In 1989, The US Supreme Court declared that if ERISA plans contain language giving plan fiduciaries discretion to interpret the terms of the plans and to make benefit determinations, courts will generally yield to that discretion. As a result of this discretion, insurance companies were able to deny claims and there was very little that courts could do to reverse the decision of an insurance company. Throughout the past several years, many states have passed laws to ban discretionary clauses and the insurance industry has been fighting to keep the discretionary clauses.
On March 18, 2009, the Sixth Circuit Court of Appeals affirmed a Michigan Statute promulgated in June 2007, which prohibited any insurance company or other entity from “issuing, advertising, or delivering to any person in the state of Michigan, including an employee benefit plan subject to ERISA, an underwritten policy or certificate that includes a discretionary clause.” See American Council of Life Insurers v. Ross, 558 F.3d 600( 6th Cir. 2009). Under the law in Michigan, disability insurance companies can no longer invest the plan administrator with unfettered discretionary authority to determine eligibility or to construe ambiguous terms of a plan.
The elimination of the discretionary clause will entitle all disability claimants a De Novo review of their claim in Federal Court if their claim is denied by the disability insurance company. The elimination of discretionary clauses is a heavily litigated issue throughout the country and there are eight states (CA, CO, IL, ME, MI, MO, NJ, SD) that have either ruled or have drafted laws that discretionary clauses are invalid. Utah has sought to significantly limit the impact of discretionary language. Attorneys Dell & Schaefer are involved on a daily basis with challenging the validity of discretionary clauses in long-term disability policies. We are continually lobbying Congress for a bill that will eliminate discretionary clauses in all employee benefit disability plans.