Jun 23, 2017

Courts Affirm Insurance Commissioners' Authority to Prohibit Discretionary Clauses


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11/17/2008
Brian S. King
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This week has seen two separate federal district courts uphold the authority of state insurance comissioners to prohibit the use of discretionary authority clauses by insurers in their respective states.  Standard Life Insurance v. Morrison was decided two days ago and American Council of Life Insurers v. Watters was decided today in the states of Montana and Michigan, respectively.  I'll post the decisions to the website library as soon as I'm able. 

These decisions are important developments.  Back in 2002 the National Association of Insurance Commissioners voted overwhelmingly to recommend that state insurance commissions disallow the practice of insurers placing discretionary authority clauses in their insurance policies.  As I've complained about before, these discretionary authority clauses largely insulate insurers from meaningful judicial scrutiny of their decisions.  They convert a court's standard of review from de novo to arbitrary and capricious.  Fortunately, the NAIC saw the manifest injustice of these clauses and recommended that states prohibit them.  Thereafter, many state insurance commissioners followed the NAIC recommendation.  Judicial challenges to these actions are now surfacing.  These two decisions are the first that specifically address the issue.  The fact that they both reject insurance industry challenges to the authority of the insurance commissioners to prohbit discretionary clauses is a very auspicious sign for consumers.   

UPDATE: the LEXIS cite for ACLI v. Watters is 2008 U.S. Dist. LEXIS 15185.



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