Some insurers insert a “discretionary clause” into their disability insurance contracts with insureds. What it does is give them discretion to make their own interpretation as to any ambiguous language that is in dispute, or to the nature of the insured’s disability, and whether it falls within the contract, meriting a payout of benefits.
This clause is extra tricky, because if the insurance company denies benefits, it is very difficult to take the case to court. Courts will be limited to reviewing the dispute between the insurance company and the claimant, instead of deciding the case entirely anew. In order to overturn the denial, the court generally has to find that there was an abuse of discretion on the insurance company’s part, and this is a difficult standard to meet.
Bans on Discretionary Clauses
Because the court is so much less likely to overturn an insurance company’s denial of benefits when a discretionary clause is in place, roughly half of the states in the US have changed their laws to make them illegal, to provide more protection to insureds.
The bans, in state law, generally contain language that states that no insurance company may, in any policy, contract or agreement, reserve discretion to interpret terms of the contract. Terms of the contract include whether benefits are merited and amount of benefits.
Although half the states have banned discretionary clauses, many insurance companies still include them, even for contracts in states with bans.
Conflicts with Federal Law
When there is a conflict between federal law and state law, federal law preempts state law. The Employee Retirement Income Security Act (ERISA) is a federal law that governs retirement benefits, including health and disability benefits.
Therefore, a person insured under an ERISA plan who goes to court over a denial, even in a state with a discretionary clause ban, may have their denial upheld in court due to federal law preempting their state’s law. Several federal courts have held that ERISA cannot preempt a state discretionary clause ban, so it is less clear at this point how each case will be decided, unless and until the Supreme Court takes a case on this issue.
Should I Get an Attorney?
Issues with ERISA and discretionary clauses can get complicated, but can heavily impact your financial and employment situation. So contacting an employment attorney who specializes in insurance benefits can assist you with understanding the issues and pursuing compensation if you are faced with a denial of benefits based on a discretionary clause.