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New York Bans Health, Disability Discretionary Clauses

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Empire State insurance regulators have joined their California colleagues in trying to get discretionary clauses out of health and disability insurance policies and subscriber contracts.

Charles Rapacciuolo, chief of the Health Bureau at the New York Insurance Department, has declared in Circular Letter Number 8 (2006) that the department will no longer approve any health insurance policies or contracts, including disability insurance policies or contracts, that include discretionary clause provisions.

The New York department also is ordering insurers and health maintenance organizations to remove discretionary clauses from existing policies and contracts within 30 days.

Carriers must give the New York department a list of all affected policies and contracts that include discretionary clauses along with plans for revising the clauses, Rapacciuolo writes.

If carriers fail to revise policies and contracts voluntarily, the New York department will withdraw approval of the affected policies and contracts, and it may seek a court injunction to enjoin use of policy forms containing discretionary clauses, Rapacciuolo writes.

California insurance regulators are in court to defend similar efforts to ban use of discretionary clauses in health and disability policies.

Discretionary clauses are contract provisions that grant a carrier the unrestricted authority to determine eligibility for benefits and to interpret terms and provisions of the policy or contract.

“Historically, such provisions were permitted as a recapitulation of the insurer’s…or HMO’s rights subject to independent judicial review,” Rapacciuolo writes.

But recent federal cases have held that discretionary clauses sharply limit courts’ ability to review policy provisions and carrier decisions, and those limits would negate essential features of policies and contracts, as well as statutorily required appeal rights, Rapacciuolo writes.

The recent court decisions seem to let carriers interpret discretionary clauses in such a way that the clauses would nullify the carriers’ responsibility to pay claims, Rapacciuolo writes.

Rapacciuolo says the New York department has determined that the use of discretionary clauses in health and disability policies and contracts is now an “unfair or deceptive act or practice.”

A copy of the circular letter is on the Web at Document Link


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