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Disability Insurance Observer: Gotcha

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In my capacity as an ordinary human being in a benefit plan, who doesn’t understand all of the restrictions and the case law, I hate seeing a paragraph in my plan document that says the plan has complete discretion to do anything it wants when interpreting the plan.

My understanding is that, in real life, the plan administration faces many obvious statutory and regulatory restrictions. It cannot interpret a plan provision to mean that my employer should be able to take my disability benefits away because I wore a blue shirt to work. 

The administrator cannot use a discretionary clause to interpret the policy to mean that the insurer can send people dressed in chicken suits to parade in front of my apartment with signs saying I’m too chicken to come to work. 

But I just think it would be good for everybody if something in “discretionary clauses” made it very clear to everyone involved that the administrators have the discretion to do something reasonable, not something that’s clearly horrible and absurd.

But, at the same time, maybe because of court concerns about the effects of discretionary clauses on disability plan members and other group plan members, some courts have started to play weird games with insurers when it comes to saying how clear warnings about the inclusion of a discretionary policy in a group benefits plan must be.

Earlier this month, for example, a panel at the 4th U.S. Circuit Court of Appeals ruled that an insurer’s warning about a discretionary clause was too unclear because the provision simply said a claimant had to “submit proof of continuing disability satisfactory to Prudential.” And this case hinged on Prudential using discretion to decide whether proof of disability was satisfactory, not discretion to do anything strange.

And, to me, Prudential’s mild-mannered discretionary clause seems to describe how plan administrators actually use discretion a lot better than a clause that makes it sound as if an insurer has the freedom to feed workers to wolves or drop them from tall buildings, if that’s how it interprets the plan terms.

It seems as if, in the long run, the Supreme Court should come up with court-approved, litigation-tested discretionary clauses that are clear and complete without being terrifying, but that, in the short run, the courts should be more realistic about what constitutes a warning that an administrator will be exercising discretion.

Decisions that seem to require the insurer to send someone with a hammer to hit the plan member over the head and shout, “Yo! There’s a discretionary clause in here, you bozo” seem to be an abuse of the courts’ own discretion.

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