Under ERISA (Employee Retirement Income Security Act) governed insurance policies, insurers typically include a “grant of discretion.” These clauses provide the insurer with discretion to interpret the policy and decide the claim. For decades, courts have upheld the validity of these clauses and interpreted them in such a manner which makes it very difficult for an insured to successfully challenge an insurer’s decision in court. Simply put, the legal effect of discretionary clauses changes the manner in which a court reviews the propriety of a claim decision. If an insurer has been granted discretion, the Court does not determine whether an insured is actually entitled to benefits, rather they review the claim decision to decide whether the insurer “abused its discretion,” i.e., acted unreasonably. This has created a very difficult battle for insureds who contest a claim decision denying them benefits to which they are entitled.
In 2010 and 2011, Kantor & Kantor worked with the California legislature to enact a statute banning discretionary clauses in insurance policies. The proposed legislation was passed by both the Assembly and the State Senate unanimously and the statute, Insurance Code, Section 10110.6, became effective January 1, 2012. Despite the passage of the statute, insurers have continued to insist that they are entitled to discretion and that the statute has no application to their policies.
Kantor & Kantor challenged the insurer’s resistance to the statute in a recent case, Polnicky v. Liberty Life, Civil Action No. C-13-1478 SI, U.S. District Court for the Northern District of California. We are pleased to report that on November 18, 2013, Judge Susan Illston ruled that California’s statutory ban on discretion must be applied to policies which remained in force after January 1, 2012. The result is that the evidence in our client’s case will be reviewed by the trial court without any deference to either the insurer’s decision or its interpretation of the insurance policy.
This is a significant victory for California insureds after an almost decade long battle to eliminate discretionary clauses in ERISA governed insurance policies.