California Governor Arnold Schwarzenegger has the opportunity to sign California Assembly Bill 1868 (“AB 1868”) and put an end to unreasonable discretionary clauses contained in ERISA governed long term disability policies. Discretionary clauses provides authority to the insurer to determine eligibility for benefits or coverage, interpret the terms of the policy, or interpret the terms of the contract in a manner inconsistent with state law. In my opinion discretionary clauses tie the hands of courts and allow disability insurance companies to wrongfully deny disability claims. The proposed AB 1868 bill that needs Governor Schwarzenegger’s approval would prohibit any insurance company from issuing any insurance policy in the state of California that contains a discretionary clause.
In the recent case of Morrison v. Standard Insurance Company, the 9th Circuit U.S. Court of Appeals ruled that the California Insurance Commissioner does not need to approve any disability insurance policies that contain discretionary clauses. For a summary of the Morrison case, please see our article titled The Standard Insurance Company Loses Their Battle To Enforce Discretionary Clauses In Long-Term Disability Policies.
The elimination of discretionary clauses in California is a great start, but a bill similar to AB 1868 should be on the books in every state. The discretionary clauses allow disability insurance companies to hide behind the wall of ERISA and its arbitrary and capricious standard of review. The elimination of the discretionary clause will give every claimant who has a denied disability claim the opportunity to have an independent judge review their claim denial.
Disability Attorneys Dell & Schaefer support AB 1868 and urge you to send a message to Governor Schwarzenegger by clicking here. In the “Choose Your Subject” box, please select insurance issues. You can cut and paste the following message to the Governor in order to show your support for AB 1868:
Please support Assembly Bill 1868 which bans discretionary clauses in insurance policies. As a result of the Federal Courts’ interpretation of the ERISA statute, when insurance companies insert language into the policies vesting themselves with discretion to decide claims, the Federal judges who review denials will give substantial deference to the insurer’s decision. This means the judge will not be determining if the claimant is entitled to benefits, but will rather be looking to see if the denial was “arbitrary or capricious,” and will ignore the merits of the claim. The insured essential has no right to their day in court. Any standard of review that ignores the merits of an individual’s claim is inherently unjust. Such a standard leaves an already vulnerable group of individuals less able to obtain the disability benefits they both desperately need and rightfully deserve. It is an exceedingly unfair and unreasonable interpretation of a statute, which does not align with the concepts of fairness and justice.
AB 1868, which bans discretionary clauses in group long-term disability policies, would create an even playing field for insurance claimants and could help dissuade insurance companies from unfairly denying claims. This, in turn, would help many people with disabling conditions rely on disability benefits to pay their bills when they cannot work.
Without these protections against discretionary clauses, insurance companies who deny valid disability claims have a completely unfair advantage, and thus, will more often than not succeed in denying valid claims. With the protection in AB 1868, insurers will be incentivized to review claims more thoroughly, which will even the playing field somewhat and reduce the need for an employee to resort to the legal system. Here in California, prohibiting discretionary clauses will make the standard of court review for group policies purchased by an employer the same as it already is for individual policies.