On December 6, 2010 the Texas Commission of Insurance adopted a new rule which prohibits discretionary clauses in disability insurance policies. This is a major victory for disability insurance claimants and hopefully a trend that will continue in every state. The 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.
These clauses are only detrimental to a claimant if the policy is governed by ERISA. 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. The Texas Insurance Commissioner stated, “the discretionary powers of insurance companies are unjust, encourage misrepresentation and are deceptive because they mislead consumers regarding the terms of coverage” in their policies.
The elimination of the discretionary clause will allow the courts to take a fresh look at any claim denial and make a determination without any deference to the disability insurance company. The elimination of the discretionary clause is not a cure of the ERISA restrictions, but it is certainly a major step in the right direction.
The new rules take effect on February 1, 2011 for some types of disability insurance, and June 1, 2011 for all other forms of health, life, and disability insurance policies issued in Texas. According to the Texas Office of Public Insurance Counsel twenty-three states and the National Association of Insurance Commissioners have now adopted statutes, rules, or policies prohibiting discretionary clauses.