Choice of law provisions will not defeat state regulations prohibiting discretionary clauses

Washington is among the many states that adopted a model regulation drafted by the National Association of Insurance Commissioners (MDL-42), which prohibits insurers from selling disability insurance policies containing “discretionary clauses.” Insurers have routinely included such clauses in their policies, giving themselves discretion to interpret their own policies and to determine whether their own actions are reasonable, since the 1989 U.S. Supreme Court decision in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). There, the Supreme Court held that judges reviewing ERISA benefit cases should do so using the “de novo” standard of review, which allows the court to inspect and analyze the facts of the case and make its own independent determination as to whether a person is entitled to the benefits at issue – unless the insurance policy (or “benefit plan”) has a clause granting discretion to the plan administrator. If a policy contains such a discretionary clause, then the judge may only reverse the insurer’s benefit denial if it was an “abuse of discretion.” That standard can be difficult for a claimant to meet, as it requires an insurer’s decision to be reversed only if it lacked any reasonable basis. If the insurer simply paid a physician consultant to opine the claimant was not disabled, that was often enough to successfully demonstrate a “reasonable basis” – after all, a doctor had said the person was not disabled, so how could that be unreasonable?

The Washington regulation prohibiting discretionary clauses, WAC 284-50-321, provides as follows:

(1) No disability insurance policy may contain a discretionary clause. “Discretionary clause” means a provision that purports to reserve discretion to an insurer, its agents, officers, employees, or designees in interpreting the terms of a policy or deciding eligibility for benefits, or requires deference to such interpretations or decisions, including a provision that provides for any of the following results:
(a) That the insurer’s interpretation of the terms of the policy is binding;
(b) That the insurer’s decision regarding eligibility or continued receipt of benefits is binding;
(c) That the insurer’s decision to deny, modify, reduce or terminate payment, coverage, authorization, or provision of health care service or benefits, is binding;
(d) That there is no appeal or judicial remedy from a denial of a claim;
(e) That deference must be given to the insurer’s interpretation of the contract or claim decision; and
(f) That the standard of review of an insurer’s interpretation of the policy or claim decision is other than a de novo review.

As a result of this regulation, most judicial review of insurer’s claim denials is under the de novo standard. Because the “abuse of discretion” standard of review tipped the playing field so heavily in favor of insurers, the regulation has brought more fairness to ERISA disability litigation.

Disability insurers have been trying to find ways around the laws prohibiting discretionary clauses. In one recent effort, the insurer claimed that California’s Insurance Code prohibiting discretionary clauses should not apply because the insurance policy at issue stated that it was governed by the law of Maryland. The federal district court rejected that argument, stating that “allowing a choice of law provision to trump California Insurance Code Section 10110.6 on the narrow issue of the applicable standard of review for a denial of benefits would subvert the right to a ‘fair review of claims denials’ that was granted by the California legislature to all California residents.” Hirschkron v. Principal Life Ins. Co., — F.Supp.3d –, No. 15-CV-00664-JD, 2015 WL 6651146 (N.D. Cal. Oct. 29, 2015).

That is sound reasoning.