Filing a long-term disability claim is a major undertaking. When an insurance company makes it as hard as possible to qualify for insurance benefits, the process can be even more daunting.
One way an insurance company might try to avoid paying out claims is through a “discretionary clause.” This completely changes the game and the potential fairness of litigation. If your policy includes a discretionary clause, the insurance company has the power to deny your claim even if you meet all the criteria outlined in the policy. This can lead to unfair denials and delays in receiving the benefits you’re entitled to.
In this article, we’ll explore what discretionary clauses are, how they can affect insurance benefits, and why insurance companies so often include them in their policies, despite being banned in some states. We’ll also discuss how an experienced disability lawyer can help you get the benefits you deserve.
Here’s what we’ll cover:
- What is a discretionary clause?
- The effect of sole and absolute discretion
- Washington and Oregon: No discretionary clauses allowed
- Why insurance companies gamble
- How you can level the playing field
What is a discretionary clause?
A discretionary clause is a provision in an insurance policy that gives the insurance company the authority to interpret the policy terms and decide whether or not to pay out benefits. Essentially, it allows the insurance company to have the final say in determining eligibility for benefits, rather than an impartial third party. Clearly, this can be problematic for policyholders, as it gives the insurance company a significant amount of power and discretion in denying claims.
It is truly a scenario of “the fox watching over the henhouse.” It’s in the insurance company’s best interest to avoid paying out benefits as long as possible or to delay in the hope that you eventually give up your claim. A discretionary clause allows the company to do just that.
The effect of sole and absolute discretion
The critical language in a discretionary clause is “sole and absolute discretion.” This seemingly simple term can have profound implications.
First, sole and absolute discretion allows the insurance company sole authority to interpret the insurance policy. Therefore, any term of the policy that is ambiguous, meaning it is subject to two or more “reasonable interpretations,” must be interpreted in favor of the insurance company. This is true even if common sense would dictate otherwise.
Second, let’s say your disability insurance policy was provided as an employee benefit and the policy is governed by ERISA’s special judicial review procedures. In this case, the court cannot overturn the insurance company’s denial of your claim unless it finds the insurer committed an “abuse of discretion” by acting in an “arbitrary and capricious” manner.
It’s critical to carefully review your policy to see if it contains a discretionary clause. If it does, you should consider seeking legal advice before filing your claim. An experienced attorney can help you navigate the complexities of the claims process and ensure that your rights are protected. By being aware of the presence of a discretionary clause and taking the necessary steps to protect your claim, you can increase your chances of a successful outcome.
Washington and Oregon: No discretionary clauses allowed
Because of the obvious imbalance of power and unfairness resulting from discretionary clauses, many states have banned them outright. Fortunately, discretionary clauses have been banned for disability insurance claimants in Washington and Oregon.
Both Washington and Oregon have had lawsuits that have upheld the bans on discretionary clauses and given the bans preeminence in disability insurance disputes. Even so, understanding how to go after the insurance company to get it to honor a valid claim can still be tricky. That’s why hiring a competent attorney is so important.
Roy Law Group won a landmark case proving that Principal Life Insurance Company’s discretionary clause was invalid for a claimant living in Washington state. Despite the fact the insurance policy was issued and delivered in Texas, where discretionary clauses were not banned, Washington State law took legal precedence.
Why insurance companies gamble
Even though many states have banned discretionary clauses, many insurance companies will gamble and include a discretionary clause on most disability insurance policies. Why?
The short answer is the insurance company assumes no risk by including the clause, and it can help prevent legitimate claims.
If the clause is not applicable, the court will simply ignore it and not apply deference to the insurance company. However, sometimes the inquiry never goes that far. Sometimes claimants give up on their claims because they think they have little chance of winning, unaware that the policy’s discretionary clause is invalid and unenforceable.
Unenforceable discretionary clauses are all a part of the game
Insurance companies deny legitimate claims all the time. They know most claimants have no idea what parts of their contracts are enforceable or whether the law actually backs up their denials.
If the insurance company decides to deny a claim and then wins in a court case, it gets to reduce the payments it owes the person suing the company. If it appears the company will lose a case, all it must do is honor the contract. Barring harm caused by the denial, it is off the hook legally.
Insurance companies deny legitimate claims all the time. They know most claimants have no idea what parts of their contracts are enforceable or whether the law actually backs up their denials.
Each point is a gamble with a degree of risk. In most cases, the insurance company considers the potential reward much better than the perceived risk. There is one instance, however, where the tables get turned very quickly: The claimant hires an attorney.
When the claimant hires a disability insurance attorney, the insurance company’s risk-and-reward formula gets turned upside down. An attorney will know the law and how it is applied, how courts have regarded it, and how ERISA works. A competent ERISA attorney is also trained in negotiation and can handle the legal legwork that drives some claimants away.
How you can level the playing field
If you are filing a disability claim, you have a choice. You can go it alone and hope the insurance company does the right thing. Or make it clear from the start that you mean business, and fighting you will only cost the insurance company more money.
Hiring an attorney who specializes in disability law, ERISA, long-term disability benefits, and discretionary clauses is essential for leveling the playing field in a battle against insurance companies.
Roy Law Group specializes in disability law and nothing else. Our legal experts know what it takes to fight insurance companies with endless resources and beat them at their own game. If your insurance company has denied your long-term disability claim, or even if you’re just starting the process of filing a claim, contact us today for a free consultation.