CHATTANOOGA, Tenn. â€“ It is a big dilemma for insurance investors: Do you buy the stock of an insurer because it saves money by being tough on claims? Or should you sell because those claims practices draw plaintiffsâ€™ lawyers like flies?
That claims conundrum is hanging over the stock of UnumProvident Corp., the nationâ€™s largest disability-income insurer. The manner in which the company, headquartered here, handles claims is being scrutinized by Georgia insurance regulators, and some former UnumProvident employees, in sworn statements now part of policyholder or wrongful-dismissal lawsuits pending against the company, allege that Unum is overzealous in denying claims. The company maintains that it pays all legitimate claims and that the critics have distorted its approach, which is geared toward getting employees back to work.
The critics include a doctor who used to count among the 100 physicians that the company brags in marketing materials are in house to evaluate claims. In a lawsuit filed this summer in a Tennessee state court alleging wrongful dismissal, Dr. Patrick Fergal McSharry contends that one duty of the in-house doctors to rubber-stamp claim denials. Many decisions on claims are made by low-level staffers, with doctors sometimes feeling pressure to validate decisions regardless of the medical evidence, the lawsuit contends.
In an interview, Dr. McSharry, who worked at Unum from November 2000 until January of this year, maintains the front-line claims consultants know they can advance their careers by showing a â€œknack for denying claims.â€
The Georgia Insurance Department has been conducting an investigation of UnumProvident for nearly two years, with a report expected by year end. Insurance Commissioner John Oxendine says, â€œThere are areas of concern and they deal with claims handling.â€ He notes that while the number of complaints the department received about UnumProvident wasnâ€™t high, the companyâ€™s response to the departmentâ€™s queries â€œgave my staff the feeling that something might not be the way it should be.â€ He adds: â€œThe preliminary results indicate that my staff was accurate with its gut feeling.â€
More potentially bad news came Monday, when a lawsuit seeking class action status was filed in federal court in New York accusing UnumProvident of improper claims practices. â€œThe unfolding evidence of UnumProvidentâ€™s scheme is staggering,â€ the lawsuit contends. An Unum spokesman says the company â€œquestions the potential class status, in that these claims are handled individually,â€ adding that it believes â€œwholeheartedly in the integrity of our claims-management process.â€
Shares of UnumProvident, which climbed as high as $29.45 in April, stood Wednesday at $21, up 33 cents in 4 p.m. composite trading on the New York Stock Exchange.
UnumProvidentâ€™s investors, while wary of expensive litigation and regulatory action, take comfort in the companyâ€™s approach to claims. â€œIf Unum didnâ€™t have lawsuits against it, I donâ€™t think the people handling claims would be doing their jobs,â€ says Edgar Wachenheim III, chairman of Greenhaven Associates Inc., a big holder of Unum shares.
But if Georgia comes out with a negative report, it could spark probes in other states, says Kevin Hennosy, a Kansas City, Mo., consumer advocate. And if the scrutiny compels Unum to use a more lenient claims regimen, its bottom line could be hit. Insurance companies set up reserves to cover claims to be paid in the future, in part by using their experience as a guide. So any changes could prompt a charge against earnings to boost its reserves.
A company spokesman says that of the 400,000 claims it received last year, fewer than 2% of claimants were determined not to be disabled. (Comparable numbers from rivals arenâ€™t generally made public, according to research firm Conning & Co.) UnumProvident, which paid $3.6 billing in claims last year, also points to statistics compiled by regulators showing fewer complaints against it, in relation to its size, than other disability-income insurers.
In the lawsuit filed Monday, attorneys for the four named plaintiffs allege that UnumProvident established targets â€œfor cost-saving to be attained through the denial of claims,â€ and gave high-dollar claims â€œgreater consideration for termination.â€ The suit also states that claims specialistsâ€™ â€œability to terminate claimsâ€ impacted their likelihood of being promoted. Dr. McSharryâ€™s lawsuit claims that â€œmedical advisors were encouraged to use language in their reports that could be used to support denials.â€
Ralph Mohney, UnumProvidentâ€™s claims director, says no financial goals are set by claim units, although they do submit estimates of payments. The company says the estimate arenâ€™t shared with claims personnel and that high-dollar claims receive no greater scrutiny. Mr. Mohney says no bonuses have been paid to claims handlers based on savings from claims denials and taht promotions arenâ€™t based on claims denials and that promotions arenâ€™t based on claims denials, though claims handlers could be rewarded for skill and â€œsuccess in getting someone back to work.â€ He rejects suggestions that the in-house physicians are coached to word reports to support denials.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack