Many disabled persons have been denied long term disability benefits under their employers' disability plans because the insurance policies funding the plans gave the administrators nearly unfettered discretion to decide whether a person is disabled or not. With insurers getting to decide whether to pay or not, with little risk of being overruled, it is no wonder that insurers have done what is best for themselves, deny claims.

Now insurance policies issued in several states, including Michigan, funding those disability plans are prohibited from including the onerous “discretionary” clauses that give the plan administrators such power to reject claims.

Most recently federal courts in Michigan and Montana rejected insurance industry's challenges to the insurance department rulings, including Michigan administrative rules issued in February 2007 by the State of Michigan Office of Financial & Insurance Services and rulings by the Montana Department of Insurance which prohibited disability and health insurers from including discretionary clauses in their policies.

These rulings come after other State Insurance Departments such as California, Utah, Maryland, and Indiana, prohibited such clauses and after the National Association of Insurance Commissioners (NAIC) adopted a model health insurance code prohibiting those provisions. Several states have adopted this model code including Maine, Oregon, and Maryland.

Why is this so important? Disability plans issued by employers as an employee benefit plan fall under the regulation of the Employee Retirement Security Act of 1974 (ERISA). Under the case law developed for ERISA, if a benefit plan contains a discretionary clause, the decision of the plan administrator is upheld unless the claimant can show that the decision was arbitrary and capricious, a very difficult task for the disabled person. If there is any reasonable basis or information to support an insurer's denial of a claim, it will be upheld by the court. This is like starting with 2 outs and 2 strikes against you in the bottom of the ninth inning.

By eliminating discretionary clauses the courts are permitted to make a “de novo” review of all of the evidence of disability. That means it can decide whether the person is disabled or not based on all the evidence without giving the insurer such a big advantage by presuming their decision was right if there was any evidence to support it.

It is likely that the insurance industry will appeal the Michigan and Montana federal court rulings and will continue to challenge similar rulings by State Insurance Departments and courts as there is much at stake for both the insurers and disabled persons.

Endnotes:

1. Examples of Discretionary Clauses include:

a.“.. . we have the full and exclusive authority to control and manage the Group Policy and resolve all questions arising in the administration, interpretation, and application of the Group Policy.

Our authority includes, but is not limited to:

3.The right to determine:
.. .
b.Entitlement to benefits;
c.The amount of benefits payable; and
d.The sufficiency and the amount of information we may reasonably require to determine a., b., or c. above.” [Standard Insurance Co. policy].

b.“When making a benefit determination under the policy, UNUM has discretionary authority to determine your eligibility for benefits and to interpret the terms and provisions of the policy.”

2.American Council of Life Insurers, et al v. Linda A. Walters, ____ F. Supp. 2d ____, 2008 WL 541654 (2/29/08 W.D. Mich).. Standard Insurance Co. v. Morrison, ____ F. Supp. 2d ____, 2008 WL510053 (D. Mont., 2/27/08).

3.Michigan Administrative Rules 500.2201-2202 and 550.111-112, issued 2/23/07 and effective June 1, 2007.