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New York Bans Health And Disability Discretionary Clauses

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New York 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, 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 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 seem to limit the scope of judicial review and let carriers interpret discretionary clauses in such a way that the clauses would nullify the carriers’ responsibility to pay valid claims, he adds.

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

Stephen Rings, a New York department official who is working on the discretionary clause issue, said the department would entertain suggestions for substitute language.

The Life Insurance Council of New York Inc., Albany, N.Y., was surprised by the release of the circular letter and is in the process of coming up with a response, says Diane Stuto, the council’s executive vice president.

America’s Health Insurance Plans, Washington, also is reviewing the circular letter, says AHIP spokesman Larry Akey.

AHIP is not sure whether New York regulators can ban use of discretionary clauses through a circular letter, and it believes judicial review continues to prevent insurers from using policy discretionary clauses to exercise unrestrained authority, Akey says.

But “judges ought to presume that the carriers know what their contracts say,” he says.

Permitting use of discretionary clauses can give insurers the flexibility they need to avoid unnecessary litigation, Akey says.


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