Discretionary Authority – Another One Bites the Dust

The KY Department of Insurance last week issued Advisory Opinion 2010-01, stating its opinion that “discretionary clauses deceptively affect the risk purported to be assumed in any policy and as such, any forms containing discretionary clauses may be disapproved.” This opinion rescinds Advisory Opinion 2008-05, which KY issued a couple years ago to advise that the department would allow discretionary clauses so long as the insurer construed and interpreted the benefits according to the policy and did not use the discretionary clause to deny benefits otherwise promised by the policy. In the wake of recent similar activity in TX, this is a pretty clear sign that regulatory pressure on discretionary clauses is not going away or lessening, as some industry insiders thought it might after the initial wave of state activity against these provisions several years ago.