Many health and disability group insurance contracts contain discretionary clauses---clauses that provide the company writing the contract with the discretion to determine the meaning of contractual terms or to determine the insured's eligibility for benefits. If your disability insurance policy is subject to ERISA, meaning it was purchased by your employer as part of a group plan, it most likely includes a discretionary clause. In order to prevail in court against an insurer, the claimant must demonstrate not just that the insurer's decision was wrong, but that the insurer abused its discretion in making that decision. Insurers use these clauses to deny claims, with knowledge of the added difficulty these clauses provide for their customers to succeed in court.
State legislators are reacting to these unfair clauses. California recently enacted a law, making discretionary clauses in disability and life insurance policies void and unenforceable. Starting January 1, 2012, for California residents challenging the denial of disability benefits, that denial may now be subject to de novo review by the court--the court would decide whether given all the evidence the person is disabled.
New Jersey Insurance regulations contain a weaker version of this California prohibition. New Jersey Administrative Code section 11:4-58.3 prohibits provisions that reserve "sole discretion" to the insurer, but permits discretionary clauses as to the insurer's "initial interpretation of the policy." Why did the Department of Banking and Insurance decide to place the word "sole" before discretion? The meaning of the word "sole" is not apparent and could lead to unfair interpretations, such as in Evans v. Employee Benefit Plan, 311 Fed. Appx. 556 (3d Cir. 2009) and Baker v. Hartford Life Ins. Co. This regulation should be revised to unequivocally state that discretionary laws are void as a matter of public policy.
We at Bonny G. Rafel are experienced in interpreting insurance contracts and will continue to pursue fairness and justice by using the New Jersey Regulation and its progeny to protect your rights.
--By Julie Gendel, Esq.
