The ban on discretionary clauses in long term disability insurance plans has been going on for years, with more states pushing for change.
In addition to Texas, many states have amended their state insurance codes to limit or ban the use of discretionary clauses in both individual disability and group disability insurance policies.
This is due to the unending conflicts of interest that result in cases where an insurance company basically gives itself discretionary powers to both interpret the terms of the policy and to pay or deny claims.
Under discretionary provisions, the insurance carrier is often able to explain away confusing or misleading policy language, or use their own interpretation of a claimant’s disability and whether benefits are justified.
Examples of Discretionary Clauses:
The following are three common versions of discretionary clauses found in disability insurance plans:
- “The plan administrator (insurance company) has sole discretion and authority to determine eligibility for benefits or to interpret the terms or provisions of the policy or contract.”
- “The Plan Administrator (insurance company) has discretionary authority to make benefit determinations under the Plan. (Insurance company) may act directly or through their employees and agents or further delegate their authority through contracts, letters or other documentation or procedures to other affiliates, persons or entities. Benefit determinations include determining eligibility for benefits and the amount of any benefits, resolving factual disputes, and interpreting and enforcing the provisions of the Plan. ”
- “(Insurance company) has full, exclusive, and discretionary authority to determine all questions arising in connection with the policy, including its interpretation.”
States’ Efforts to Eliminate the Potential for Conflict of Interest
Discretionary clauses cannot override policy definitions and terms; their purpose is to be applied in a reasonable manner in uncommon situations, or when no other explanations exist within the policy. However, many insurers abuse this privilege to deny claims by manipulating the discretionary clauses to their benefit.
This abusive practice has led Texas and other states to take regulatory or legislative actions to refuse the allowance of such clauses in any disability insurance policies.
Although ERISA law “preempts” state contract law, certain states are taking the stance that applying contract law to insurers in these cases is the right thing to do, even when the claimant is an employee covered under a group (ERISA) plan—because an insurance policy is a contract.
“Standard of Review” and “Abuse of Discretion”
Discretionary clauses limit the manner by which a judge can review a disability case.
In an ERISA LTD claim, if you disagree with your insurance company’s decision that you are not disabled, and you have exhausted all administrative appeals, only then can you pursue your case in Federal court.
But even then, in most cases, the court does not make a judgement about the ultimate question, are you disabled.
This is known as the limited standard of review. In ERISA claims, there is no jury, only a judge, who is going to review your case file – the exact same material that you have submitted to the insurance company.
If the policy gives the insurer the “discretionary authority” to decide if you are disabled, you must prove, and the court must find, that the insurer “abused its discretion” when it denied your claim. The judge will only review the facts of the case to see whether the claims administrator abused his or her discretion or if the claims handling process was arbitrary or capricious.
These are high legal standards requiring you to show the insurance company had “no reasonable basis” for denying your claim.
If the judge finds that the insurance company’s decision is “reasonable” the judge will generally uphold the insurance company’s decision to deny.
Other times the court may rule that the case goes back to the insurance company again (as opposed to an order of payment) since the reason they denied the claim was not a valid reason. In those situations, the insurance company often comes up with another reason not to pay the claim.
Contact Experienced Disability Insurance Lawyers
The use of discretionary clauses in group disability plans plays a critical role in determining the standard of review in ERISA disability lawsuits, and ultimately in the results of such cases.
The disability attorneys at Marc Whitehead & Associates stay current on new regulations and case law so we can deliver the most effective representation to you.
Our law firm represents clients nationally in all matters of group and individual disability claims. We offer free consults for clients who need help filing for disability insurance benefits or who wish to appeal the termination or denial of benefits.