UNUM’s Unfair Incentives To Claims Handlers

Testimony Regarding Pressure and Financial Reward For Claim Denials and Closures

Rhonda Rigsby was the Vice President of executive and corporate compensation, and she testified in 2008 that the Company’s MICP program provided bonuses to Unum employees based on a formula starting with a target percentage based on the job level of the employee; the target percentage is not the maximum, but can be adjusted up or down. Exhibit H, Rigsby depo, p. 48.   The percentage is adjusted based on a combination of factors that include individual goals and corporate goals and corporate financial goals. Exhibit H, Rigsby depo, p. 46.  At the corporate level, there is a threshold goal, which must be met for there to be a payment under the plan.  “Once the threshold goal is met, there are additional financial corporate goals which are set and the evaluation of how the company performs against those financial goals determines the corporate achievement level.” Exhibit H, Rigsby Depo p. 46.

Former Unum medical director Dr. Patrick Fergal McSharry was also deposed regarding the financial incentives Unum gave its staff to deny legitimate claims.  Dr. McSharry’s engagement letter from Unum explains that, as an Associate Medical Director, Dr. McSharry was “eligible to participate in the Management Incentive Compensation Plan (MICP) at a target level of 25% of your base salary earnings.  He confirmed that the MICP is based on the achievement of certain corporate earnings thresholds and the formula includes weights for both corporate and individual goals.” (Exhibit F p. 22-24.)  Dr. McSharry explained that bonuses under the MICP could be as high as an additional 25% of an employee’s base salary. (Exhibit F p. 1, depo. p. 88)

In addition to bonuses under MICP, physicians and other managers have been eligible for even more bonuses under another bonus program called the “long term incentive program” or “LTI” program, which pays bonuses in stock and cash to higher level employees.  Exhibit H, Rigby Depo p. 66.  Eligible employees must be “an officer of the company . . . [or a manager at a certain level].” Exhibit H, Rigby Depo p. 66-67.  Assistant Vice Presidents receive deferred cash; Vice Presidents and above receive stock.  Exhibit H, Rigsby Depo p. 70. Ms. Rigsby testified that in-house physicians receive cash bonuses.

Ms. Rigsby explained that, “The program is very similar to the MICP program.  There are target award levels based on your job level. . . . And then the LTI program, just like the MICP program, has financial factors that determine the achievement level for that program. ” Exhibit H, Rigsby Depo, p. 67-68.  The range of bonuses under the LTI plan range from $10,000 at the assistant vice President (“AVP”) level to the CEO, who can earn up to approximately 350% of his salary. Exhibit H, Rigsby depo p. 68-69.  Under the LTI program, AVP’s receive deferred cash; VP’s and above receive stock. Exhibit H, Rigsby depo p. 69.

Dr. McSharry testified that disability cases were assigned to different teams or offices. (Exhibit F p. 5, depo p. 143.) The head of these teams encouraged the employees under them to make decisions in favor of the company.  The department heads:

“..were responsible for the company making the profit, the profitability.  They were – you know, there are two ways that an insurance company makes money.  One is from investments that they make on the claimant’s policies, and the second area is the claims management.  That’s the two areas, and these impairment heads were very responsible for getting results from claims management.” Id.

Unum’s former-CEO, Thomas Watjen, elaborated on the concept of how Unum makes money in a quarterly corporate earnings conference call with major investors.  Exhibit I, Unum Investor Call Transcript.  Answering a question about why the company had not been as profitable as investors expected, Mr. Watjen explained:

“I don’t think it is about underpricing [of insurance policy premiums].  We have done a lot of work to get our business properly priced. As you know, we put a lot of renewals into the marketplace.  We have terminated business that was unprofitable. It is not about a book of business that is underpriced. It is about – it is not about that issue.  It is not about higher levels of incidence [i.e., more disability claims], and it is not about severity [i.e., disability claims that cost more]. It is really about the claim performance piece.

I think when people think about what is embedded in the projections and our outlook and things like that, I would say that is a big piece of it.  It is really very much on the back of claim recoveries, not around pricing, not around severity, not around (indiscernible) at this particular point.

Id. at 4 (emphasis added).  This is Unum’s recent-CEO, explaining to Unum’s most important investors that the primary way this company makes money is “on the back of claim recoveries,” i.e., by denying more claims.”

Reserve and Other Financial Information Was An Integral Component of Unum’s Claims Evaluation, Including Plaintiff’s Claim, and is therefore Discoverable

As to reserves, Dr. McSharry testified that employees kept track of the amount of reserve money that claims handlers could “free-up” by denying cases.  Specifically, he obtained a spreadsheet showing the claim’s handler’s name, the claim number, and the amount of reserve that would be released by closing the claim. Exhibit F pp. 6-7, depo pp. 150-157.  He explained that the employees who closed the most in claims were considered the “great performers.” Exhibit F p.8, depo p. 160.

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