Discretionary Clause

Discretionary clauses grants insurance companies substantial discretionary

authority to interpret a policy and determine the eligibility for disability benefits.
If your disability policy contains a discretionary clause and your insurance
company denies your claim, courts will generally be reluctant to overturn the
denial.

A discretionary clause is a contractual term in a disability insurance policy that

provide insurers with sole discretion in deciding if, when, and what benefits are
due under the insurance policy.

An example of a discretionary clause in a disability policy would state, “The

administrator (insurance company) has sole discretionary and authority to
determine eligibility for benefits or to interpret the terms or provisions of the
policy or contract.”

The existence of a discretionary clause limits the way that a Court can review a
disability claim denial and makes it extremely difficult for a court to conduct a
fair review of a disability claim.

Said clauses had been abused by a number of insurance companies as to

control and deny claims from their clients. The following are some cases where
in there was an abuse of the said discretionary clauses.

In the case of SALOMAA v. HONDA LONG TERM DISABILITY PLAN a case

decided in the US the Supreme Court held that:

The administrator of the plan before us has a conflict of interest, as the term is
used in ERISA cases, because the insurer acts as both funding source and
administrator. In our en banc decision in Abatie v. Alta Health, we held that if a
plan gives discretion to an administrator operating under a conflict of interest,
the “conflict must be weighed as a factor in determining whether there is an
abuse of discretion.” Procedural errors by the administrator are also “weighed in
deciding whether the administrator's decision was an abuse of discretion.” We
held in Saffon v. Wells Fargo & Company Long Term Disability Plan that we apply
different levels of skepticism on account of conflicts of interest, depending on
various factors such as inconsistent reasons for denial or evidence of malice. We
held that “when reviewing a discretionary denial of benefits by a plan
administrator who is subject to a conflict of interest, we must determine the
extent to which the conflict influenced the administrator's decision and discount
to that extent the deference we accord the administrator's decision.”

The Supreme Court further refined the standard of review in its decision this year
in Conkright v. Frommert, holding that “a single honest mistake in plan
interpretation” administration does not deprive the plan of the abuse of
discretion standard or justify de novo review for subsequent related
interpretations. The Court emphasized that under Glenn, “a deferential standard
of review remains appropriate even in the face of a conflict.” Conkright noted,
though, that “[a]pplying a deferential standard of review does not mean that
the plan administrator will prevail on the merits.” What deference means is that
the plan administrator's interpretation of the plan “ ‘will not be disturbed if
reasonable.

Conclusion

In the US, more than 12 different states have enacted laws that prohibit
disability insurance companies from selling disability policies that contain a
discretionary clause. The National Association of Insurance Commissioners
model rules propose the abolishment of all discretionary clauses.

But Discretionary Clauses may be used in a different number of ways, and

to help the insurance company to make sure that their clients comply with what
they have agreed upon. However to maintain the use of these clauses the
insurance company must be open about said clauses and inform their clients of
its existence. The discretionary clause should be included in any document that
contains a description of the terms of the plan. If the addition of the clause
constitutes a change in the plan terms, the proper procedure for
communicating to plan participants the material modification should be
followed. The grant of discretion should be clearly communicated to the plan
participants.