Why “internal appeals” are WORSE than a waste of time.

If an insurance company denies a claim for long-term disability benefits, the insured should not get side-tracked with the internal appeals process. If the goal is to have the insurer reverse their decision, or to reach a  settlement with the insured, then the fastest way to do this is by litigation. Let me tell you why.

Let’s begin with a bit of background about internal appeals and litigation. If one disagrees with the insurance company’s decision about a claim (that is, to deny the application for long-term disability benefits, or to stop payment of benefits), then the insured basically has two options: appeal the decision using the insurance company’s internal appeal procedures (the internal appeal), or file a lawsuit against the insurance company (litigation).

These two options are like a fork in the road: to the left is the road to internal appeals and to the right is the road to litigation.

What are internal appeals?

If an insurance company denies an application for disability benefits, or stops payment of disability benefits, most will give the insured an option to “appeal” the decision internally within the company. Quite simply, this means that the insured asks the insurance company to reconsider its own decision.

Each insurance company has a different procedure for internal appeals, but they all share some similarities. They usually involve 2-3 separate rounds of reconsideration.

The internal appeal process usually requires the insured to provide additional information or medical reports to the insurance company. The insurance company may send the insured for assessments with their doctors. Generally, they send the insured a series of letters denying the claim and inviting the insured to move to the next round of appeals. It may take several months to exhaust all the so-called levels of appeal.

Internal appeals: going the wrong way.

Upon receiving a denial of benefits, most insureds choose the route of internal appeals. There are many reasons why they chose to go this way. Some are not aware they have to option to bring a lawsuit against the insurance company. Some believe they have to do the appeals before they can bring a lawsuit. Most insured choose internal appeals because they believe it will be quickest and least expensive way to get the insurance company to reverse its decision; however, nothing could be further from the truth.

There are 4 reasons why taking the road to internal appeals is a big mistake.

Reason#1 – Internal appeals are simply a detour.

If the goal is to get to a place where the insurance company pays disability benefits, or reaches a settlement with the insured, then internal appeals are nothing more than a  detour to this final destination. Most internal appeals are a complete waste of time. Insureds spend months going through the motions: providing new information, getting doctor to clarify things, seeing the insurance company’s doctors, but the end result is always the same — they still deny the claim. Once an insurance company decides to deny a claim, there is almost nothing an insured can do to make them reverse their decision, short of filing a lawsuit against them.

Reason #2 – A waste of limited emotional and financial resources.

The Fabian Strategy is a famous military tactic, which is used to defeat an enemy by wearing them down over time, rather than facing them in direct battle. When the Fabian Strategy is used successfully, the enemy eventually gives up or is defeated because of lack of resources, frustration, or loss of morale. This tactic is named after the Roman general Fabius Maximus who used this strategy to defeat Hannibal.

Internal appeals are an example of the insurance company using the Fabian Strategy against their insureds. Understanding that internal appeals are nothing more than a delaying tactic, it is easy to see how effective this strategy is for insurance companies. A delay of several months or a year does not hurt the insurance company. They have very deep pockets; insureds, on the other hand, likely have very limited financial resources, especially if they cannot work.

After several months of no income, an insured will be in a much weaker position to start a lawsuit against the insurance company. Emotionally drained and bereft of morale, insureds are now more likely to accept settlement terms that are more favourable to the insurance company. Unfortunately, insurance companies can use the Fabian Strategy with great success.

Reason #3 – Internal appeals may harm the case.

There is a risk that insureds will harm their case during the internal appeals process. This happens in a number of ways. One common example is that the insured will create more of the “wrong type” of medical evidence. During the internal appeal, insureds will likely ask their doctors to write (yet another) letter to the insurance company. Most doctors do not know what issues they need to discuss in the letter. Worse yet, because of a lack of understanding, the doctor may be inadvertently saying things that harm the case.

Allowing oneself to be examined by the insurance company’s doctor (during the internal appeal process) is another common mistake. For strategic reasons, an insured will only want to attend one set of examinations with the insurance company’s doctors, and it is best to see their doctors in the context of litigation. It’s beyond the scope of this article to explain why, but basically there are more restrictions on the examinations that happen in litigation.

Insureds will want to avoid giving the insurance company “two kicks at the can” at getting a medical expert to support them. By sending insureds to a doctor during the internal appeals process, the insurance company is giving itself the opportunity to send the insured to another doctor later on in litigation, if it doesn’t like the opinion it gets from the first doctor. It will get two kicks at the can.  On the other hand, If the first medical examination happens during litigation, the insurance company is stuck with it, even if they don’t like what the doctor has to say.

Reason #4 – Limitation periods.

Once the insurance company denies a claim, or terminates payment of benefits, the insured usually has 2 years to bring a lawsuit against them. There are legal arguments lawyers can make about when the “clock” starts to run on the 2 year deadline, but the insurance companies always says it starts from the time of their first denial letter to you. I know. I’ve personally argued this very point in the BC Court of Appeal, back when I was in-house counsel at Manulife, in Pekarek v. Manufacturers Life Insurance Company, 2006 BCCA 250.

I once had a client who missed the deadline to file a lawsuit because he was stuck in the internal appeals process for over two years. He was eventually able to reach a settlement with the insurance company, but this issue of whether he missed the deadline was a problem in the case, and he had to accept a smaller settlement, than if there was no issue about a missed deadline. You want to avoid this problem in your own case. Don’t accept any assurances from your insurance representatives that you still have lots of time to file a lawsuit, unless they put it in writing to you.

Conclusion.

If internal appeals were just a waste of time, I wouldn’t advocate so strongly against them. They are much worse than just delay. When insureds take the road of internal appeals, they come out the other end weaker in every way. They will have wasted their limited financial and emotional resources, to go nowhere. Insureds may make common strategic mistakes by getting the wrong reports from their doctors and by being examined by the insurance company’s doctors. Once litigation finally starts, the insured will be in a much worse position to negotiate with the insurance company. Out of mental and financial desperation, the insured will be much more likely to agree to settlement terms more favourable to the insurance company.

If you have an insurance claim which has been terminated or denied, contact Jan Fishman, a former in-house Manulife lawyer, and put his experience to work for you.