A California investment analyst won a lucrative new job that included a high salary and a large annual bonus. But 3 months into his employment there, he was severely injured in a bicycling accident that left him a quadriplegic. He applied for long-term disability insurance but then felt the insurer tried to cheat him. So he went to court.

What happened. “Donald” joined Thomas Weisel Partners (TWP) in spring 2007 as managing director in its institutional sales department. His offer letter said he’d be paid $200,000 per year plus a $300,000 annual bonus. Following his accident, Donald learned that TWP’s long-term disability carrier was Unum Life Insurance Co. And, Unum soon decided that it wouldn’t calculate his monthly benefit—60 percent of his salary up to $20,000—based on his salary plus the bonus, but only on his salary.

Donald rejoined that his offer letter had stated his income as $500,000, not $200,000. And, TWP, saying it must “morally honor” its promise, paid his bonus for his first year despite his disability. Donald and his lawyer hired some consultants to help with his case, but Unum turned a deaf ear to all.

Donald sued Unum in federal district court, but the judge sided with Unum. Donald appealed to the 9th Circuit, which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington.

What the court said. Appellate judges believed the district judge had made several mistakes. The judge had correctly, they said, noted Unum’s inherent conflict of interest: It “both decides who gets benefits and pays for them.” But he’d given too little weight to that conflict, had improperly refused to admit evidence outside the administrative record, and had failed to view the evidence as favorably to Donald as possible.

In particular, Donald had obtained several internal Unum memos about his case that cast the company’s decisions in a poor light, but the district judge wouldn’t admit them. Appellate judges ruled they should be admitted. And they went a good deal further: Two out of three of them pointed to a damning history from other courts of Unum’s “erroneous and arbitrary benefit denials, bad faith contract misinterpretations, and other unscrupulous tactics.” So judges reversed the district court’s ruling and sent the case back for reconsideration. Stephan v. Unum Life, U.S. Court of Appeals for the 9th Circuit, No. 10-16840 (9/12/12).

Point to remember: We’re surprised appellate judges went this far to criticize Unum, especially since similar conflicts of interest are common. And we’d be equally surprised if that criticism didn’t hurt its reputation with corporate clients.