What Is A Discretionary Clause?
Discretionary clauses grant your insurance company substantial discretionary authority to interpret your disability insurance policy and determine your 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.
Here is an example of a discretionary clause taken from a Unum policy:
DISCRETIONARY ACTS
The Plan, acting through the Plan Administrator, delegates to Unum and its affiliate Unum Group discretionary authority to make benefit determinations under the Plan. Unum and Unum Group may act directly or through their employees and agents or further delegate their authority through contracts, letters or other documentation or procedures to other affiliates, persons or entities. Benefit determinations include determining eligibility for benefits and the amount of any benefits, resolving factual disputes, and interpreting and enforcing the provisions of the Plan. All benefit determinations must be reasonable and based on the terms of the Plan and the facts and circumstances of each claim.
It is easy to see why discretionary clauses are “highly prized” by disability insurance companies.[1] Such clauses not only grant your insurance company the authority to interpret the provisions of your disability policy, but also the authority to resolve factual disputes. The practical consequences of this are obvious: any close calls regarding ambiguous policy language or the seriousness of your disability will be resolved in the insurance company’s favor.
Discretionary clauses also make overturning a denial of disability benefits much more difficult. If your disability insurance policy has a discretionary clause, the court can generally only overturn your denial if you prove that the denial was an “abuse of discretion” because it was “illogical, implausible, or without support in . . . the record.”[2] In contrast, if your disability policy does not contain a discretionary clause, the court generally conducts a “de novo,” or independent, review of your claim.[3] In some cases involving discretionary clauses, courts that would normally be willing to overturn a denial under de novo review have been compelled to uphold the denial under the more exacting abuse of discretion standard.[4]
Not surprisingly, because the “abuse of discretion” is a high legal standard, the inclusion of discretionary clauses in disability policies dramatically reduces policyholders’ chances of successfully challenging a denial of benefits. A 2004 study found that only 28% of lawsuits to overturn denials of benefits were successful if the policy included a discretionary clause.[5] In contrast, policyholders won 68% of similar cases involving policies that did not have discretionary clauses.[6]
Insurance companies’ abuse of discretionary clauses has led several states to outlaw them.[7] You should avoid disability policies which include discretionary clauses. If you already have a disability policy which includes one, talk to your insurance agent about finding a new policy.
[1] See Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 384 (2002).
[2] Saloma v. Honda Long Term Disability Plan, 642 F.3d 666, 667 (9th Cir. 2011).
[3] Id. at 673.
[4] See, e.g., Curtis v. Kansas City Life Ins. Co., 2011 WL 901992 (W.D. Ky. 2011).
[5] Brent Brehm and Corinne Chandler, California’s Ban on Discretionary Clauses in Disability and Life Insurance Policies, Advocate: Journal of Consumer Attorneys Associations for Southern California, June 2013.
[6] Id.
[7]The states that have outlawed discretionary clauses are: California, Colorado, Hawaii, Illinois, Indiana, Kentucky, Maryland, Maine, Michigan, Montana, New Hampshire, New Jersey, New York, Oregon, South Dakota, Texas, Utah, Vermont, and Wyoming. See American Health Insurance Plan’s (AHIP) “Limitations on the Use of Discretionary Clauses: Summary of State Laws,” available at www.ahip.org.
