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.”

New SERFF Requirement in Connecticut

In one of his last official acts, outgoing CT Insurance Commissioner Thomas Sullivan signed Connecticut Bulletin IC-26 mandating use of SERFF for all form, rate or rule filings made on or after January 1, 2011. The bulletin states that paper filings received after that date will be rejected.

State Insurance Department Updates

On the heels of our last post regarding Alaska’s reinstatement of its “filing for prior approval” requirement, here’s some other recent insurance department news on the state filing front:

Arkansas issued Bulletin No. 9-2010 dated November 2nd to advise that SERFF and EFT will be required for rate and form filings effective March 1, 2011….Connecticut alerted the industry informally this week that it will be releasing a bulletin soon to implement a SERFF requirement as of some yet to be determined effective date…. Delaware released Forms and Rates Bulletin No. 33 informing insurers that the department will only accept EFT for payment of fees in connection with rate, form, rule and advertisement filings.

Also, Michigan continues to work with trade groups to refine requirements for its anticipated data call for policies sold since January 1, 2000. And Alaska issued Bulletin B-10-07 on October 28th requesting that insurers provide an updated general email address specifically for the purpose of receiving email notifications from the department, to avoid situations where notification emails from the department are returned as undeliverable due to staffing changes at insurers.

Alaska to Require New Filing Approvals

The Alaska Division of Insurance issued Bulletin B 10-08 recently to provide notice of Order R10-04 repealing the exemption of certain products, including disability, from filing and approval requirements. Beginning January 1, 2011, all new or revised forms must be filed for prior approval by Alaska. Forms not filed prior to January 1, 2011 are not required to be filed for approval unless they are amended.

Alaska now joins Michigan in the ranks of states that have rescinded relatively long standing exemptions from filing and approval requirements in 2010. As the Massachusetts Insurance Division collects survey data from disability insurers, it will be interesting to see what may come of their exemption for the filing of group disability forms for approval as well.

Delaware - EFT Required for SERFF Filings Starting November 1

On September 27th, the Delaware Insurance Department issued Bulletin No. 33 requiring use of Electronic Funds Transfers (EFT) for rate, form, rule and advertisement filings that are submitted using the System for Electronic Rate and Form Filings (SERFF). The new EFT requirement is effective November 1, 2010.

Senate Hearings on Disability Insurance

The Senate Finance Committee held a hearing in Washington last week on the question “Do Private Long-Term Disability Policies Provide the Protection They Promise?”


The hearing was attended by only 3 of the 23 Senators that make up the committee, a fact that was lamented by Senator Baucus (D-MT), the committee chairman, in his closing remarks.

The committee heard testimony from a vocational rehabilitation counselor, a judge from an AL district court, a prominent disability plaintiffs’ attorney, an ACLI representative and a deputy commissioner from the Social Security Administration.

The hearing was largely a forum on the extent to which there’s “something broken” with long term disability insurance and the degree to which ERISA serves to harm the interests of claimants.

Of note, one of the 3 senators attending remarked that ERISA jurisdiction does not rest with the Finance Committee and seemed more intent on discussing LTD as it pertains to the Social Security disability application process. Another senator suggested that the GAO study the 50 states to see if issues might be better addressed by alternative courses of action at the state level. Committee chairman Baucus did voice his determination to bring his findings to the Senate committee that has jurisdiction over ERISA, in the hope of fixing the perceived problem with private disability insurance.

Notwithstanding the sparse turnout by the committee membership, the hearing did represent at least another indication that the role ERISA plays in regulating employee benefit plans may yet be subject to a more searching examination in Congress.

More State Activity on Discretionary Authority Provisions

Regulatory activity has been continuing in recent weeks on the discretionary authority front that we have written about in recent posts.

One insurance department issued a bulletin to clarify that its state's 2005 ban on discretionary clauses in health or disability insurance policies is applicable to new policies issued after 2005 as well as to policies renewed after that date.

Leaving aside the question as to whether policies technically "renew" or not, the department's bulletin advised in no uncertain terms that insurers who "continue to exercise discretionary clauses against their policyholders" are not in compliance with their state's laws and "will be held accountable and subject to regulatory action."

The phrasing of the bulletin is as curious as it is revealing. This is not a good thing for anybody - least of all the insurers who issue group policies, the employers who buy them or the employees whose incomes are protected by them.

Insurers do not "exercise" discretionary authority clauses in the same manner they exercise clauses, for example, that require a person to be disabled for 180 days under certain long term disability policies or that call for the LTD benefit amount to be reduced by the amount of Social Security benefits for that same disability. In fact, you would be hard pressed to find the phrase "discretionary authority" in any of the numerous and sometimes lengthy communications an LTD insurer sends its claimants.

Instead, it is typically the federal courts (where most claims under group policies are litigated) that fix on the inclusion or omission of discretionary clauses as a factor in determining what standard of review the court will apply in hearing a case. The presence of a discretionary clause generally leads the court to apply a standard that is considered more "deferential" to the insurer's claim determination.

This is the legal standard that has governed ERISA litigation for some time now, in an effort to rein in the legal free for all - and spiraling insurance costs - that would result if courts all over the country could substitute their own interpretations for the ones that the insurers' claims people had made. So it is disturbing to read regulatory pronouncements that appear out of touch with what happens in the real world of claim administration and litigation.

At another state insurance department's recent hearings on proposed rules to ban discretionary clauses in policies issued in their state, an insurance department legal representative questioned the evidence supporting the LTD industry's contention that a ban on discretionary authority provisions would lead to rising LTD plan costs, stating that in any event "carriers are free to apply a rate change due to the removal of the clause."

Another regulatory spokesperson at the hearing dismissed industry concerns about the impact a ban on discretionary authority provisions would have on costs, citing the small percentage of overall employee benefits costs that group disability plans represent and the belief that the ban would lead to better claim decisions and eliminate bad lawsuits. In any event, states of late seem more and more eager to push the envelope on the issue of just how  important discretionary clauses are in helping to keep the cost of a typical group disability policy fairly modest.

As CA and NY move ahead with their own discretionary authority bans, it's hard to escape the conclusion that something has to give here, and soon, before the court system becomes logjammed with disability claim litigation from claimants and attorneys eager to take advantage of the new ground rules that result from the absence of discretionary authority provisions.