In a January 29, 2014 order, the Honorable Richard A. Jones from the United States District Court Western District of Washington, ruled Washington State’s September 2009 ban on discretionary clauses applies to all insurance policies from September 2009 forward, regardless of whether the policy was issued before September 2009.
How Discretionary Clauses Affect Long-Term Disability
Discretionary clauses in insurance contracts give insurance companies total discretion to decide issues related to policy interpretation and coverage. In the case in question, an insurance company denied long-term disability benefits to its insured.
A Question of Timelines
The denial occurred after September 2009, but the policy was issued years earlier. The insured brought suit under the Employee Retirement Income Security Act (ERISA) for wrongful denial.
The insurance company argued its decision could only be reviewed for “abuse of discretion” because the policy contained a discretionary clause, and it was issued before September 2009 (so the ban on discretionary clauses did not apply to the policy).
Abuse of Discretion?
Abuse of discretion is a standard that gives deference to the insurance company’s decision. Judge Jones disagreed, ruling Washington State intended its ban on discretionary clauses to take effect September 2009, banning discretionary clauses in all policies from September 2009 forward. Since the discretionary clause is invalid, the insurance company’s decision to deny benefits will be reviewed “de novo”, or from the beginning, with no deference to the insurance company. This is a very favorable ruling for employees with long-term disability claims, and other insurance policy disputes, in Washington State.