Discretionary Clauses & Long Term Disability
Discretionary Clauses are often found in Long Term Disability (LTD) plans that employers provide for employees. Discretionary clauses generally provide that the insurance company administering an LTD policy has the “discretion” both to interpret the terms and conditions of the insurance policy and to decide whether the evidence submitted established that the employee meets the definition of disability. Insurance companies include these clauses because it gives the insurance company much broader discretion to deny claims. These clauses protect the LTD denial or termination decisions from reversal in federal court, where all these claims must be litigated because of the provisions of ERISA, the Employee Retirement Security Act.
With a discretionary clause, the Courts basically assume the decision is correct and only reverse the denial decisions if they are arbitrary or capricious or if they are not supported by any substantial evidence in the record. In other words, if the denial decision appears to have any reasonable basis it will be upheld. Without a discretionary clause, the Courts review denial decisions “de novo”, which means that the Court will only uphold the denial decision if it is supported by the preponderance of the evidence in the record (ie., more than 50% of the evidence in the record).
Discretionary Clauses in Maryland
A number of states, including Maryland, have issued bans on discretionary clauses in these policies. In the recent case of Flaen v Principal Life Ins. Co., 2016 WL 747227 (W.D. Wash. 12/22/16), the Court had to determine the applicability of Washington’s ban on discretionary clauses. The Principal insurance company argued that its discretionary clause should not be banned because although the employee in question worked in the State of Washington, the master LTD policy in question was issued in Texas and included a clause that the policy was subject to the laws of the State of Texas. Although the State of Texas now also bans discretionary clauses, when this LTD policy was issued, the ban had not yet been passed by the Texas legislature. The Court had to determine whether to apply Washington law or Texas law in this case.
The Washington Court had to determine whether Washington’s public policy against discretionary clauses would override the provision in the LTD policy that the policy should be interpreted based on Texas law, where the discretionary clause was allowed. The court applied a balancing test and determined that Washington’s ban on discretionary clauses would be applied. The Court stated, in part:
In sum, the Court finds that the balance falls in Flaen’s favor. The national trend is to ban such [discretionary] clauses, and the Washington Insurance Commissioner stated that clauses are “prohibited … because they unreasonably or deceptively affect the risk purported to be assumed in the general coverage of the agreement.” Id. The Court declines to enforce a clause that is unreasonable and deceptive. Therefore, the Court concludes that enforcement of the discretionary clause would violate a strong public policy in Washington.
It is important to help ban these discretionary clauses in all 50 states. Until that is accomplished, insurance companies will continue to issue policies that apply the state law where there is no ban on discretionary clauses. Therefore, disputes over the applicability of State bans on discretionary clauses will continue. Thus, it is important to lobby our state insurance commissioners and/or legislatures to adopt bans on these clauses.
Contact the Disability Lawyers at Andalman & Flynn in Maryland
The disability team at Andalman & Flynn makes it a practice to stay up to date on new regulations and case law to provide the most effective representation to our clients. We normally provide free consultations for clients looking to file for disability insurance benefits or appeal the denial or termination of those benefits, whether the claim is covered by ERISA or not. Contact Andalman & Flynn for a free consultation today.
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