Multi-State, $120M Agreement with UnumProvident Requires Reassessing Claims Back to 1997

November 18, 2004

A multi-state settlement with UnumProvident Corp. over its disputed handling of disability claims would cost the firm more than $120 million to comply and require it to review more than seven years of claims. It also calls for $15 million in fines.

The agreement does not preclude the possibility of further fines and sanctions by states that decide to pursue additional settlements. It must be approved by two-thirds of states before becoming effective in all states.

The insurance regulators of Maine, Massachusetts and Tennessee released their examination of the claim handling practices of three disability insurers owned by UnumProvident, along with settlement agreements requiring the companies to change their claims practices and to re-assess certain claims going back as far as 1997.

UnumProvident has been the repeat target for several years of complaints and lawsuits alleging it unfairly and deliberately denied disability claims.

In addition to the three lead states in the agreement, 47 other states and the District of Columbia joined in the multi-state market conduct examination of Unum Life Insurance Company of America, The Paul Revere Life Insurance Company, and Provident Life and Accident Insurance Company.

The U.S. Department of Labor, which conducted a related investigation of UnumProvident’s practices involving employee benefit plans covered by the Employee Retirement Income Security Act, is also a party to the settlement agreements. New York’s Attorney General, who also investigated the companies’ claim practices, has endorsed the settlement.

All 50 states and the District of Columbia will have the opportunity to join in the identical settlement agreements signed by Maine Insurance Superintendent Alessandro Iuppa, Massachusetts Insurance Commissioner Julianne Bowler, Tennessee Insurance Commissioner Paula Flowers, and U.S. Department of Labor Employee Benefits Security Administration Regional Director James Benages. A substantially identical agreement was signed by Gregory Serio, New York Superintendent of Insurance, with UnumProvident’s New York company. All four agreements become effective once two-thirds of the participating states have approved.

“This action is one of the most significant multistate insurance regulatory actions in history, providing a uniform, verifiable and effective state-based settlement for the benefit of UnumProvident policyholders nationwide,” said Maine Superintendent Iuppa.

The multistate market conduct examination identified several claims handling practices of concern to the state insurance regulators, including:

• excessive reliance on in-house medical staff to support the denial, termination, or reduction of benefits;
• unfair evaluation and interpretation of attending physician or independent medical examiner reports;
• failure to evaluate the totality of the claimant’s medical condition; and
• an inappropriate burden placed on claimants to justify eligibility for benefits.

“As regulators, our duty is to protect the hundreds of thousands of policyholders who depend on these companies for disability benefits,” said Tennessee Commissioner Flowers. “This agreement makes sure that policyholders and claimants, past and present, get what they paid for – meaningful disability coverage.”

“Throughout this process, we were committed to providing a just solution that benefits all of UnumProvident’s policyholders and claimants, and we’ve done that,” said Flowers.

The settlement agreements, which are substantially similar, require the companies to:
• offer, in writing, to reassess claims denied or closed since January 1, 2000 for reasons other than settlement, death, or reaching benefit maximums (about 215,000 claimants are in this population);
• allow for reassessment, upon request, of claims similarly denied or closed between January 1, 1997 and December 31, 1999;
• modify claims handling and benefit determination practices as specified by the agreements;
• improve accountability and oversight of claims processes as specified in the agreements; and
• enhance corporate governance by expanding the Board of Directors by three directors with insurance industry or regulatory experience.

“The agreements require significant changes in UnumProvident’s claim handling processes, and our agencies will continuously monitor and assess the companies’ compliance with the agreements,” said Massachusetts Commissioner Bowler.

The cost of the examination, the continued oversight called for in the settlements, and compliance with the settlements is estimated to be more than $120 million.

The companies also will pay a fine of $15 million, which will be divided on a pro-rata basis among the participating states based on the long term disability income insurance premium in each state as of December 31, 2003. If the companies fail to meet the terms of the Plan of Corrective Action set forth in the agreements, a substantial fine ($145 million) will be imposed.

“We are pleased the global settlement will protect the rights of affected employees to a fair, impartial consideration of their claims,” said Ann L. Combs, Assistant Secretary of Labor for Employee Benefits Security Administration.

The multi-state exam began in September 2003, after Massachusetts and Tennessee had begun market conduct examinations of their respective domiciled companies. In consultation with their colleagues nationwide through the National Association of Insurance Commissioners (NAIC) all the states and the District of Columbia joined in the multi-state examination.

UnumProvident was the target of a class action suit filed in 2002 and media reports suggest there have been almost 3,000 lawsuits filed against it.
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Following announcement of the agreement, A.M. Best Co. said it would not be taking a rating action and that its outlook on UnumProvident’s ratings remains negative.

A.M. Best said it remains concerned with the ongoing announcement of one-time charges; however, after analyzing the impact of the upcoming fourth quarter charge, A.M. Best remains comfortable with UnumProvident’s GAAP and statutory capitalization and the current level of earnings.

A.M. Best noted that while all 50 states, D.C, the New York Attorney General and the Department of Labor participated in the multi-state market conduct exam, the settlement will need approval from at least two-thirds of the states to ratify. A few states, including California, have also conducted separate market conduct exams recently but have not ruled on their findings. Jurisdictions that choose not to approve the multi-state settlement can individually impose additional fines or request other costly remedies in addition to this charge.

Because of these factors, A.M. Best said there is uncertainty that ultimate remediation expenses from the multi-state exam might exceed anticipated levels in UnumProvident’s own estimates if additional fines are levied by other regulators.

A.M. Best said it would monitor UnumProvident’s operations as to the impact of the multi-state settlement, as well as the operating results on its core group long-term disability business.

On May 6, 2004, A.M. Best affirmed the financial strength ratings of A- (Excellent) and the senior debt rating of “bbb-” of UnumProvident’s insurance subsidiaries. All of the group’s ratings have a negative outlook.

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