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.

Discretionary Authority – A House of Cards?

The U.S. Supreme Court on May 17th declined to review the 9th Circuit Court of Appeal’s 2009 decision that upheld the state of Montana’s ban on discretionary clauses in group health and disability policies. Standard Insurance Company sued in 2006 to challenge the state’s prohibition, arguing that state law in this instance should be pre-empted by ERISA, the primary federal law governing employee benefit plans. The MT ban was supported first by the ruling of the district court, and then by the 9th Circuit Court of Appeals.

The Supreme Court’s recent Conkright decision spoke of the important part that ERISA – and with it, the principal of deference to benefit determinations made by claim administrators - plays in promoting the efficiency, uniformity and predictability that recession-plagued employers need in order to continue benefit programs at current cost levels.

The Supreme Court in Conkright seems in one breath to be holding the line on the importance of deference to the decisions of claim administrators, in instances where the plan includes “discretionary authority” language such as the provision that MT banned. But in the next breath, electing to pass on reviewing the MT discretionary authority prohibition seems to be opening the door to more situations where plans will not have that language because of state laws forbidding it.

Maybe, as a Standard spokesperson stated, the Supreme Court “may feel further development in the lower courts is appropriate before it directly addresses the issue” of whether state bans such as the MT one are pre-empted by ERISA. But as the ranks of states barring discretionary authority provisions grow, how much “further development” will be too much?

Presentation: "Disability Hot Topics - Legislative and Litigation Update"

Here's a link to my presentation at the AICP New England Chapter's "Education Day" conference in Providence last week.

AICP Presentation

A couple of CT updates since the presentation was compiled.... the legislature amended SB 141 to require a separate and prominent disclosure to employees regarding offsets, instead of prohibiting offsets for dependent Social Security as the original version of the bill called for. And SB 194, a proposal to require rate filings for individual disability income products, died in the legislative session.

Association of Insurance Compliance Professionals (AICP) – New England Regional Chapter Education Day

Just back from Providence, where I presented last week on “Hot Topics in Disability Insurance – Legislative and Legal Update” at the annual Education Day sponsored by the New England chapter of the Association of Insurance Compliance Professionals (http://www.aicp.net/). 

Several conference attendees confirmed that they too are running into new filing issues related to variability in MO and several other states, as regulators raise objections and impose requirements that were not raised on filings approved as recently as several months ago.

On another note, a MA Insurance Department representative stated at the conference that his department will soon be releasing a draft survey to insurers regarding disability insurance, a product not regulated by MA up to now (at least on the group side). There was no mention, however, of any imminent plans by the department to push for greater regulation or required filings of disability income products.

Learn more about CDS at http://www.customdisability.com/

Whither Discretionary Authority?

The New York State Insurance Department (NYSID) recently released a draft of Regulation 184 - Prohibition of Discretionary Clauses.

Here is the link http://www.ins.state.ny.us/r_outreach/r_out_discret_clause.pdf

NY took some initial halting steps on discretionary authority in 2006, with the release of Circular Letter 14 proposing to ban discretionary authority provisions in insurance policies, but it has been very surprising that NY had not jumped back into the discretionary authority mosh pit since then. Perhaps emboldened by similar recent stirrings in other jumbo states (TX and CA), it appears NY is now moving ahead with promulgating such a regulation. NY has asked that comments on the draft it is now proposing be submitted by May 5th. As the list of states acting on the topic of discretionary authority grows, it seems only a matter of time before this issue bubbles up to the Supreme Court for a decision that will have a profound impact on employee benefit plans and ERISA.

Financial Services Reform

For the most part, the insurance industry escaped the glare of the financial services reform proposal rolled out in Congress recently by Senator Dodd (who is not running for re-election). However, the proposal does recommend the creation of an office of national insurance within the Treasury Department to monitor the insurance industry and assess ways to modernize insurance regulation. Specifically, the proposed national insurance office would evaluate the merits of providing insurers with the option for federal charters, and thus federal regulation. It is hard to imagine a Congressionally-created, federal office of anything concluding that state regulation is a more favorable framework, but my instincts and my sense of history tell me that this is another small step in the slow drift toward a dual regulatory system similar to the one that oversees the banking industry. We can only hope that a federal system of insurance regulation would be more diligent and well-informed than the regulatory framework that was charged with keeping the activities of our banking giants under control.

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.