Texas Publishes New Rule on Discretionary Clauses

On the heels of the recent notice from insurance authorities in the District of Columbia advising that they will not approve forms containing discretionary clauses, the Texas Department of Insurance on December 7th published adopted rules similarly prohibiting the use of discretionary clauses in insurance policy forms.

The news from TX capped a rule-making process that had been in motion since early in 2010. While industry representatives provided testimony at the public hearings that were held on this issue, their input failed to stem the rising tide of state insurance department opposition on this issue.

The regulatory drum on the issue of discretionary clauses continues to beat steady and loud. The shoe that some industry observers expect to drop next is a big one – NY has been silent on this issue since April, when it issued a draft regulation prohibiting discretionary clauses in NY policies.

DC Bulletin on Discretionary Authority

The District of Columbia Department of Insurance last week issued a formal Notice to insurers advising that policies containing discretionary clauses “will be examined to determine if any discretionary clauses can be used improperly to deny claims or to restrict any rights an insured has under the policy which is otherwise properly payable…”

The Notice cites the following language as an example of a discretionary clause:

“We have full discretion and authority to determine eligibility for benefits and to construe and interpret all terms and provisions of the policy.”

While there are no specific prohibitions on this sort of policy language in the DC insurance code or regulations, the Notice advises that the “Department does prohibit Sole Discretionary language and other types of discretionary clauses in policy forms, and will request changes to the policy form.”