Chief U.S. District Judge William Young, the author of the provocative indictment of the claims practices of the UnumProvident Corp. in Radford Trust v. First Unum Life Insurance Company of America, 321 F.Supp.2d 226 (D. Mass. 2004), has written yet another thoughtful opinion.

The ruling in Iwata v. Intel Corp., 2004 U.S. Dist. LEXIS 24973 (D. Mass., Dec. 8), involves a motion to dismiss a complaint alleging that Intel Corp. fired Jeanne M. Iwata on account of her mental disability and her efforts to pursue a claim for disability benefits. The complaint further alleges a self-insured plan's exclusion of benefit payments for mental illness constitutes unlawful discrimination under state and federal law.

Ironically, the plaintiff was an occupational health nurse for Intel whose job duties included assessment of employees as to fitness for duty. She became disabled following an incident involving an employee who threatened violence in the workplace; Iwata suffered major depression as well as post-traumatic stress disorder.

Although she received short-term disability benefits, Iwata was denied long-term disability based on plan provisions excluding coverage for mental illness unless the claimant is hospitalized. Iwata also was terminated from her employment due to her inability to return to work when her short-term disability leave expired.

The plaintiff subsequently was awarded Social Security disability benefits; she also received a notice of right to sue from the Equal Employment Opportunity Commission. She then filed suit under 29 U.S.C. §1140, challenging her dismissal, as well as pursuant to 29 U.S.C. §1132, seeking payment of benefits. In addition, Iwata sued under state anti-discrimination laws, as well as the Americans with Disabilities Act.

Recognizing that the plan does not provide for benefits for mental disabilities other than when the claimant is hospitalized, the court nonetheless observed that federal laws are not preempted by the Employee Retirement Income Security Act; and if the provision of the plan constitutes unlawful discrimination, it will be stricken from the plan, thus giving the plaintiff a cause of action for benefits under the plan. The court did find, though, that the plaintiff could not establish retaliatory discharge or other liability under section 1140.

Turning to the ADA claim, the court noted that the definition of ''discriminate'' under 42 U.S.C. §12112 includes ''limiting, segregating or classifying a job applicant or employee in a way that adversely affects the opportunities or status of such applicant or employee because of the disability of such applicant or employee,'' either directly or via a contractual relationship with, inter alia, ''an organization providing fringe benefits to an employee of the covered entity.'' The definition also includes ''utilizing standards, criteria or methods of administration that have the effect of discrimination on the basis of disability.''

The court added that the ADA regulations render it unlawful for an entity covered by the ADA ''to discriminate on the basis of disability against a qualified individual with a disability in regard to fringe benefits available by virtue of employment, whether or not administered by the covered entity.'' 29 C.F.R. §1630.4(f). Nonetheless, there is a safe-harbor provision that allows for discriminatory classification in insurance so long as it is ''based on underwriting risks, classifying risks or administering such risks that are based on or not inconsistent with state law.'' 42 U.S.C. §12201(c).

Against this backdrop, the court first determined that Iwata could be a qualified individual with a disability and rejected applying Cleveland v. Policy Management System Corp., 526 U.S. 795 (1999), which held that it was not necessarily inconsistent to seek disability and also claim discrimination, since that case applied only to persons challenging terminations or hiring.

The court recognized, though, that several rulings have held that individuals claiming total disability are not ''qualified individuals with a disability'' subject to protection under the ADA: Weyer v. Twentieth Century Fox Film Corp., 198 F.3d 1104, 1108 (9th Cir. 2000) (noting the burden of proof rests with the ADA plaintiff); Parker v. Metropolitan Life Insurance Co., 99 F.3d 181, 186-87 (6th Cir. 1999), reversed on other grounds, 121 F.3d 1006 (6th Cir. 1997) (en banc); EEOC v. CNA Insurance Cos., 96 F.3d 1039, 1043-44 (7th Cir. 1996); Beauford v. Father Flanagan's Boys' Home, 831 F.2d 768, 771 (8th Cir. 1987) (holding as much under the Rehabilitation Act).

However, the court cited rulings from the 2d and 3d U.S. Circuit Courts of Appeal recognizing that since the ADA extends to fringe benefits, the ''qualified individual with a disability'' definition must encompass such a situation; otherwise ''no totally disabled person could ever challenge discriminatory distribution of fringe benefits, even though the ADA prohibits such discrimination.'' Citing Ford v. Schering-Plough Corp., 145 F.3d 601, 605-07 (3d Cir. 1998); Castellano v. City of New York, 142 F.3d 58, 67 (2d Cir. 1998).

''It seems unlikely,'' the court added, ''that Congress intended to create a bait-and-switch, where an individual is only covered by the statute until the moment when she actually needs its protection. The more reasonable interpretation of the statute is that a former employee who is denied access to fringe benefits due to disability-based discrimination can bring suit to challenge such discrimination.''

The court next determined that the ADA prohibits discrimination between the mentally disabled and the physically disabled, although Young recognized the body of case law pointing in the opposite direction: Weyer, 198 F.3d at 1116-17 (holding that conditions on long-term disability benefits for mental illnesses did not constitute discrimination under the ADA, as conditions were equally applicable to all employees); EEOC v. Staten Island Savings Bank, 207 F.3d 144, 148 (2d Cir. 2000) (affirming dismissal under Rule 12(b)(6) of ADA claim because the statute did not require an employer to provide a particular level of benefits); Kimber v. Thiokol Corp., 196 F.3d 1092, 1102 (10th Cir. 1999) (same); Lewis v. Kmart Corp., 180 F.3d 166, 172 (4th Cir. 1999) (same); Ford, 145 F.3d at 608 (same); Parker v. Metropolitan Life Insurance Co., 121 F.3d 1006, 1015-19 (6th Cir. 1997) (en banc) (stating that ''Congress did not believe the necessity for parity between mental and physical disabilities in long-term disability plans was sufficiently compelling to include them within the purview of the act''); CNA Ins. Co., 96 F.3d at 1044-45 (affirming dismissal under Rule 12(b)(6)); Krauel v. Iowa Methodist Medical Center, 95 F.3d 674, 678 (8th Cir. 1996) (affirming the decision that the plan was ''not a disability-based distinction in violation of the ADA''); Modderno v. King, 82 F.3d 1059, 1061-62 (D.C. Cir. 1996) (citing Alexander v. Choate, 469 U.S. 287, 304 (1985)) (affirming dismissal of claim under the Rehabilitation Act that plan discriminated against persons with mental disabilities); Wilson, 117 F.Supp.2d at 97-98 (dismissing claims since access to the disability plan was not denied).

On the other hand, to the contrary is Johnson v. Kmart Corp., 273 F.3d 1035 (11th Cir. 2001), which was vacated pending rehearing, though that has been stalled due to the Kmart bankruptcy. Johnson found that offering a lesser benefit to the mentally disabled was discriminatory. The court also expressed its belief that, ''[I]t is much more difficult to find actuarial reasons to treat mentally and physically disabled participants differently. The costs of income replacement do not vary based on whether an individual's inability to work results from mental or physical disability. It is considerably more likely that differential treatment in such a context results from beliefs that mental illness is less 'real' or debilitating than physical injury, or that individuals who claim to have mental disabilities are more apt to be 'faking it.' ''

As further support, Young cited the EEOC Enforcement Guidance, which declares that health-related insurance distinctions ''that are based on a disability may violate the ADA. A term or provision is 'disability-based' if it singles out a particular disability (e.g., deafness, AIDS, schizophrenia), a discrete group of disabilities (e.g., cancers, muscular dystrophies, kidney diseases), or disability in general (e.g., non-coverage of all conditions that substantially limit a major life activity).''

The court therefore concluded, ''Assuming, then, as the court must at the motion to dismiss stage, that the plan's distinction between mental and physical disabilities is motivated by stereotypes about mental disability, rather than by actuarial considerations, Iwata has stated a claim under the ADA.''

This is an interesting analysis, but Young himself acknowledges that the weight of legal authority is against him. He also could have cited the influential 7th Circuit ruing in Doe v. Mutual of Omaha, 179 F.3d 557 (7th Cir. 1999); cert. denied 120 S.Ct. 845 (2000), as yet another decision holding that the ADA does not regulate the content of an insurance policy and that limited benefits as to discrete medical conditions are not unlawful (caps on reimbursement of medical expenses incurred for treatment of AIDS).

The judge's speculations about the basis for the distinction between mental and physical disabilities was also questionable, although when the Parker case was originally decided before the en banc ruling cited above, the court challenged MetLife to provide an actuarial justification for the distinction. Another interesting ruling in that regard is Goldman v. Standard Insurance Company, 341 F.3d 1023 (9th Cir. 2003), where the 9th Circuit reinstated an action challenging Standard's refusal to issue coverage to individuals with a history of treatment for adjustment disorders, finding that such refusal violated California's anti-discrimination laws unless the insurer could demonstrate an actuarial justification for its underwriting decision.

There is another aspect to this ruling, though, that is extremely troubling; and Young does not mention it at all. We have wondered whether Doe v. Mutual of Omaha would have come out the same way if it had excluded reimbursement for AIDS entirely rather than limiting the reimbursement. The Intel plan, unlike most group coverage for long-term disability, does not pay benefits at all for disabilities due to mental illness, rather than limiting the duration of payments. This is like selling health insurance that excludes treatment for cancer. The insured thinks she is protected only to find out that there is no coverage whatsoever for a risk generally recognized might occur.

Although some state insurance departments might not approve such policies, it is quite likely that policies with such exclusions would be approved in some jurisdictions. Unless there is a ground for finding exclusions of certain disabilities unlawful, the next step will be to exclude disability payments for fibromyalgia, chronic fatigue syndrome, complex regional pain syndrome/reflex sympathetic dystrophy, or perhaps other conditions such as degenerative joint disease, heart disease or virtually any ailment.

Insurance policies have long been recognized as contracts of adhesion where the consumer has little, if any, bargaining power with respect to the terms of the policy. While a competitive marketplace might encourage insurers to be more liberal as to coverage terms, we can easily envision just the opposite occurring — once one company sees another company write more limited coverage, it would encourage the entire industry to move in that direction. Witness the rapid spread of ''self-reported illness'' limitations once Unum inserted such provisions into their contracts. The doctrines of ''reasonable expectations'' and contra proferentum, which protect consumers from unreasonable interpretations of insurance policies when the language is unclear can go only so far in avoiding against a race to the bottom as far as limiting coverage.

Particularly in an ERISA environment, though, where plans write discretionary language in their contracts giving themselves the right to interpret the policy in a manner that serves their financial interests, the courage of judges such as Chief Judge Young of the District of Massachusetts will hopefully trigger a policy debate on the purpose of insuring against disability and how far will consumers allow insurers to go in limiting coverage.