It is now almost three years since the New York State Insurance Department issued Circular Letter No. 14 (2006) claiming it ” . . . is drafting regulations that would prohibit the use of discretionary clauses in all new and existing accident and health insurance policies, life insurance policies, annuity contracts and subscriber contracts upon renewal, modification, alteration or amendment . . . “
But as yet there is no hint of a regulation which would give New York citizens the force of law they need to level the legal playing field.
The issue involves ERISA law which, as applied by the courts, gives insurance companies broad power to decide if a claimant is covered by the terms of a policy which it wrote, but severely restricts courts from any meaningful review of those insurance company decisions, where the plan documents expressly grant “discretion” to the insurer.
If the insurer decides a claim is invalid, the claimant is forced to prove to a court that the insurer’s finding was “arbitrary and capricious” before a court can overturn it. Should a court find any valid evidence which supports the insurer’s finding, the court is bound to uphold the finding even if in the court’s judgment the weight of the evidence clearly favors the claimant.
The problem with discretionary clauses dates back to the U.S. Supreme Court’s seminal ERISA decision in Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101 (1989), which held that benefit determinations made by carriers to whom discretion has been conferred are entitled to great deference by the district courts. Given the inherent conflict of interest which pervades this entire ERISA process, where the same entity which decides the claim must also pay the claim from its own revenues, this inability to get de novo review of such decisions resulted in significant abuse.
In 2004 the National Association of Insurance Commissioners (NAIC), an organization comprising all 50 state insurance regulators, recognizing the unfairness of the situation to claimants, adopted Model Act 42, titled “Prohibition on the Use of Discretionary Clauses.” The purpose was to assure de novo review of all such conflicted claims determinations, while avoiding the broad reach of ERISA’s preemption provision. Since state power to deal with the language of insurance policies within its jurisdiction is specifically exempted from ERISA preemption, the NAIC Model Act suggested language insurance regulators might use to prohibit the use of discretionary clauses in their state.
In 2006, both New York and New Jersey insurance regulatory bodies focused on this issue. Both declared the discretionary clause in health and disability policies to be illegal and in strongly worded statements declared those clauses against the public policy of their respective states. Both promised to take action to do something about the clause.
Effective Jan. 1, 2008, a regulation went into effect in New Jersey which banned discretionary clause language from New Jersey health and disability policies. That means that New Jersey residents with ERISA claims after Jan. 1, 2008, will generally have the right to de novo review in court of a claims determination made by a conflicted claims administrator.
So far, New York regulators have done nothing but talk about the issue, while doing nothing to effectively ban the policy language. Therefore, they have given their residents no legal tool to fight insurer discretion.
It is no secret that the failure to act in New York has put claimants at a distinct disadvantage at a time when an illness or injury puts their ability to work in serious question. Add to this today’s tough economic times and we have a stew which clearly calls for some action by the New York State superintendent of insurance to make the process fair for claimants.
The New York Insurance Department had the matter in its sights in 2006 but quickly backed off. It issued Circular Letter 8 which is a rundown of the department’s anti-discretionary clause thoughts on the matter but gives a court no legal basis for attacking the discretionary clause. It helps claimants in New York not one whit.
Not that there haven’t been major developments on the issue in the intervening years. Last year in Met Life v. Glenn, 128 S. Ct. 2343 (2008), the U.S. Supreme Court recognized the inherent conflict of interest which exists where carriers, under authority of the discretionary clause, may make decisions based upon the carrier’s financial interests, rather than on the merits of the claim. In Glenn the Supreme Court directed trial judges to consider how fairly the conflicted insurer handles its discretionary powers as another factor in determining whether the insurer’s finding was arbitrary and capricious. The Court recognized what is obvious to anyone – an insurer who is deciding the validity of a claim it has to pay will tend to find in its own favor.
This year in ACLI v. Ross, 2009 WL 91062, the U.S. Court of Appeals for the Sixth Circuit made it abundantly clear that state insurance regulatory agencies have the power to prohibit the use of discretionary clauses in insurance policies because the “saving” language of the ERISA statute specifically carves out this power to regulate policy language from Federal preemption.
Even a sparsely populated state like Wyoming has decided to deal with the unfair discretionary favoritism in ERISA. The Wyoming legislature is considering a bill to ban discretionary language from health and disability policies in that state. When passed, Wyoming will be the 16th state to ban the language.
What is New York’s superintendent of insurance waiting for?
Michael Quiat is the managing partner in Uscher, Quiat, Uscher & Russo, P.A.