It’s 2015. Out with the old and in with the new. Can we really say goodbye to the discretionary clause in the Employee Retirement Income Security Act (ERISA) that governed long-term disability insurance litigation? The answer may at long last be yes. The dreaded discretionary clause (loathed by insureds and loved by insurers) in almost every long term disability insurance policy offered by an employer gave insurance companies the sole discretion to determine whether an insured met the policy definition of total disability, allowing for benefits to be paid. The fox was in firm control of the hen house.
The obvious unfairness of the situation (in the eyes of the insured individuals) was not lost on the California Department of Insurance or the State Legislature. In 2012, California banned the discretionary clause from disability insurance policies offered to insureds in California. Great, but not really great. Federal preemption under ERISA (which does not ban the discretionary clause) trumped state law and the discretionary clause had a long and profitable run in California. It’s been a long time coming, but federal case law has steadily evolved to remove preemption with respect to the discretionary clause. If a state has banned the discretionary clause, as California and many others have, that ban will not be preempted by ERISA. The practical upshot of this is that the reviewing federal court in a disability insurance contract dispute does not have to give deference to the insurance company’s decision to deny benefits. Rather than use an abuse of discretion standard in reviewing an insurance company denial of benefits, the court will take a de novo look at the facts of the case and decide if there is a preponderance of evidence to support a grant of benefits, or a denial. Accordingly, the insurance company’s denial of benefits decision has no special protection.
However, the Federal case law is still murky as to whether there will be retroactive application of the ban on the discretionary clause. Thus, there is bound to be much fighting about which disability plan (what year) applies to a claim. Is the disability policy to be applied to the claim dated before or after the legislature signed the discretionary clause ban into law? Fertile fodder for insurance company legal departments, to be sure. Fortunately, this debate will fade over time and finally a fair playing field may result for claimants denied long-term disability insurance benefits.
Randy Noah, a lawyer specializing in the representation of individuals denied long-term disability insurance benefits. For more information please visit prandallnoah.com.