A commercial airline pilot in Pennsylvania had a psychotic episode while on duty and was hospitalized. As he progressed through diagnosis and a course of treatment, the Federal Aviation Administration revoked his medical certification. The spiral of events after that must have seemed like a nightmare to him.

What happened. “Miles” had flown for American Airlines for 10 years when the episode occurred. His psychiatrist said he had an anxiety disorder, worsened by sleep deprivation, which led to “brief reactive psychosis.” He began taking several medications and applied for long-term disability benefits under American’s plan for pilots. The plan had a clause called “own occupation,” meaning that a pilot qualified for benefits even if he could still perform some other job for the airline.

In November 1999, a little over a year after his episode, Miles began receiving benefits. He saw his doctor monthly, and was gradually allowed to stop taking the medications; the doctor said his progress was “favorable.” American’s plan contained another clause, saying that benefits would cease if “verification of such disability can no longer be established.”

Beginning in May 2003, American periodically reviewed Miles’s doctor’s reports—that he had been “asymptomatic” since the spring of 2001—to see if he was still disabled. Because his FAA medical certification had been withdrawn, he was clearly still unable to work. But suddenly in 2006, American notified Miles that because he had not pursued FAA recertification on his own, his benefits would end. Again, his doctor stressed that Miles was permanently barred, by the nature of his illness, from obtaining the needed certification, but American stood firm.

Miles sued for violation of his rights under ERISA, the Employee Retirement Income Security Act. Against the advice of a magistrate judge, a federal district court judge ruled for American’s plan administrators. Miles appealed to the 3rd Circuit, which covers Delaware, New Jersey, and Pennsylvania.

What the court said. It appeared to appellate judges that Miles had been caught in a Catch-22: Having once been diagnosed with his condition, he couldn’t be recertified, so he couldn’t work. Moreover, American’s plan did not require a beneficiary to apply for his or her own recertification. So judges ordered benefits restored retroactively, saying administrators had acted arbitrarily and capriciously. Miller v. American Airlines, U.S. Court of Appeals for the 3rd Circuit, No. 10-1784 (1/25/11).

Point to remember: Courts now scrutinize terminations of long-term disability benefits, because insurers have an incentive—saving themselves money—to deny payments.