Group Disability Insurers Fight For Flexibility

"Furthermore," the company continues, "the insurers role in the process eliminates the impossible burden that would otherwise be placed upon many employers to manage an income replacement and rehabilitation program."

Group disability insurers began making heavy use of discretionary clauses in the 1990s, as a result of a 1989 U.S. Supreme Court ruling on Firestone Tire & Rubber Company vs. Bruch. The court suggested in the Firestone opinion that group disability plans could use discretionary clauses to reduce the likelihood that courts would review contested benefits determinations de novo.

Instead, the courts usually would apply a deferential approach to reviewing benefits determinations.

Use of discretionary clauses has become especially important for disability policies used in employee benefit plans governed by the Employee Retirement Income Security Act of 1974.

One section of ERISA preempts the right of states to regulate employee benefit plans but does let states regulate insurance contract provisions.

Several Supreme Court decisions permit states to ban discretionary clauses from insurance contracts that might be used in employee benefit plans, Cohen writes in the California departments letter opinion.

Moreover, "in the case of group, employer-sponsored disability contracts that are governed by ERISA, the presence of a discretionary clause has the legal effect of limiting judicial review of a denial of benefits to a review for abuse of discretion," Cohen writes.

Proving that a denial is "arbitrary and capricious" is very difficult for insureds and might deprive some of the benefits that they thought they had paid for, Cohen writes.

A second section of ERISA removes employers that self-insure from the jurisdiction of state insurance regulators.

Because of that provision, large employers could escape from the effects of bans on discretionary clauses by self-insuring their disability plans, Kayatta says.

Large employers that wanted fully insured plans and small employers that had to buy insured coverage to spread risk would have to put up with the discretionary clause ban or go without disability coverage, Kayatta says.

He notes that plaintiffs lawyers already are citing the California letter opinion in court cases.

A plaintiff has referred to the letter opinion in Rowe vs. PlanetOut Partners Inc. Long Term Disability Plan, a suit filed in the U.S. District Court in San Francisco.

But many experts say a recent U.S. Supreme Court decision involving the managed care units of Aetna Inc., Hartford, and CIGNA Corp., Philadelphia, should block state group disability discretionary clause restrictions by strengthening the ERISA shield against state interference in benefit plan regulation.

Americas Health Insurance Plans, Washington, and its California affiliate have filed a brief in opposition to the proposed discretionary clause ban that points out that the California department failed to persuade the California legislature last term to enact a ban on disability insurance discretionary clauses.

The California letter opinion is a statement of what the California department believes the law should be, not what the law currently is, and the opinion "is not the result of a full and fair administrative process," AHIP and its affiliate write.

Reproduced from National Underwriter Edition, August 5, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.