Much of the expansion was driven by economic changes that spurred the need for disability coverage. The changes required many families to begin fielding not just one full-time worker, but two, in order to afford a middle-class life. As a result, families lost their "reserve player," the non-working spouse who could enter the workforce if the other fell ill or was injured, and so found it increasingly important to take out insurance against that possibility.
However, by the late 1970s and early 1980s, many politicians and business executives had become convinced that matters had gone too far, that industry and government could not afford many of the promises they'd already made, and that some programs were backfiring by leading people to fake or exaggerate problems to collect benefits.
Remarkably, in the case of disability insurance, the first group to bring the issue to a head was the nation's doctors, seeking payments not for their patients but for themselves.
Disability insurers had sold a generation of doctors extremely generous, individual, "own occupation" policies, confident that their new clients would continue working almost no matter what, and therefore file few claims. But as the managed care revolution began to clamp down on what physicians could charge, many doctors started to exit their profession and, according to insurance industry executives, a considerable number filed for disability.
At the U.S. Supreme Court and at many federal appeals courts, attention focused on the Employee Retirement Income Security Act of 1974.
According to its preamble, ERISA's goal was to "protect ... participants in employee benefit plans and their beneficiaries." Although the 208-page law's chief focus was pensions, it also superseded virtually all state laws that "relate to any employee benefit plan." One of its authors, the late Sen. Jacob K. Javits, a New York Republican, praised ERISA as "the greatest development in the life of the American worker since Social Security."
But over the last 25 years, the Supreme Court has read the "relate to" provision so broadly that claimants who believe they have been wrongly denied benefits are rarely able to sue for punitive damages under state bad-faith or fraud laws.
The court has said the most that claimants generally can win by suing in federal court is the original benefits due them, no matter how long their wait or, often, how steep their legal fees.
In addition, the court has effectively granted insurance companies and benefit plan administrators a special status that requires an employee whose claim has been denied to prove not just that the denial was wrong, but that the officials making the decision acted in an "arbitrary and capricious" manner.
Two views of ERISA
The insurance industry argues that the recent trend in the law has strengthened, not weakened, the employee benefit system.
"It has allowed companies and unions to operate benefit plans without getting chewed up by lawsuits," said Steven J. Sacher, who helped draft ERISA as a young Labor Department lawyer and now represents insurers as an attorney with the Washington office of Kilpatrick Stockton. "That means they're willing to offer employees more choice of benefits at better prices."
"I'm a big fan of ERISA," UnumProvident Chief Executive Thomas R. Watjen said in a recent interview. "It gives consumers a voice they didn't have before."
Watjen and other UnumProvident executives defend the company's operations, especially its handling of claims. "We strive to set the standard for fair and objective claims handling," said Senior Vice President George A. Shell Jr.
As evidence, Shell said UnumProvident paid more than 90% of the 450,000 disability claims it received last year, at a cost of $4.2 billion. He said that in an additional 8% of cases, the firm did not pay because of what he described as technical reasons, as in cases where claimants returned to work before they became eligible for benefits. Only in the remaining 2% of cases or less -- involving no more than 9,000 claimants -- did the firm limit or deny benefits that led claimants to appeal.
But industry experts say that the profitability of disability insurers hinges not so much on the mass of routine claims, which typically are for short periods and involve small sums, but rather on a small number of long-term claims by people who were making good -- and therefore expensive-to-replace -- incomes.
"There's no question claims costs are driven by the adverse experience of a small percentage" of claimants, said Charles E. Soule, retired CEO of Paul Revere Life Insurance Co., one of three firms that merged in the late 1990s to form UnumProvident, and author of the definitive textbook on disability insurance. "I mean we're talking about single-digit."
