Empire State regulators have posted a version of a proposed regulation that would prohibit annuity issuers and life and health insurers in the state from using contracts that include discretionary clauses.
The New York State Insurance Department defines a discretionary clause as a policy form provision that “grants an insurer, plan administrator or claims administrator the discretionary authority to determine eligibility for benefits, resolve disputes, or interpret the terms and provisions,” or “reserves a right to an insurer, plan administrator or claims administrator to develop standards of interpretation or review.”
Insurers and others have argued that they have the best understanding of a policy, and that they can interpret policies only within the confines of strict state insurance laws and regulations.
But New York department officials believe that, when discretionary clauses are used, “policy form provisions may be rendered illusory by nullifying the insurer’s responsibility to pay,” officials write in a provision in the regulation draft that explains the purpose of the proposed regulation.
“Even where there is a conflict of interest because the plan administrator is both determining benefit eligibility and paying claims, the court will apply an arbitrary and capricious standard when the contract contains a discretionary clause,” officials write.