Consumer Advocates Seek Ban On DI Discretionary Clauses

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Consumer advocates are raising concerns that discretionary clauses in disability insurance contracts are harming consumers and consequently, they say, the clauses should be prohibited.

The issue was raised during the recent winter meeting of the National Association of Insurance Commissioners.

Discretionary clauses are provisions in a contract that allow insurers to decide benefits for insureds.

In June 2002, the NAIC passed a model act that prevents the use of discretionary clauses in health insurance contracts. The issue was a controversial one.

If DI discretionary clauses are addressed at the NAIC in 2004, the issue could be just as controversial, observers say.

When a consumer challenges the discretionary clause in a contract, a lot of evidence is needed in order to win, according to Mila Kofman, an assistant professor with the Health Policy Institute at Georgetown University and an NAIC-funded consumer representative. The consumer needs to prove the case and prove it in such a way so it demonstrates that the insurers decision is both arbitrary and capricious, she continues.

The only relief brought about by the case is that the claim will get paid, Kofman says, and consequently, a lot of people do not pursue a complaint.

But insurers are taking issue with the suggestion that a problem exists. There has not been a problem with DI discretionary clauses, says Terri Sorota, senior counsel with the American Council of Life Insurers, Washington. A change in the use of discretionary clauses will “needlessly increase costs,” she says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 2, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.