ERISA Discretionary Clauses

Discretionary Clauses in Employee Retirement Income Security Act (ERISA) policies — In protecting deference in the face of substantial claims procedure violations, the United States 5th Circuit’s position not only conflict with other United States Circuits but with the Texas Department of Insurance and other state insurance commissioners regarding what is fair to an insured.  In the balance between an individual insured’s rights and the efficiency of the federal court system, the 5th Circuit has found the latter to be more important, perceiving de novo review to be a threat to the court’s efficiency.  The Texas Department of Insurance and Texas legislators perceive deference to be a greater threat.

In 2010, the Texas Commissioner of Insurance wrote as follows regarding discretionary clauses in policies that are meant to bind a court to deferential standard of review:

“Discretionary clauses are unjust, encourage misrepresentation, and are deceptive because they mislead the consumers regarding the terms of coverage.  For example, a consumer could reasonably believe that if they are disabled they will be entitled to benefits under the policy and will be able to receive a full hearing to enforce such rights in court.  Instead, a discretionary clause permits a carrier to deny disability income benefits even if the insured or enrollee is disabled, provided that the process heading to the denial was not arbitrary or capricious.”
The State of Texas outlawed discretionary clauses in disability, accident, or health policies effective June 17, 2011.  Other states have acted in a similar fashion.  Statutes prohibiting discretionary clauses have consistently been found not preempted by ERISA.
ERISA has a broad preemption provision but also a savings clause that protects certain state insurance laws from preemption.  The savings clause is invoked when the courts find no preemption, thereby causing the discretionary clause within ERISA policies to be illegal under state law and therefore unenforceable.  These cases, finding that discretionary clauses are prohibited by state law and unenforceable, are limited to claims made under insured ERISA plans.  A state statute outlawing discretionary clauses in insurance policies does not apply to an employer’s self-insured plan, nor does it change the 5th Circuit precedent established in prior case law, that factual determinations by an ERISA claims fiduciary should always be given preference.
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