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Discretionary Clauses Outlawed in Many States

If you have long-term disability coverage through an employer, chances are that the policy grants discretionary authority to the insurance company. This simply means that a federal court reviewing the decision must give deference to the insurance company's decision applying what is called an “arbitrary and capricious” standard of review. However, many states have outlawed such deference in part because an insurance company has a conflict of interest in both making the decision whether a person is “disabled” and then paying the monetary benefit. The following states have leveled the playing field by making it illegal to enforce such discretionary clauses.

California

Cal. Ins. Code § 10110.6: (a) If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed, whether or not in California, that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer, or an agent of the insurer, to determine eligibility for benefits or coverage, to interpret, to determine eligibility for benefits or coverage, to interpret the terms of the policy, contract, certificate, or agreement, or to provide standards of interpretation or review that are inconsistent with the laws of this state, that provision is void and unenforceable.

(b) For purposes of this section, “renewed” means continued in force on or after the policy's anniversary date.

(c) For purposes of this section, the term “discretionary authority” means a policy provision that has the effect of conferring discretion on an insurer or other claim administrator to determine entitlement to benefits or interpret policy language that, in turn, could lead to a deferential standard of review by any reviewing court.

Connecticut

Bulletin HC-67 (March 19, 2008)

The Department understands there have been complaints in other states about health insurers' use of discretionary clauses which are frequently included in individual health insurance policies and in group health insurance policies and certificates. An example of a discretionary clause is as follows:

“We have full discretion and authority to determine eligibility for benefits and to construe and interpret all terms and provision of the Policy.”

Department Position

 

The Department wants to remind health insurers and health care centers writing individual and group health insurance coverage in Connecticut that such clauses cannot be used to improperly deny claims or to restrict any rights an insured has under the policy, including but not limited to:

(1)the right to appeal to the insurer or health care center under contract terms;

(2)the right to an external appeal for certain managed care determinations as specified in Section 38a- 478n of the Connecticut General Statutes;

(3)the right to proceed to litigation against the insurer or health care center.

Discretionary clauses cannot in any way override policy definitions and policy terms, but rather may only be used as reasonable and appropriate in unusual situations where there is no specific language in the policy. Such clauses cannot be used to deny a claim which is otherwise properly payable under policy terms.

Health insurers and health care centers are also reminded that they are fully subject to Connecticut's unfair insurance practices laws (Sections 38a-815 through Section 38a-819, Connecticut General Statutes), and the Department will take action under these laws if discretionary clauses are misused by a health insurer or health care center.

Policy Forms

 

The Department does not prohibit the language in policy forms, but the Department will monitor through it Consumer Services and market Conduct Divisions any inappropriate use of this language in claims handling by health insurers or health care centers.

Hawaii

Commissioner's Memorandum 2004- 13 H (Dec. 8, 2004): ….[C]ontractual provisions giving HSMA, or any health insurer, discretionary authority to interpret the plan so as to deprive the insured of a de novo appeal constitute unfair or deceptive acts or practices in the business of insurance…..

Idaho

Idaho Administrative Code § 18.01.29.011: 01. Discretionary Clauses Prohibited. No health insurance contract may contain a discretionary clause.

Illinois

Ill. Admin. Code 50 § 2001.3 (2005): Discretionary Clause Prohibited. No policy, contract, certificate, endorsement, rider application or agreement offered or issued in this State by a health carrier, to provide, deliver, arrange for, pay for or reimburse any of the costs of health care services or of a disability may contain a provision purporting to reserve discretion to the health carrier to interpret the terms of the contract, or to provide standards of interpretation or review that are inconsistent with the laws of this State.

Indiana

Bulletin 103: The [Indiana] Department [of Insurance] finds that in group accident and sickness insurance policies governed by state law, these [full and final discretion] provisions are inequitable and deceptive, and tend to mislead consumers. Under state law, an insurance policy is subject to the same rules of interpretation and construction as other contracts, and where the policy is ambiguous or silent, it is construed by the courts against the company that drafts it. These provisions could lead consumers and companies to believe that the company has the last word on whether benefits will be paid, regardless of other terms in the contract, and contrary to the right of the insured group to have a court interpret the contract.

To the extent that insures wish to incluse such language in policies issued to employee benefit plans, they may include a statement substantially similar to the following: “This provision applies only where the interpretation of the Policy is governed by the Employment Retirement Income Security Act (ERISA), 29 U.S.C. 1001 et seq.” Otherwise, forms including a full and final discretion clause will be subject to objection and disapproval by the Department of Insurance under Ind. Code s 27-8-5-1.

Kentucky

Advisory Opinion 2010-01 (March 9, 20120): The [Kentucky] Department [of Insurance] is concerned that the use of discretionary clauses functions to undermine the promise to provide benefits as set forth in the policy. If the insurer has unfettered ability to interpret and construe benefits, the insured can never be certain that they will be provided with the benefits as set forth in their policy. Further, there is an inherent conflict of interest when the payer of benefits is also afforded broad discretion to interpret eligibility that would otherwise be guaranteed under the terms of the contract.

KRS 304.14-130(1)(b) instructs the Department to disapprove any form filed if the form “contains or incorporates by reference…any inconsistent, ambiguous, or misleading clauses, or exception and conditions which deceptively affect the risk purported to be assumed in the general coverage of the contract.” Discretionary clauses by their nature alter the risk and terms of the agreement by allowing the insurer to have final authority to interpret and construe the eligibility and benefits under the contract. It is the Department's position that discretionary clauses deceptively affect the risk purported to be assumed in any policy and as such, any forms containing discretionary clauses may be disapproved.

Maine

24-A.M.R.S. § 4303 (11): ABSOLUTE DISCRETION CLAUSES. The use and enforcement of an absolute discretion clause is governed by this subsection.

  1. A.    A policy, contract, certificate or agreement offered, delivered, issued or renewed for delivery in this State by a carrier to provide, deliver, arrange for, pay for or reimburse any of the costs of health care services may not contain a provision purporting to reserve sole or absolute discretion to the carrier to interpret the terms of the contract or to provide standards of interpretation or review that are inconsistent with the laws of this State.
  2. B.    A carrier may not enforce a provision in a policy, contract, certificate or agreement that was offered, delivered or issued for delivery in this State and has been continues or renewed by a group policy holder or individual enrollee in this State that purports to reserve sole or absolute discretion to the carrier to interpret the terms of the contract or to provide standards of interpretation or review that are inconsistent with the laws of this State.

Maryland

Md. INSURANCE Code Ann. §12-211 (b): In general. – A disability insurance policy may not be sold, delivered, or issued for delivery in the State by a carrier if the policy contains a clause that purports to reserve sole discretion to the carrier to interpret the terms of the policy or to provide standards or interpretation or review that are inconsistent with the laws of the State.

New Jersey

N.J.A.C. 11:4-58.3: Discretionary clauses prohibited. No individual or group health insurance policy or contract, individual or group life insurance policy or contract, individual or group long-term care insurance policy or contract, or annuity contract, delivered or issued for delivery in this State may contain a provision purporting to reserve sole discretion to the carrier to interpret the terms of the policy or contract, or to provide standards of interpretation or review that are inconsistent with the laws of this State. A carrier may include a provision stating that the carrier has the discretion to make an initial interpretation as to the terms of the policy or contract, but that such interpretation can be reversed by an internal utilization review organization, a court of law, arbitrator or administrative agency having jurisdiction.

New York

Circular Letter No. 14 (2006): This Circular Letter supersedes Circular Letter No. 8 (2006), Supplement 1 to Circular Letter No. 8 (2006), and Supplement 2 to Circular Letter No. 8 (2006), which are withdrawn, and sets forth the Department's position regarding the use of discretionary clauses in accident and health insurance policies, life insurance policies, annuity contracts and subscriber contracts.

Discretionary clauses are contract provisions that grant a commercial insurer, Article43 corporation, HMO or administrator the unrestricted authority under an insurance policy, annuity contract or subscriber contract to determine eligibility for benefits and to interpret terms and provisions of the policy, contract or certificate. Examples of discretionary clauses are: "the company has full, exclusive, and discretionary authority to determine all questions arising in connection with the policy, including its interpretation," and "when making a benefit determination under the policy, the company has the discretionary authority to determine your eligibility for benefits and to interpret the terms and provisions of the policy."

Historically, these provisions were permitted as a recapitulation of the insurer's, Article 43 corporation's or HMO's rights, subject to independent judicial review. However, the Department has re-examined whether the use of discretionary clauses in insurance policies, annuity contracts and subscriber contracts complies with New York Insurance Law, in light of recent federal cases that have interpreted discretionary clauses under the federal Employee Retirement Income Security Act (ERISA) as constricting the ability of the courts to exercisede novo review of policy provisions contained in the insurance policy, contract or certificate. The courts apply an arbitrary and capricious standard, whereby the courts would be required to uphold the insurer's, Article 43 corporation's or HMO's claim decisions unless they were found to be "arbitrary and capricious." Such wide latitude in the insurer's, Article 43 corporation's or HMO's discretion serves to negate essential features of the policies, contracts and certificates, as well as statutorily required appeal rights. As a result, policies, contracts and certificates may be rendered illusory by nullifying the insurer's, Article 43 corporation's or HMO's responsibility to pay.

The Superintendent may disapprove any accident and health insurance policy form, life insurance policy form, annuity contract form or subscriber contract if "the same contains any provision...which is likely to mislead the policyholder, contract holder or certificate holder." The Superintendent may disapprove any life insurance policy form, or any form of annuity contract or group annuity certificate, if "its issuance would be prejudicial to the interests of policyholders or members or it contains provisions which are unjust, unfair or inequitable." The Superintendent may disapprove any accident and health insurance policy forms, or subscriber contracts that "encourage misrepresentation or are unjust, unfair, inequitable, misleading, deceptive, or contrary to law or to the public policy of this state." See New York Insurance Law Sections 3201(c) and 4308(a). Additionally, pursuant to Article 24 of the Insurance Law, no person shall engage in this state in any unfair or deceptive act or trade practice. The Department believes that the use of discretionary clauses are contrary to Sections 3201(c) and 4308(a) and Article 24. Accordingly, the Department is drafting regulations that would prohibit the use of discretionary clauses in all new and existing accident and health insurance policies, life insurance policies, annuity contracts and subscriber contracts upon renewal, modification, alteration or amendment on or after the effective date of the regulation.

In the interim, in accordance with Sections 3201 and 4308 and Article 24 of the Insurance Law, the Department suggests that commercial insurers, Article 43 corporations and HMOs remove discretionary clauses from policies, contracts and certificates that are submitted for review and approval. Any policy, contract or certificate that is submitted containing a discretionary clause will be reviewed in accordance with the opinion expressed herein. Accordingly, any life insurance policy or annuity contract form containing a discretionary clause may not be submitted to the Department for approval under a certified procedure.

South Dakota

S.D. Admin Rules § 20:06:52:02: Discretionary clauses prohibited. A discretionary clause is not permitted in any individual or group health policy. No policy offered or issued in this state by a health carrier or plan to provide, deliver, arrange for, pay for, or reimburse any of the costs of health care services may contain a discretionary clause or similar provision purporting to reserve discretion to the health carrier or plan to interpret the terms of the policy or to provide standards of interpretation or review that are inconsistent with the laws of this state. The provisions of this rule apply to any health insurance policy issued or renewed after June 30, 2008.

            Nothing in this section limits the director's authority under SDCL 58-11-19 to 58-11-21, inclusive, to disapprove or withdraw approval of any policy that contains a discretionary clause or to otherwise disapprove any practice involving a discretionary clause.

Texas

28 Tex. Admin. Code § 3.1203: Discretionary Clauses Prohibited. Inclusion of a discretionary clause in any form to which this subchapter applies is prohibited.

Utah

R590-218-5. Reservation of Discretion Clauses Prohibited - Exception - Safe Harbor Language.

(1) The commissioner finds reservation of discretion clauses in forms to be in violation of Subsections 31A-21-201(3) and 31A-21-314(2). Accordingly, such clauses are not permitted in a form unless provided otherwise by this rule. Any reservation of discretion language previously accepted or approved by the department is hereby prohibited. Any use of reservation of discretion clause in a form required to be filed with the department is a violation of Subsections 31A-21-201(3) and 31A-21-314(2) and is prohibited, regardless of whether the form has been filed with or prohibited by the department.

(2) Notwithstanding Subsection (1), a reservation of discretion clause may be included in a form if the form is used only in ERISA employee benefit plans and the reservation of discretion clause has language that is the same as, or substantially similar to, the language in Subsection (3).

(3) The following language may be used in a reservation of discretion clause in forms filed for use in ERISA employee benefit plans (Parenthesis indicate that the company filing the form may use a name or pronouns as applicable):

"Benefits under this plan will be paid only if (the plan administrator) decides in its discretion that (the claimant) is entitled to them. (The plan administrator) also has discretion to determine eligibility for benefits and to interpret the terms and conditions of the benefit plan. Determinations made by (the plan administrator) pursuant to this reservation of discretion do not prohibit or prevent a claimant from seeking judicial review in federal court of (the plan administrator's) determinations.

The reservation of discretion made under this provision only establishes the scope of review that a federal court will apply when (a claimant) seeks judicial review of (the plan administrator's) determination of eligibility for benefits, the payment of benefits, or interpretation of the terms and conditions applicable to the benefit plan.

(The plan administrator) is an insurance company that provides insurance to this benefit plan and the federal court will determine the level of discretion that it will accord (the plan administrator's) determinations."

(4) A reservation of discretion clause in a form that is used in an ERISA employee benefit plan must be highlighted in the form by use of a bold font that is not less than 12 point type.

 Vermont

Sec. 31. 8 V.S.A. § 4062f: § 4062f. Discretionary clauses prohibited

(a) The purpose of this section is to ensure that health insurance benefits, disability income protection coverage, and life insurance benefits are contractually guaranteed and to avoid the conflict of interest that may occur when the carrier responsible for providing benefits has discretionary authority to decide what benefits are due. Nothing in this section shall be construed to impose any requirement or duty on any person other than a health insurer or an insurer offering disability income protection coverage or life insurance.

(b) As used in this section:

(1) "Disability income protection coverage" means a policy, contract, certificate, or agreement that provides for weekly, monthly, or other periodic payments for a specified period during the continuance of disability resulting from illness, injury, or a combination of illness and injury.

(2) "Health care services" means services for the diagnosis, prevention, treatment, cure, or relief of a health condition, illness, injury, or disease.

(3) "Health insurer" means an insurance company that provides health insurance as defined in subdivision 3301(a)(2) of this title, a nonprofit hospital or medical service corporation, a managed care organization, a health maintenance organization, and, to the extent permitted under federal law, any administrator of an insured, self-insured, or publicly funded health care benefit plan offered by a public or private entity; as well as entities offering policies for specific disease, accident, injury, hospital indemnity, dental care, disability income, long-term care, and other limited benefit coverage.

(4) "Life insurance" means a policy, contract, certificate, or agreement that provides life insurance as defined in subdivision 3301(a)(1) of this title.

(c) No policy, contract, certificate, or agreement offered or issued in this State by a health insurer to provide, deliver, arrange for, pay for, or reimburse any of the costs of health care services may contain a provision purporting to reserve discretion to the health insurer to interpret the terms of the contract or to provide standards of interpretation or review that are inconsistent with the laws of this State, and on and after July 1, 2012, any such provision in a policy, contract, certificate, or agreement shall be null and void.

(d) No policy, contract, certificate, or agreement offered or issued in this State providing for disability income protection coverage may contain a provision purporting to reserve discretion to the insurer to interpret the terms of the contract or to provide standards of interpretation or review that are inconsistent with the laws of this State, and on and after July 1, 2012, any such provision in a policy, contract, certificate, or agreement shall be null and void.

(e) No policy, contract, certificate, or agreement of life insurance offered or issued in this State may contain a provision purporting to reserve discretion to the insurer to interpret the terms of the contract or to provide standards of interpretation or review that are inconsistent with the laws of this State, and on and after July 1, 2012, any such provision in a policy, contract, certificate, or agreement shall be null and void.

Washington

WAC 284-96-012: Discretionary clauses prohibited. (1) No disability insurance policy may contain a discretionary clause. “Discretionary clause” means a provision that purports to reserve discretion to an insurer, its agents officers, employees, or designees in interpreting the terms of a policy or deciding eligibility for benefits, or requires deference to such interpretations or decisions, including a provision that provides for any of the following results:

(a)   That the insurer's interpretation of the terms of the policy is binding;

(b)  That the insurer's decision regarding eligibility or continued receipt of benefits is binding;

(c)   That the insurer's decision to deny, modify, reduce or terminate payment, coverage, authorization, or provision of health care service or benefits, is binding

(d)  That there is no appeal or judicial remedy from a denial of a claim;

(e)   That deference must be given to the insurer's interpretation of the contract or claim decision; and

(f)   That the standard of review of an insurer's interpretation of the policy or claim decision is other than a de novo review.

(2) Nothing in this section prohibits an insurer from including a provision in a policy that informs an insured that as part of its routine operations the insurer applies the terms of its policies for making decisions, including making determination regarding eligibility, receipt of benefits and claims, or explaining its policies, procedures, and processes.

Wyoming

W.S. 1997 § 26-13-304: Discretionary clause prohibited. (a) No policy, contract, certificate or agreement offered or issued in this state by a health carrier to provide, deliver, arrange for, pay for or reimburse any of the costs of health care services may contain a provision purporting to reserve discretion to the health carrier to interpret the terms of the contract, or to provide standards of interpretation or review that are inconsistent with the laws of this state. This subsection shall not apply to a policy, contract, certificate or agreement subject to and meeting the requirements of subsections (b) and (c) of this section.

(b) Any group policy, contract, certificate or agreement subject to the federal Employee Retirement Income Security Act and offered or issued in this state by a health carrier to provide, deliver, arrange for, pay for or reimburse any of the costs of health care services and which contains a provision purporting to reserve discretion to the health carrier to interpret the terms of the contract or to provide standards of interpretation or review shall contain the following language highlighted in bold in not less than twelve (12) point type:

This benefit plan contains a discretionary clause. Determinations made by (insurer name) pursuant to the discretionary clause do not prohibit or prevent a claimant from seeking judicial review in court of (insurer name's) decisions. By including this discretionary clause (insurer's name) agrees to allow a court to review its determinations anew when a claimant seeks judicial review of (insurer name's) determinations of eligibility of benefits, the payment of benefits or interpretations of the terms and conditions applicable to the benefit plan.

(c) Any group policy, contract, certificate or agreement containing a discretionary clause as authorized in subsection (b) of this section shall contain a provision entitling any person denied benefits in whole or in part to have the determination reviewed de novo in any court with jurisdiction.

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Greg Paul has 18 years experience fighting for long-term disability benefits against insurance companies such as Aetna, CIGNA, Guardian, Hartford, Liberty Mutual, Mutual of Omaha, Principal, Prudential, Reliance Standard, Standard, Sun Life, and Unum.