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Group Disability Insurers Fight For Flexibility

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Insurance regulators in California and other states are attacking use of discretionary clauses in group disability insurance plans.

The attacks could hurt group disability agents and brokers, according to William Kayatta Jr., a Portland, Maine, insurance defense lawyer.

A ban on group disability discretionary clauses could make group disability insurance policies more rigid, more expensive and harder to find, Kayatta says. “Most brokers dont like having the menu of what they can offer employers reduced.”

A disability policy discretionary clause usually states that the insurer has the authority to interpret policy provisions and determine whether claimants are eligible for benefits.

If a group disability plan has no discretionary clause, a judge can review a benefits dispute involving the plan from scratch, or “de novo,” legal experts say.

If a group disability plan has a discretionary clause, the judge is supposed to defer to the plan administrator and interfere only if a benefits decision appears to be capricious, arbitrary or unreasonable.

The California Department of Insurance has issued a letter opinion and a withdrawal notice that ban the use of discretionary clauses in new and existing group disability insurance contracts.

Using a discretionary clause in any disability insurance policy is illegal in California because a discretionary clause “effectively negates operative terms of the contract” and makes the contract “unintelligible, uncertain, ambiguous, abstruse and likely to mislead the insured,” writes Gary Cohen, the California departments general counsel, in the letter opinion.

Regulators from California and other states have been talking at meetings of the National Association of Insurance Commissioners, Kansas City, Mo., about promoting a national ban on disability plan discretionary clauses.

Units of UnumProvident Corp., Chattanooga, Tenn., and Hartford Financial Services Group Inc., Hartford, have requested a hearing on the withdrawal notice and are asking the California department to annul the notice.

Group disability insurers argue that a ban on discretionary clauses will take away the flexibility they need to do their jobs without doing much to help consumers.

UnumProvident believes a ban on discretionary clauses is unnecessary because “existing law requires insurers to make decisions under standards that are reasonable and supported by substantial evidence,” says spokesman Jim Sabourin.

Banning discretionary clauses could hamper disability insurers efforts to provide consistent benefits packages for multi-site employers, Kayatta says.

In a world without discretionary clauses, he says, each court would, in effect, set its own group disability plan standards.

Hartfords discretionary clause “is in the best interest of the public,” Hartford says in a statement.

The clause lowers the cost of disability coverage and promotes access to disability benefits by ensuring that claims are paid appropriately, Hartford says.

“Furthermore,” the company continues, “the insurers role in the process eliminates the impossible burden that would otherwise be placed upon many employers to manage an income replacement and rehabilitation program.”

Group disability insurers began making heavy use of discretionary clauses in the 1990s, as a result of a 1989 U.S. Supreme Court ruling on Firestone Tire & Rubber Company vs. Bruch. The court suggested in the Firestone opinion that group disability plans could use discretionary clauses to reduce the likelihood that courts would review contested benefits determinations de novo.

Instead, the courts usually would apply a deferential approach to reviewing benefits determinations.

Use of discretionary clauses has become especially important for disability policies used in employee benefit plans governed by the Employee Retirement Income Security Act of 1974.

One section of ERISA preempts the right of states to regulate employee benefit plans but does let states regulate insurance contract provisions.

Several Supreme Court decisions permit states to ban discretionary clauses from insurance contracts that might be used in employee benefit plans, Cohen writes in the California departments letter opinion.

Moreover, “in the case of group, employer-sponsored disability contracts that are governed by ERISA, the presence of a discretionary clause has the legal effect of limiting judicial review of a denial of benefits to a review for abuse of discretion,” Cohen writes.

Proving that a denial is “arbitrary and capricious” is very difficult for insureds and might deprive some of the benefits that they thought they had paid for, Cohen writes.

A second section of ERISA removes employers that self-insure from the jurisdiction of state insurance regulators.

Because of that provision, large employers could escape from the effects of bans on discretionary clauses by self-insuring their disability plans, Kayatta says.

Large employers that wanted fully insured plans and small employers that had to buy insured coverage to spread risk would have to put up with the discretionary clause ban or go without disability coverage, Kayatta says.

He notes that plaintiffs lawyers already are citing the California letter opinion in court cases.

A plaintiff has referred to the letter opinion in Rowe vs. PlanetOut Partners Inc. Long Term Disability Plan, a suit filed in the U.S. District Court in San Francisco.

But many experts say a recent U.S. Supreme Court decision involving the managed care units of Aetna Inc., Hartford, and CIGNA Corp., Philadelphia, should block state group disability discretionary clause restrictions by strengthening the ERISA shield against state interference in benefit plan regulation.

Americas Health Insurance Plans, Washington, and its California affiliate have filed a brief in opposition to the proposed discretionary clause ban that points out that the California department failed to persuade the California legislature last term to enact a ban on disability insurance discretionary clauses.

The California letter opinion is a statement of what the California department believes the law should be, not what the law currently is, and the opinion “is not the result of a full and fair administrative process,” AHIP and its affiliate write.

Reproduced from National Underwriter Edition, August 5, 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.


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