aggressive claims handling" that "saved literally millions of dollars."

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