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Insult to Injury: Insurance, Fraud, and the Big Business of Bad Faith

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Joan Hangarter bought a disability policy in 1990 to protect her should she ever become seriously ill. She dutifully paid her annual premiums for nearly a decade. But when she became disabled, she and her children found themselves homeless and bankrupt when her insurer--UnumProvident--stopped paying her benefits. With the help of attorneys Ray Bourhis and Alice Wolfson, Hangarter won a landmark $7.7 million jury verdict against Unum.
Through the compelling stories of ordinary people who have been driven to bankruptcy--or worse--when tragedy struck, Bourhis shows how the insurance industry runs roughshod over the very people it is paid to protect. He shows how the industry has become so insulated from accountability that neither lawsuits, punitive damage awards, federal court injunctions, newspaper headlines, nor television exposure can derail their determined efforts to turn a profit at any cost.
Bourhis, a national champion of policyholder rights, walks readers through both Joan Hangarter's heart-wrenching case and the stories of Susan McGregor, Stuart Gluck, John Tedesco, Laurie Hindiyeh, Eugene Molfino, Julie Guyton, Michael Baldwin, Margaret Santana, and numerous other claimants--real people with heart disease, AIDS, spinal injuries, brain damage, Parkinson's disease, and other disabilities whose benefits were cut off just when they needed them most. Bourhis shows how the world's largest disability carrier, UnumProvident, has relied on a host of shady practices--from surveillance to one-sided medical evaluations to policy re-interpretations-to target and terminate benefit payments.
Through these cautionary tales, he shines a spotlight on widespread bad faith double-dealing by insurance providers and details the key regulatory failures that enable these practices to continue unchecked.

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INSULT TO INJURY

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Chapter One FALSE PROFITS

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THE WOMAN SEATED BEFORE ME HAD PAIN AND SADNESS ETCHED deeply into her face. Her eyes were dark and hollow; her gray-brown hair tired and stiff. The corners of her mouth were fixed in a dry frown. She had the look of a frightened, skittish animal, betrayed and immensely fragile. She appeared on the verge of lunging for the door, poised to make a run for it before uttering a word. Watching her as she fidgeted with the papers on her lap, struggling to maintain her composure, I felt an air of uneasy tension settling in between us.

A few years earlier, Joan Hangarter had everything going for her. She had a successful chiropractic practice; two great kids; a nice house in upscale and comfortable Novato in Marin County, California; a late-model car; and a relationship she saw as solid and lasting. Then one day in 1997, while she was performing a difficult lumbar manipulation on a patient, Joan felt a sudden ripping pain in her right forearm. The pain radiated up the arm to the base of her neck. She thought her condition would improve, but instead it worsened. Months later, following extensive testing, her doctors told her that her injuries were permanent and that she would no longer be able to perform the demanding maneuvers required in her work. She was devastated.

 

Chapter Two LICENSED TO STEAL

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IT WAS IN MARCH 1997 THAT IT HAPPENED. THOMAS L. SEJAC WAS NO lightweight. At 247 pounds in his bare feet, moving him would have proved a challenge to an NFL lineman.

While you don’t need the ability to bench press a Buick to be a chiropractor, power, force, and upper-body strength are required. Manipulations are performed on the pelvic region and on the cervical, thoracic, and lumbar spine. Procedures include a lot of pulling, tugging, twisting, pressing, and bending. A chiropractor can’t merely tell patients to position themselves on the treatment table; he or she has to do it. “The procedures are very specific,” Joan was to explain later. “It may look like I’m just moving anything, but that’s not correct. I’ve decided on what has to be adjusted, and how. And it’s very precise.”

Sejac was not an easy man to maneuver on the treatment table. As Joan grappled with Sejac’s hips, trying to position his lower back, she felt a jolt in her right arm followed by a sharp pain in her upper spine. She shook her head. She would probably be making an appointment with a chiropractor herself.

 

Chapter Three SO SUE ME

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DEPOSITIONS ARE SOMETIMES HELD IN EXPENSIVE HOTEL CONFERence rooms, with sumptuous buffets featuring freshly squeezed orange juice and croissants, linen napkins, and fragrant floral arrangements.

Someone in my office, perhaps in a misplaced effort to save the firm from profligacy, had instead scheduled this deposition in a court reporter’s office located twenty minutes and two light-years west of the Four Seasons on Boston Common. It was obvious that no one from that hotel’s housekeeping staff was moonlighting cleaning this unpleasant little conference room. It was dirty and damp and exuded the distinct odor of wet, day-old cigarette butts and leftover pizza.

I was there to question several UnumProvident witnesses in the Hangarter case. The company was engaged in the seven-veils dance of termination: if this reason doesn’t work, peel off that veil and move to the next one. The company was now claiming that Joan could still perform the bookkeeping part of her job and therefore was not disabled. Why the company thought there would be any bookkeeping if there were no patients shall forever remain a mystery.

 

Chapter Four GO FIGURE

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INSURANCE COMPANIES CERTAINLY DO NOT OWE BENEFITS TO EVERYone who files a claim. Many claims are properly denied. In addition, some insurers simply pay the benefits they owe. But if an insurance company—any type of insurance company—wants to dramatically increase revenues by denying or terminating valid claims, it can do so. Although the numbers used here are based on estimates, in the case of disability insurance claims the denial analysis might look something like this.

There are three underlying realities to bear in mind:

First, there’s an important difference between short-term and long-term disability claims. The former include conditions such as broken arms or wrists. They involve payouts over a limited period of time and, from an insurer’s point of view, are not usually worth fighting about. The latter claims are for more permanent conditions and usually involve very substantial sums of money.

Second, group policyholders—most of whom have ERISA-preempted policies—tend to have lower monthly benefits than individual policyholders.

 

Chapter Five THE SEVENTH AMENDMENT

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ON JANUARY 14, 2002, SIXTY-SEVEN PROSPECTIVE JURORS WERE herded into the fourteen-row gallery section of Department F on the fifteenth floor of the U.S. District Court Building in San Francisco. The two teams of attorneys, consisting of three lawyers each, were seated with their clients at two large rectangular counsel tables aligned parallel to the empty jury box and perpendicular to the judge’s bench. Dozens of cardboard file boxes filled with records, documents, reports, pleadings, interrogatory answers, responses to admissions requests, and other filings lay neatly stacked and labeled on a long bench that ran the width of the room between the attorneys and the gallery.

Weeks before, final discovery had been completed and several hundred pages of pretrial motions filed with the judge. Both sides, as required, submitted to the court their witness lists and indexed exhibit binders, with copies sent to opposing counsel. Three four-inch volumes were filed by the plaintiff, four by the defendants.

 

Chapter Six OPEN FIRE

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OPENING STATEMENTS, AS JURORS ARE REPEATEDLY REMINDED, are not evidence. Furthermore, they are not final argument. They are merely an organized recitation—a road map—describing what the actual evidence in the case will be. That being said, to most people opening statements sound an awful lot like both evidence and argument. They are an important early opportunity for the lawyers to talk directly to the jurors about the facts. More importantly, they are a strategic watershed, a chance to out-maneuver opposing counsel and cut him or her off at the knees early in the process.

Of all the many givens in trial practice, one of the most tried and true is that you never want to appear to have played “hide the ball” with a jury. If there are bad facts in your case you had better get them out there yourself, and early on. If you wait for the other side to do this, you’re dead. I can hear the taunt in my sleep: “Well, Mr. Bourhis gave a very nice opening statement to you. Yes, very nice indeed. The only thing is, he didn’t tell you everything. He must have forgotten. He didn’t mention that his client is (fill in the blank).”

 

Chapter Seven SO HELP ME GOD

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THE MOST IMPORTANT WITNESS IN ANY CASE IS THE PLAINTIFF. IF the jury can identify with her and agree that she is doing what’s right by bringing a lawsuit to recover damages for events that happened to her, then the battle is half won. On the other hand, if the plaintiff comes off as a whiner, an angry person, or someone who’s exaggerating or looking for a windfall, then problems are created that may be insurmountable. This is not shocking. People have empathy for someone who was cheated, but they don’t like woe-is-me crybabies.

Someone who appears angry, upset, tearful, or vindictive can really turn a jury off. A good cross-examiner can exploit this very effectively, making the plaintiff her own worst enemy. In preparing Joan for her testimony, Alice and I tried to anticipate as much of this defense tactic as possible. We wanted to give her a bigger dose of sour medicine than she would ever get from the defendants at trial. The problem was that in many ways Joan was angry, upset, tearful, and vindictive. She felt, and with good reason, that she had been knocked down, stepped on, crushed, and ruined by Ralph Mohney and Joseph Sullivan and Sandra Fryc and Chris Collins of Provident. And a part of her wanted to get them all back. The truth of the matter was that if she could have sent them all somewhere for a week of thumb bending, she would probably have done it in a flash. That is not the Joan we wanted to present.

 

Chapter Eight PINPRICKS AND PRETEXTS

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PLAINTIFF MAY CALL HER NEXT WITNESS,” JUDGE LARSON SAID.

“Thank you, Your Honor,” said Alice. “The plaintiff calls Dr. Edward Katz.”

Katz, a highly respected orthopedic surgeon, graduated from medical school at Northwestern University. He spent his early years treating disabled children at the Chicago Shriners’ Hospital. During the Vietnam conflict, he served two years as assistant chief at the Great Lakes Medical Center, performing orthopedic surgery on complex war-related injuries. For the past twenty-five years, Katz had a private practice in northern California, treating hundreds of patients and performing ten to fifteen surgeries per week.

Katz was a pleasant, unassuming, and casual man, with whom most people felt instantly comfortable. He testified that when he examined Joan, it was his understanding that prior to her injuries, Joan’s usual occupation had been that of a chiropractor in active practice. That is, he explained, she was a hands-on chiropractor that did myofascial manipulations (stretches and movements done on soft tissue), manual traction, and spinal adjustments.

 

Chapter Nine CUSTOMER CARE

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WE HAD RESTED OUR CASE. THE DEFENSE WAS UP. FOR UNUMProvident’s first witness, Horace Green called Sandra Fryc. Fryc was finally going to get to answer questions from a friendly examiner. She testified that she began working with Paul Revere in 1987 as a claims examiner. She worked in that position for two years. Through various promotions she moved to the positions of development manager, claims manager, and claims quality performance consultant. Fryc said that as a claims manager, she was involved in the training of claims personnel and in mentoring them—helping adjusters with specific problems or questions involving claims.

She stated that Paul Revere’s philosophy concerning claims handling was to perform a “thorough, objective, and fair handling of every claim.”

After the merger between Paul Revere and Provident, Fryc noted no change in the company claims philosophy. She said that the merger was good because it increased the resources necessary to handle claims properly.

Fryc was asked about her company’s process for handling claims. She said that resources such as medical, financial, legal, vocational rehabilitation, and underwriting services were all available to the claims department. In addition to evaluating claims thoroughly before they were denied, Fryc insisted that the company would also consider any new information made available by a claimant after the denial. If appropriate, the claim denial would be reconsidered. She said that the reason for sometimes ordering surveillance was to ascertain whether a claimant was being accurate with what he or she told the company, “to substantiate what the claimant was telling us.”

 

Chapter Ten FACT OR FICTION

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FEW PEOPLE REALIZE THAT IN ADDITION TO THE MORE COMMON privileges such as the attorney-client privilege, which conceals from public exposure verbal or written communications between a lawyer and client, something called the “work-product privilege” also exists. Under this, virtually everything an attorney does in preparation for litigation is out of bounds to discovery.

For example, if a lawyer is fishing around for an expert witness to testify on a client’s behalf, the lawyer can talk to any number of experts before choosing one. The identities of all the rejected experts can be hidden from the other side, concealed forever. The “designated” expert’s identity is disclosed only after he or she is formally “declared” as an expert. Those not ultimately chosen are considered “consultants.” They, along with whatever opinions they may have rendered, are kept secret. So even if an attorney goes through ten or fifteen candidates before finding one willing to say what the lawyer wants to hear, the other side has no way of knowing that.

 

Chapter Eleven …SOME WITH A FOUNTAIN PEN

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DRIVING HOME FOLLOWING JOAN’S TESTIMONY, I WRESTLED WITH different approaches for our closing argument. If only I knew what the jurors were thinking. But this was a very noncommunicative group—disturbingly so. After having spent four weeks sitting not ten feet from them, I still had no more of an idea where they were coming from than I’d had on the first day of trial.

Some arguments are best made to yourself—alone, in your car, with the windows rolled up. That this company was an outfit being run by a gang of avaricious, devious, sinister, inhumane, malevolent, amoral people was one such argument. That the jury should simply do to them what they had done to Joan—drive them into bankruptcy—was another.

True, there would be a certain poetic satisfaction in picturing a smug Ralph Mohney being hauled off his high horse, stripped of his assets, evicted from his home, and left standing, trying to preserve some sense of dignity, in donated clothing, on a food stamps line. Likewise, in picturing Chris Collins, Esq., in his battle fatigues, explaining to a bigwig stockholder how a jury of ordinary, decent folks could have chosen to consign UnumProvident to the same desperate fate as those whose lives it had destroyed.

 

Chapter Twelve A MESSAGE

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TWO HOURS LATER, WE GOT THE CALL. “THEY HAVE A VERDICT,” said Judge Larson’s clerk.

By the time we arrived downstairs in Judge Larson’s court, the defense was already in place. Many of those who had listened to the closing arguments were also back in court.

The jurors filed in. One by one, they shuffled down the two narrow aisles in the jury box, and settled quietly into their seats—blank stares, no outward emotion, no eye contact, nothing.

I glanced at Joan. She was sitting with her ankles crossed, fidgeting with a paper clip. Dark circles ringed her eyes. She appeared as if she hadn’t been getting much sleep. She looked isolated, worried, lonely, and completely drained.

I could tell she was thinking the same thing I was: Why wasn’t there even a hint from the jurors? Not a sympathetic smile? Not a reassuring nod? Not the slightest positive sign of any kind? It was as though we were completely invisible to them.

“I’m told you have a verdict,” said Judge Larson.

“We do,” said the jury foreman, Jeffrey Goldfine.

 

Chapter Thirteen LIAR’S DICE

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MICHAEL KARZIS FLEW TO SAN FRANCISCO ON A WEDNESDAY afternoon. Karzis, though young, had managed to land a job as an assistant producer with the best investigative news program in television history, 60 Minutes. Talking with him, I soon realized why.

Several weeks before, Karzis and his senior producer, David Gelber, had asked us to send them copies of depositions, trial transcripts, motions, court orders, and other documents from our various cases against UnumProvident. This involved thousands of pages. I’d doubted that anyone could possibly read, much less process, all the stuff we’d sent—certainly not within a matter of weeks.

But by the time Karzis showed up at our office, it was obvious he’d absorbed the material in its entirety. He knew the facts from every angle. He could quote witnesses verbatim and cite documentary evidence by the exhibit number. It was incredible. He wanted more.

Karzis asked questions I’d never heard anyone ask before. He was meticulous, serious, and very bright.

 

Chapter Fourteen FRIENDS IN HIGH PLACES

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ALICE DIDN’T HAVE TO WAIT LONG FOR AN ANSWER. ON APRIL 7, 2003, white-collar crime was given its biggest boost in history. Corporate swindlers, con artists, scammers, thieves, and killers had found an ally in a very unlikely place: the Supreme Court of the United States. In State Farm Mutual Automobile Insurance Company v. Campbell, our nation’s highest court slapped down the rights of states to sanction the awarding of punitive damages at a level sufficient to deter outrageous fraud.

Big exemplary damage awards, said the Court, were “unfair.” The thieves were “not on notice” for what could happen to them if they were caught robbing the bank. Punitive damages, said the Court, had to have a “single digit” relationship with the actual (compensatory) damages awarded. If the compensatory damages were, say, $200,000 or $300,000, exemplary damages should not be more than about $2 million or so.

This arbitrary standard, which was simply made up by the justices signing off on this ruling, would obviously do nothing to deter a company focused on increasing profits by hundreds of millions or billions of dollars. If anything, the ruling would reward the biggest crooks from the biggest gangs in the land. The more a company could steal, the less the percentage of the loot it would have to cough up. States with exemplary damages laws that took into account the amount necessary to deter the conduct in question were dismissed with a wave of the hand. “Here’s your hat,” said the Supreme Court. “What’s your hurry?”

 

Chapter Fifteen KICK IN THE ASSETS

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YEARS AFTER UNUMPROVIDENT HAD FILED ITS APPEALS IN McGregor and Hangarter to the Ninth Circuit, and months after oral argument, two different three-judge panels issued rulings in both cases. The first ruling came in McGregor on January 15, 2004. The panel, made up of justices Procter Hug Jr., Betty Binns Fletcher, and A. Wallace Tashima, unanimously affirmed the trial court’s verdict, finding Unum guilty of bad faith. Following a futile attempt to obtain an en banc hearing (involving a panel of twelve judges) from the entire circuit, Unum finally paid the judgment. It really had no choice but to do so. The only additional appeal it had left was to petition the U.S. Supreme Court, and the types of cases accepted by the Court are almost always restricted to matters involving major constitutional or first impression issues or cases involving conflicting decisions among the circuit courts of appeals.

A few months later on June 25, 2004, the Hangarter panel, consisting of Justices Alfred T. Goodwin, A. Wallace Tashima, and Richard R. Clifton, also ruled. Again the decision was unanimous. Again, the ruling affirmed the trial court’s verdict (disagreeing only as to Judge Larson’s injunction on the technical grounds that a Section 17200 case has to be brought in state, not federal, court). Again, following its usual feeble grumbling and after using what seemed like every delaying device imaginable to put off paying for as long as possible, UnumProvident threw in the towel.

 

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