"Discretionary Clauses" in ERISA disability insurance policies are the largest cause of unfair ERISA LTD claim denials across the country. They essentially create an uneven playing field in favor of an already powerful insurance company over a disabled claimant. Imagine if the Yankees were forced to play the World Series with only seven players on the field, while the Phillies had the usual nine. That’s how bad discretionary clauses are for disabled claimants. For this reason, a number of states now ban discretionary clauses in insurance contracts in an effort to simply make the playing field fair for disabled claimants.
Montana is one such state. The Standard Insurance Company didn’t like little old Montana taking away their powerful shield against paying legitimate disability claims. Little did The Standard know that John Morrison, Montana’s Commissioner of Insurance, is one scrappy fighter for consumers in Montana. I recently had a chance to meet Mr. Morrison and he is an impressive fellow who felt strongly that his state had the right to level the playing field for Montana residents.
Well, two days ago, Mr. Morrison beat back The Standard Insurance Company in the Ninth Circuit Court of Appeals in the case of Standard Insurance Co. v. Morrison , No. 08-35246 (October 27). As stated by the Court:
"Under the Employee Retirement Income Security Act of
1974 (“ERISA”), insureds who believe they have been
wrongfully denied benefits may sue in federal court. The
court determines the standard of review by checking for the
presence of a discretionary clause. Such a clause might read:
“Insurer has full discretion and authority to determine the
benefits and amounts payable [as well as] to construe and
interpret all terms and provisions of the plan.” If an insurance
contract has a discretionary clause, the decisions of the insurance
company are reviewed under an abuse of discretion standard.
Absent a discretionary clause, review is de novo.
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 111
Discretionary clauses are controversial. The National Association
of Insurance Commissioners (“NAIC”) opposes their
use, arguing that a ban on such clauses would mitigate the
conflict of interest present when the claims adjudicator also
pays the benefit. The use of discretionary clauses, according
to NAIC, may result in insurers engaging in inappropriate
claim practices and relying on the discretionary clause as a
shield. See also John H. Langbein, Trust Law as Regulatory
Law: The Unum/Provident Scandal and Judicial Review of
Benefit Denials under ERISA, 101 Nw. U. L. Rev. 1315, 1316
(2007) (“As regards Unum’s ERISA-governed policies,
Unum’s program of bad faith benefit denials was all but
invited by an ill-considered passage in . . . Firestone Tire . . .
which allows ERISA plan sponsors to impose self-serving
terms that severely restrict the ability of a reviewing court to
correct a wrongful benefit denial.”).
According to NAIC, as of 2008, a dozen states had limited or barred the use of discretionary clauses in at least some form of insurance.
Insurers and other supporters of discretionary clauses argue
they keep insurance costs manageable. They assert that more
cases will be filed in the absence of a discretionary clause and
that the wide ranging nature of de novo review will lead to
increased per-case costs as well. Failure to control litigation
costs, they suggest, will discourage employers from offering
employee benefit programs in the first place. See, e.g., Metro.
Life Ins. Co. v. Glenn, 128 S. Ct. 2343, 2353 (2008) (Roberts,
C.J., concurring in part and concurring in the judgment)
(“Ensuring that reviewing courts respect the discretionary
authority conferred on ERISA fiduciaries encourages employers
to provide medical and retirement benefits to their
employees through ERISA-governed plans—something they
are not required to do.”)"
In conclusion, the Court stated:
"The Commissioner’s practice is directed at the elimination
of insurer advantage, a goal which the Supreme Court
has identified as central to any reasonable understanding of
the savings clause."
Smart Court. Smarter Insurance Commissioner. Now, when will New York State Insurance Superintendent James J. Wrynn follow in Mr. Morrison’s brave footsteps and protect New York consumers by banning discretionary clauses?