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.