Texas Boots Deference

When a ‘kick-in-the-slats” state like Texas gives the heave-ho to the discretionary clause in disability income insurance policies, it’s time for the rest of the states (and maybe the courts) to take another look at a discretionary clause ban.

In early December, in a strong, well-reasoned ruling, the Texas Commissioner of Insurance booted the discretionary clause out of the State of Texas starting in 2011. 

Any one reading this blog should know that the discretionary clause in a disability policy gives an insurance company an inordinate advantage when challenged by an ERISA policyholder over a disability denial.

This advantage was not mandated by Congress when it first enacted ERISA in 1974. This downer for the disabled was a “gift” of the Gods of the U.S. Supreme Court in Firestone v. Bruch, 489 U.S. 101 (1989), when the majority engaged in a pedantic discussion of trust versus contract law and decided to give administrators of disability insurance policies a more or less free hand by putting disabled workers through the almost insurmountable task of proving that the denial decision of an administrator was “arbitrary and capricious”.

The Firestone court opted for a trust-style review of how to weigh plan administrator denials rather than a contract-style review. Courts were ordered to give deference to the plan administrator denial (usually an insurance company which has to pay the claim, if approved) which automatically erects a steep hill which a disability claimant has to climb. (Apparently the Court overlooked the fact that no person in their right mind would set up a trust in which the trustee and the beneficiary had such obviously conflicting interests).

What a holiday present for insurance companies which have had a long history of taking maximum advantage in any situation. And, the insurers certainly have maxed out on the “deference” gift given them by the Supreme Court!

Down through the years, Federal District judges, bridling at not being able to judge ERISA cases as they see them because of Firestone, have tried to devise ways within the restrictions of Firestone to still do justice to the many wrongly denied disabled claimants whose cases they hear.

ERISA contains a preemption clause which generally keeps states from interfering with the Federal ERISA legislation. Many states were quick to recognize the advantage Firestone gave insurance companies and the unconscionable burden it placed upon the backs of those already so disabled that they could not work.

Led by the National Association of Insurance Commissioners, some states have already found an exception to the preemption clause – the language used in a policy is not preempted and, therefore states can ban the use of deference clauses in policies issued in their state, without violating ERISA.

At this time, some 22 states have tried to level the playing field for their citizens in ERISA disability income claims. Deference to insurers has been a topic of discussion in the ERISA disability insurance field for many years and slowly states have seen the wisdom and justice of giving claimants a chance to prove their case just as a plaintiff does in every other type of litigation – by a preponderance of the evidence with no head start for either side.

To have Texas, a state not known for being partial to wimpy notions, jump on the bandwagon so strongly, indicates that the advantage given to insurance companies in these types of cases is so one-sided, that even a state where sissy stuff is sneered at, says, “Enough”.