Neil Chamberlain recently wrote an interesting article in Arkansas Trial Advocate regarding disability clauses in insurance agreements. Contact the Attorneys at Branch Thompson Warmath and Dale if you would like to discuss any problems you have personally experienced.
Disability insurance claimants in Arkansas have something new: a fair chance. That is because discretionary clauses – those giving insurance companies the discretion to interpret policy terms – are now prohibited in disability insurance policies. This is pursuant to Rule 101 adopted by Arkansas Insurance Commissioner Jay Bradford. Rule 101 applies to all disability insurance policies issued or renewed in Arkansas on and after March 1, 2013. That includes policies governed by the Employee Retirement Income Security Act (“ERISA”), 29, U.S.C. § 1001. et seq.
Perhaps this sounds small, but it is not. Rule 101 wipes away the onerous “abuse of discretion” standard of review that the discretionary clauses trigger in litigation. It replaces that standard with a fair standard: de novo.
Here is the backstory. Most people covered by disability insurance obtain that coverage through their employment – that is, through employee welfare benefit plans. With few exceptions, employee welfare benefit plans are governed by ERISA. Thus, most disability insurance policies are governed by ERISA.
In 1989, the U.S. Supreme Court held that, when an ERISA-governed insurance policy includes a discretionary clause, the courts must defer to the insurance company’s decision to deny a claim unless the claimant proves that the denial was “arbitrary and capricious.” The court held that, when an ERISA-governed insurance policy does not include a discretionary clause, the courts must review the case de novo. Consequently, disability insurance companies routinely include discretionary clauses in their policies. When faced with a discretionary clause in litigation, a claimant must provide that the insurance company is denying the claim.
Under the abuse of discretion standard of review, a reviewing court will uphold an insurance company’s decision to deny a claim if the decision is supported by “substantial evidence”. Substantial evidence is “more than a scintilla but less than a preponderance.” That’s right even if less than a preponderance of the evidence supports paying the claim that is not enough for the claimant to prevail under the abuse of discretion standard.
In the words of AARP (formerly the American Association of Retired Persons). “If discretionary clauses are permitted, a claim for benefits merely becomes a gratuity resting on the largesse of the insurer, rather than a true benefit upon which employees may rely for their economic security.” According to Families USA, insureds prevailed in only 28% of cases where the courts used the “arbitrary and capricious” (i.e., abuse of discretion) standard of review, but prevailed in 68% of cases where the courts used the de novo standard.
In 2002, the National Association of Insurance Commissioners (“NAIC”) adopted the Prohibition on the Use of Discretionary Clauses Model Act, written to apply to health insurance policies. In 2004, the NAIC amended the model act to also apply to disability insurance policies. The model act is the template for Rule 101 adopted by the Arkansas Insurance Commissioner, although Rule 1010 applies only to disability insurance policies.
Michigan and Montana were among the first states to ban discretionary clauses in insurance policies. The Michigan Commissioner of the Office of Financial and Insurance Services promulgated rules prohibiting insurers from issuing, delivering, or advertising insurance policies that contained discretionary clauses. The Montana State Auditor adopted a practice of disapproving insurance policies that contained discretionary clauses because a state statute required him to disapprove forms containing certain inconsistent, ambiguous or misleading content.
Representatives of the insurance industry filed suit in both Michigan and Montana to prevent enforcement of the above rules and practice, arguing that they were preempted b, by ERISA. The courts rejected those arguments. In 209, the U.S. Court of Appeals for the Sixth Circuit held that ERISA did not preempt the rules adopted in Michigan to ban discretionary clauses. Later in 2009, the U.S. Court of Appeals for the Ninth Circuit held that ERISA did not preempt the practice adopted in Montana to disapprove policies containing discretionary clauses.
Banning discretionary clauses in insurance policies – disability and other- is now a trend. According to the NAIC as of January of 2912, 21 states had adopted some type of prohibition against discretionary clauses. Add Arkansas to the list.
Rule 101 should result in disability insurance claimants in Arkansas benefiting from the de novo standard of review rather than having to surmount the abuse of discretion standard. That should result in those claimants receiving disability benefits in return for premiums paid when the preponderance of the evidence shows they are disabled. That is only fair.