Insurance Policy Discretionary Clause

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What Is an Insurance Policy Discretionary Clause?

When an insurance contract has a discretionary clause, the insurance company retains the right to interpret any unclear terms in the contract, including whether the policyholder is eligible for a payout in certain circumstances.

A discretionary clause gives the insurance company a lot of leeway to deny a benefits claim. If the policyholder goes to court, the discretionary clause in the insurance contract will likely stall and complicate the resolution of the legal claims.

Bans on Discretionary Clauses

Many states prohibit discretionary clauses because they give too much power to the insurance company. As of this article, about half the states ban use of discretionary clauses.

However, many insurance companies still place discretionary clauses in their insurance contracts. They may be just using a form contract meant for all states. The insurance company may also be hoping to enforce the clause before going to court (where it will like be invalidated).

Conflicts with Federal Law

When there is a conflict between state law and federal law, federal law preempts state law. For example, the Employee Retirement Income Security Act (ERISA) is a federal law that governs retirement benefits, including health and disability benefits. Under ERISA, discretionary clauses may still be valid. So, if there is a discretionary clause in an insurance policy that falls under ERISA, a discretionary clause may be upheld under the federal law, even when it is illegal under state law.

Should I Get an Attorney?

A qualified pensions and benefits lawyer can review your insurance agreement for any discretionary clauses. If a discretionary clause is not valid, an attorney will help you receive the compensation you deserve from your insurance policy.

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Last Modified: 12-23-2013 03:55 PM PST

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