Guardian disability insurance denial is upheld by Ohio Federal Court & Sixth Circuit Court of Appeals

A Federal Court of Appeals recently upheld Guardian’s decision to terminate long-term disability payments to an executive after four years. In Schwalm v. Guardian, the Court found that Guardian’s decision was supported by substantial evidence and was not arbitrary and capricious. Such evidence included that fact that during the final two years he was receiving disability benefits, Schwalm had been working upwards of fifty hours per week for a technology start-up company, though he had never been paid. A closer look at the background of the case reveals additional insight as to why the Court sided with Guardian. After reviewing the Court’s opinion in this case it appears that the Claimant never really stood of chance of overturning the claim denial.

John Schwalm, the chief administrative officer of Acero, Inc., injured his back lifting luggage on a business trip in 1999. The injury turned out to be a herniated disk that required surgery. In late 1999, Schwalm underwent two surgeries to provide relief, but the back pain increased. In 2002, he sought a second opinion and underwent a third surgery. Orthopedic surgeon Louis Keppler performed a spinal fusion surgery on Schwalm’s L-4 and L-5 vertebrae in late 2002. Although recovery was difficult and the pain continued, Schwalm attempted to return to work in February 2003. Unable to continue, Schwalm applied for his long-term disability benefits from Guardian in March 2003.

The Guardian plan includes two definitions of disability: “own occupation” and “any occupation”. With these provisions, during the first 24 months of disability benefits payments, a person is considered disabled if the person is unable “to perform, on a full-time basis, the major duties of his own occupation.” After the initial 24 months of disability benefits payments, a person is disabled if they are unable “to perform, on a full-time basis, the major duties of any gainful work.”

Guardian reviewed Schwalm’s application, determined that he was disabled pursuant to the “own occupation” definition, and mailed the first benefit payment of $7,000 in May 2003 (60% of his salary of $140,000 per year). “¨ In March 2004, after two more surgical procedures, Schwalm was referred to Dr. Edwin Covington for pain management. After diagnosing Schwalm with post-laminectomy syndrome, Dr. Covington and other doctors prescribed Schwalm with various medications (Maprotiline, Kadia, Vicodin, Effexor, methadone, Lyrica, and Oxycontin). After consulting with Dr. Covington for several months, Schwalk remained unable to return to work because of the pain and the side effects associated with the medications.

In May 2005 at the request of Guardian, Schwalm attended an independent medical exam (“IME”) with Dr. Michael Harris. Dr. Harris reviewed notes and records of Schwalm’s visits with Dr. Keppler, a questionnaire concerning Schwalm’s daily activities, X-rays from September 2003, an MRI from October 2003, and discussed Schwalm’s reported symptoms. Dr. Harris concluded that he did not believe that Mr. Schwalm would be capable to work as a CEO at full capacity due to physical limitations, loss of function, effects of opioids, and required accommodations including the ability to lie down several times per day.

After being shown a surveillance video of Schwalk moving around fairly comfortably, bending over into a car, and sitting in a coffee house working at his lap top for a 12 minute stretch at one point and then another 25 minutes, Dr. Harris did not alter his conclusion that Schwalm’s cognitive limitations would prevent him from resuming his chief executive duties full time, though he did conclude that “(c)learly, he can easily work at a sedentary level doing some type of management job…” “¨ On June 22, 2005, a Guardian medical specialist reviewed the results of the IME and Dr. Harris’s supplementary surveillance report, and concluded that Schwalm was still disabled, even though he could “perform some type of managerial position,” because the “complexity” of the duties associated with high-level business management may be impossible while on high doses of opioid medications. Guardian continued to pay Schwalm long-term disability benefits.

On June 1, 2005, Schwalm’s application for disability benefits from the Social Security Administration was denied. The Social Security Administration determined that Schwalm’s “condition is not severe enough” to keep him from working.

Guardian continued to pay Schwalm’s disability benefits for another year until August 2006 when Guardian received treatment records compiled by Dr. Covington’s office from February 2005 through August 2006. The records indicated that Schwalm was spending a significant amount of his time working in an executive management and finance role at a technology start-up called Peritus Technologies, LLC (“Peritus”). Schwalm was spending up to twelve hours per day at the company’s headquarters. Guardian also received a “Cooperation Agreement” between Schwalm and Peritus with an effective date of July 1, 2005 that provided that Schwalm was responsible for executive management functions while he agreed to work at least 160 hours per month. The Agreement indicated that Schwalm would not receive any salary until the company had turned a profit, but Schwalm’s targeted yearly salary would be $115,000.

The records Guardian received in August 2006 also contained repeated references to Schwalm’s alleged “denial” of cognition and alertness problems related to the pain medications. Based on this new information, Guardian began another review of Schwalm’s eligibility for benefits.

On November 29, 2006, Schwalm underwent a functional capacity evaluation (FCE) performed by Eric O’Brien, a physical therapist. O’Brien concluded that Schwalm was able to demonstrate physical tolerances within the medium category of work on both the occasional and frequent basis, and determined that at minimum, Schwalm can perform at a light physical demand level for a typical 8 hour day. O’Brien concluded, unequivocally, that Schwalm was physically able to perform the job functions of a chief executive officer.”¨ On February 26, 2007, Guardian received a vocational assessment (“VA”) performed by Jacqueline M. Pickering, a certified rehabilitation counselor and licensed professional counselor. After reviewing Schwalm’s employment history, FCE results, a letter written by Schwalm to Guardian in September 2006, and the Peritus Cooperation Agreement, Pickering concluded that Schwalm was capable of working an eight hour day and that his principal complaint, cognitive difficulties, was not supported by the objective evidence in the record.

On September 11, 2007, Guardian completed its review of Schwalm’s records and determined that he was no longer “disabled” within the meaning of the long-term disability insurance policy. Guardian discontinued his benefits as of that date. In a letter explaining its decision, Guardian emphasized that there was no objective evidence of cognitive difficulties in the record, and that Schwalm had been working for more than a year, albeit without compensation, in an occupation that was very similar to the one he left in 2002.

Schwalm promptly appealed on October 8, 2007. Schwalm emphasized that he continued to suffer from debilitating pain and severe side effects arising from the pain medications. He argued that the Cooperation Agreement evidenced a “vocational rehabilitation” project that he embarked on with a friend in an effort to preserve “professional capital,” and not any ability to engage in gainful work at a salary comparable to his former salary. Schwalm also provided “supporting documentation” which included a letter by Dr. Covington to Guardian’s “Adjudication Procedural Specialist,” which provided “affirmative statements to put proper context around statements and inferences in the Medical Records which were used inappropriately by Guardian in the initial review.”

The letter was actually prepared by Schwalm himself, and the copy included in the record was never signed by Dr. Covington. Indeed, when Guardian asked Dr. Covington about the letter, Dr. Covington emphasized that Schwalm had prepared it.

Schwalm also retained counsel to assist in his appeal, and in early 2008, he underwent a vocational evaluation (“VE”) at his attorney’s request. The VE was performed by Kathleen L. Reis, a certified vocational rehabilitation counselor at Allwork, Inc. Reis observed that Schwalm “appeared to have word-finding difficulty,” and frequently provided rambling or off-topic answers to her questions. Reis also noted that he “exhibited pain behaviors,” including “weight shifting, grimacing, and unannounced changes of posture.” Reis concluded that Schwalm’s position at Peritus was not “competitive employment.” “¨ On May 20, 2008, Schwalm’s attorney delivered an eleven-page letter to Guardian, which reviewed the record and emphasized favorable evidence. On June 12, 2008, Guardian issued its final denial of Schwalm’s long-term disability claim.

On June 16, 2008, Schwalm filed a complaint in the U.S. District Court for the Northern District of Ohio, challenging Guardian’s decision to terminate his long-term disability benefits. The Court determined that there was substantial evidence supporting Guardian’s decision to terminate benefits, and that it was not arbitrary and capricious to give more weight to Dr. Covington’s records, the FCE, and The Sierra Group VA, than to the Allwork VE and the IME performed by Dr. Harris.

Schwalm then appealed to the United States Court of Appeals for the Sixth Circuit. First, Schwalm contends that Guardian’s decision was arbitrary and capricious because Guardian did not consider all of the evidence in the record and misinterpreted other evidence. Second, Schwalm contends that Guardian’s decision is not supported by substantial evidence. Schwalm contends that Guardian’s termination of his benefits was arbitrary and capricious because the company did not properly consider cognitive limitations, as reported by Dr. Harris and Reis; “cherry picked” the evidence which was provided to independent evaluators, like The Sierra Group; and overemphasized the Cooperation Agreement even though Schwalm explained his employment at Peritus was not competitive.

The Court of Appeals reviewed the lower court’s ruling to determine if Guardian’s decision was arbitrary and capricious. The arbitrary and capricious standard requires courts to review the plan provisions and the record evidence and determine if the administrator’s decision was “rational.” Although the evidence may be sufficient to support a finding of disability, if there is a reasonable explanation for the administrator’s decision denying benefits in light of the plan’s provisions, then the decision is neither arbitrary nor capricious. Williams v. Int’l Paper Co.

The Court of Appeals agreed with the lower court that Guardian’s decision to terminate Schwalm’s long-term disability benefits was not arbitrary and capricious as Guardian’s decision was supported by substantial evidence.

The Court agreed with Guardian’s conclusion that Schwalm was no longer disabled within the meaning of the plan. Guardian noted that the medical evidence demonstrated that Schwalm was able to return to gainful employment at a salary consistent with his insured earnings. The conclusion was supported by substantial evidence, including the notes prepared by Dr. Covington’s nurse repeatedly noting Schwalm’s long hours and denial of cognition problems, The Sierra Group VA noting Schwalm’s physical ability to work and lack of objective signs of cognitive problems, and Schwalm’s own work product. Guardian also noted that Schwalm was working upwards of fifty hours per week for a salary target of $115,000 with Peritus (though Schwalm had yet to be paid, the Cooperation Agreement provided some indication of Schwalm’s own salary expectations and his own perceived ability to perform effectively at a high level).

The Appeals Court then noted that the FCE, The Sierra Group VA, Dr. Covington’s records and his comments on the FCE, Dr. Harris’ IME, the denial of benefits by the Social Security Administration, and even Schwalm’s own VE from Allwork suggest that Schwalm was physically capable of returning to a sedentary job. The Court also commented that any evidence of lingering pain and the side effects from the pain medications was based on Schwalm’s subjective representations medications and Guardian was entitled to discount it based on the other evidence in the record, such as the Cooperation Agreement that Schwalm entered into that provided a rather extensive list of duties including performing all of the company’s executive and administrative tasks and working at least 160 hours per month.

Due to the substantial evidence, the Appeals Court agreed that Guardian’s decision to terminate long-term disability benefits was not arbitrary and capricious and upheld it’s decision.