California is supposed to start imposing a ban on use of discretionary clauses in disability insurance policies Jan. 1, 2012

That will be probably cause tactical problems for disability insurers in the short run, but, in the long run, it seems like a necessary step.

It seems likely to me that there are more malingers in the world than there are unjustly denied disability claims. If, for example, a would-be disability claimant has the energy and skill to flood the Internet with diatribes against a mean disability insurer, maybe that claimant still has the ability to work in his or her own occupation.

But selling a policy with a provision that, to a layperson, appears to give the insurer the ability to avoid paying claims at will is not a great way to win consumer confidence.

Plaintiffs’ lawyers use the clauses to put out press releases that make disability insurers look like ogres.

Donahue & Horrow L.L.P., Los Angeles, a law firm that handles disability insurance cases, uses the discretionary clause in a recent release suggesting that insurers use the clauses to deny valid claims because they know that it is often very difficult for the insureds to challenge the decisions in court.

Disability insurers say the discretionary clauses help them fight fraud, and, in interviews, representatives for disability insurers note that there are many constraints on how they can use the discretionary clauses. The descriptions that disability insurers give of what a discretionary clause really means always sound very reasonable to me.

I think disability insurers would do better if they came up with a new “flexibility clause” to replace the discretionary clause. The flexibility clause would describe the kind of limited discretion disability insurers really exercise in the real world, rather than describing a policy that makes it sound as if the insurer can reject claims because it simply doesn’t like the claimant’s nail polish, or an astrologer has said the omens are inauspicious.

NOT ROCKET SCIENTISTS

The Alliance Group of Western New York Inc., Fairport, N.Y., indicates the kind of ignorance and tightness of fist disability insurers face in a press release about New York state’s government-run disability insurance program.

The program can provide valuable protection, and the cost is modest, but, despite the low cost for the employees, and the desperate situations disability can cause, “many employees opt out of coverage because they do not want to contribute to the costs that their employers do not cover,” the Alliance Group reports. “While having this type of coverage may not appear to be an immediate necessity, it will certainly be worth the price if an individual were ever to face a situation in which they were disabled for a period of time.”