Bluegrass State officials say insurers in the state have to be careful about how they use contract provisions that permit them to interpret the contracts and determine eligibility for benefits.

Insurers in Kentucky can continue to use discretionary clauses, John Burkholder, acting executive director of the Kentucky Office of Insurance, writes in Advisory Opinion 2008-05.

But insurers may not interpret the clauses in such a way that the contract is, in effect “rendered fraudulent, unsound, or illusory,” Burkholder writes.

Kentucky regulators have learned of the use of discretionary clauses that give the insurer “full and final discretion in interpreting benefits and administering the contract,” Burkholder writes.

If an insurer believes a clause gives it “unfettered authority to decide what benefits are due,” that could “unreasonably or deceptively affect the risk purported to be assumed under the policy,” Burkholder writes. “Hence, the office finds the above interpretation or similar interpretations to be objectionable and in violation of Kentucky’s insurance code.”

An insurer cannot use a discretionary clause to deny benefits otherwise granted under the terms of the insurance contract, and, if any terms in a contract are ambiguous, the Kentucky office will construe the terms in favor of the insured, Burkholder writes.

But an insurer “may determine eligibility for benefits and may interpret the terms and provisions of its policy,” if it does so “within the 4 corners of the policy, Burkholder writes.

In Kentucky, an advisory opinion represents the current position of the Kentucky Office of Insurance. An advisory opinion is not legally binding, officials note.