The Texas Department of Insurance has adopted a new rule prohibiting discretionary clauses in disability insurance policies. Texas now joins the growing list of a number of states which have undertaken similar action. The ban applies to group life and disability policies and is similar to Colorado’s ban on discretionary clauses as found in C.R.S. § 10-3-1116. For a brief description of Colorado’s ban on discretionary clauses, see our prior blog post by clicking here.
The inclusion of discretionary clauses generally leads to a denied claim being reviewed by a judge in a deferential manner if the claim is governed by ERISA. When discretion to render a claim exists with the plan administrator or insurance company, the claimant whose claim has been denied must demonstrate that the insurer abused its discretion in rendering the claim determination, or that the insurer acted in an “arbitrary and capricious” manner. Many states have recognized the existence of a conflict of interest that exists when an administrator or insurer who is required to pay the benefit is also the party rendering the benefit determinations. Any logical observer would agree that a conflicted entity’s decision should not be granted deference by the court. At a minimum, the aggrieved claimant should have the opportunity to have his or her claim reviewed by the court without deference being granted by the judge to the party with the conflict of interest. There are now more than 20 states which have enacted laws or passed rules banning these discretionary clauses.
In analyzing an ERISA disability, life or health insurance claim denial, one of the first steps we undertake is to determine whether discretion has been granted to the plan’s administrator, and, if so, what steps can be taken to combat this very unfavorable standard of review which flows from the grant of such discretion. To learn more about the standard of review in ERISA-governed claims, visit our website here.