Insurance Companies Questioning the Value of Discretionary Clauses — A public relations move or a genuine commitment to accurate claims handling?

In the June 2013 issue of the Advocate Magazine (published by the Journal of Consumer Attorneys Associations for Southern California), Brent Dorian Brehm and Corinne Chandler authored an article examining California’s ban on discretionary clauses in disability and life insurance policies. A pdf copy of the article is accessibly by clicking here. In the article, the national movement to eliminate discretion was examined along with California’s efforts on banning discretionary clauses.

The U.S. Supreme Court acknowledged in Rush Prudential HMO, Inc. v. Moran, discretionary clauses are highly prized by insurers. For decades insurers have fought hard to retain discretionary clauses. This is because, when there is a valid grant of discretion in an insurance policy/plan, a reviewing court will employ an “abuse of discretion” review at trial. This type of review does not determine if the insurance company determination was right, it only looks to see if the decision was unreasonable.

The powerful impact of this difference was highlighted by the First Circuit Court of Appeals in Brigham v. Sun Life of Canada. The court stated “[I]t seems counterintuitive that a paraplegic suffering serious muscle strain and pain, severely limited in his bodily functions, would not be deemed totally disabled,” but upheld the termination of disability benefits because the question was “not which side we believe is right….”

If an insurance company can prevail in a case in which the decision was not even correct, why would they ever give up this power? The answer is they wouldn’t, unless they were forced to do so. This is exactly what is happening. States have started to outlaw or otherwise ban discretionary clauses in order to level the playing field and protect their citizens. The insurance companies are being forced to give up this power. The question becomes: how will they react?

In May 16-17, 2013, in Boston, the insurance industry gathered at the Definitive Disability Conference. Billed as “an industry conference designed for in-house counsel, experienced claim personnel, and defense counsel,” the speakers included the Senior Vice President & General Counsel at Unum US, Secretary & General Counsel at Disability Management Services, Inc., Assistant Vice President & Senior Counsel at Colonial Life, AVP & Senior Counsel at Sun Life Financial, Associate General Counsel at Mutual of Omaha Insurance Company, Senior Operations Representative at Life Insurance Company of North America (LINA aka CIGNA), and Assistant Vice President of Complex Operations Risk Management at Metropolitan Life Insurance Company (MetLife). Clearly, a who’s who of the insurance industries’ litigation departments.

So what was said behind those closed doors? A blog published by Custom Disability Solutions (the reinsurance arm of Reliance Standard) might shed some insight. Posted on May 24, 2013 and referencing a two day seminar in Boston on current disability claims and legal issues, the author wrote:

One of the more thought provoking opinions heard there was the view that the discretionary clause (written about in prior blog entries on this site) has assumed an exaggerated level of importance, in the minds of those within the industry as well as those outside it, and has thus run its course. That opinion cited the increasingly negative image and bad press the discretionary clause creates for the disability industry, when in fact it is a potential factor only in the .6%-9.% or so of disability claims that are litigated, according to a Milliman study several years back.

Perhaps the insurance industry is talking about giving up the fight against bans on discretionary clauses. With the highlight on the negative image and bad press the insurance industry receives, and the perceived low value of discretion on a statistical basis, some might view this as a position staked out by the public relations department in conjunction with attorneys. Others might see it as a desire to refocus efforts and resources to promoting accurate claims administration over an unpopular policy term.

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