Posted on Apr 24, 2006
In 1989 the Supreme Court decided Firestone Tire and Rubber v. Bruch, 489 U.S. 101, stating that if ERISA plan documents contain language giving a specified plan fiduciary discretion to interpret the terms of the plan and determine eligibility for benefits, a court must defer to that discretion and the decision of a plan fiduciary will not be reversed unless the plan fiduciary acted in an arbitrary and capricious manner. Before Firestone, it had been enough to win in a dispute with an insurer in court if you could prove that you were right and they were wrong. But under the arbitrary and capricious standard, you not only had to prove the insurer was wrong, you had to prove it was completely unreasonable.
Since then insurers selling ERISA-governed health, disability and life insurance policies have routinely inserted boilerplate language into their policies giving themselves this discretion. These discretionary clauses often do not come into play. If an insurance claim is either clearly not covered or clearly should be paid, the insurer usually doesn’t deviate from the obvious course. But when claims fall into a gray area, insurers generally deny them if plausible reasons allow them to do so. This is often true even when most of the facts or policy language indicate the claim is valid. In short, insurers often deny claims that pretty clearly should be paid.
A good example of how how a discretionary clauses can make the difference in winning or losing a case is Kimber v. Thiokol, 196 F.3d 1092 (10th Cir. 1999). You can read the Kimber case here. Lynn Kimber worked for many years at Thiokol, a national aerospace company now known as ATK or Alliant. He was diabetic. As time went on his diabetes progressed, as diabetes inevitably does, and impaired his function to a greater and greater degree. Lynn began to lose function in his hands and feet and then he began to lose his eyesight. Initially, Lynn found he could not operate heavy equipment and was transferred to a less physically demanding job. But finally he could not perform that occupation either. His physicians all agreed that he was totally disabled from any occupation. He submitted a claim for disability benefits and Thiokol approved it and began to pay him a monthly benefit to which Lynn was entitled.
The disability plan sponsored by his employer had a two year limitation for disabilities “due to a mental condition.” After Lynn had been on disability for about 18 months, one of his physicians noted that he was suffering from depression. Not unusual considering the fact that he was not able to work. Another doctor noted that Lynn was beginning to exhibit some signs of dementia, a common effect of diabetes as it progresses. That was all the plan administrator, an employee of Thiokol, needed. He cut Lynn’s benefits off at two years claiming that Lynn’s disability was due to a mental condition. It did not matter that Thiokol had previously agreed that Lynn was disabled purely for physical reasons. It didn’t matter that Lynn’s depression and dementia were based solely on the underlying physical condition of diabetes. It didn’t matter that everyone agreed that Lynn’s diabetes had not improved. It didn’t matter that diabetes is a degenerative condition and that the physical damage it caused was irrevocable.
Both the trial court and the appellate court upheld the decision of the Thiokol employee. The Tenth Circuit on appeal stated that when it reviews a denial of an ERISA claim where discretion is granted to an ERISA plan administrator:
the administrator’s decision need not be the only logical one nor even the best one. It need only be sufficiently supported by facts within [his] knowledge to counter a claim that it was arbitrary or capricious . . . the decision will be upheld unless it is not grounded on any reasonable basis . . . the reviewing court need only assure that the administrator’s decision falls somewhere on a continuum of reasonableness–even if on the low end.
Thiokol’s decision and the decisions by the federal district court judge and three federal circuit court judges are simply miscarriages of justice. The federal judiciary’s rubber stamping of Thiokol’s decision is directly attributable to the discretionary authority clause.
The idea that insurers can make their denials more or less bulletproof from review by a judge simply by inserting a discretionary clause in their policies rubs a lot of people the wrong way. Consumer groups, plaintiffs’ lawyers and insurance commissioners have all objected to the use of discretionary clauses by insurers. Discretionary clauses attract criticism for other reasons. Enforcing them reverses generations of case law dealing with how insurance policies are interpreted. Before ERISA passed it was universally accepted that insurers were in a position of significant advantage when dealing with their customers. They wrote the policies they sold and did so using complex, difficult to understand language. Those policies were generally presented to consumers on a “take it or leave it” basis: consumers had little meaningful ability to negotiate with the insurer to obtain any changes or revisions to policy language. Consequently, courts placed the burden of proving insurance exclusions or limitations on the insurer. They also put into effect the doctrine of contra proferentem--the idea that since the insurer drafted the policy, if there was some ambiguity in the terms of the policy about whether a claim would be paid, the loss associated with the ambiguity rested with the insurer, not the consumer. These rules had the effect of giving consumers the benefit of the doubt when there was a really close question about whether the insurer would have to pay a claim. Sort of like putting the old baseball “tie goes to the runner” idea in place in the insurance situation. All that went out the window for ERISA cases when insurers persuaded the Supreme Court to allow use of discretionary clauses in insurance contracts.
As I’ve alluded to in the last paragraph, change is afoot! The National Association of Insurance Commissioners, the group of folks who are in charge of regulating insurers from state to state, passed a resolution in 2003 unanimously stating that insurers should not be allowed to use discretionary clauses in their policies. By itself, this didn’t have any legal effect. Each state has to act to put into place such a prohibition legislatively or by order of that state’s insurance department. But it was an important action to get the ball rolling to cut back the use of discretionary clauses.
Since then a number of states have acted to restrict or prohibit the use of discretionary clauses. California, New York and Illinois have prohibited their use and Utah has significantly limited the effect of those clauses. Other states are moving in the same direction. This is a good thing. The playing field is already tilted heavily in favor of insurers under ERISA without the additional unfair advantage insurers have in using a discretionary clause.
- ?I have been awarded Social Security disability benefits. But the insurer of my disability policy has denied my claim. Can the insurer do that?
- ?I already have a lawyer working on my social security disability claim. Can't that lawyer handle my disability insurance claim too?
- ?What issues do you see in life insurance claims?