Policyholder/Employee groups who have group disability insurance coverage through their employers and who find themselves operating in the byzantine world of ERISA have long criticized discretionary clauses contained in such ERISA policies. These often have the effect of giving insurance companies firmer ground to support claim denials because the “abuse of discretion” standard of review typically applies. This higher standard of review makes it more difficult for policyholders/employees to challenge disability claim denials.

California Governor Arnold Schwarzenegger has the opportunity to sign California Assembly Bill 1868 (“AB 1868”) and to prohibit these discretionary clauses. In the recent case of Standard Insurance Company v. Morrison, the Ninth Circuit Court of Appeals ruled that the California Insurance Commissioner has the authority to disapprove any disability insurance policies that contain discretionary clauses.

Arthur Postal of National Underwriter writes about such clauses in an article entitled “Disability Policy Discretionary Clauses Come Under Fire.” Here is a reprint of it: