Judge Upholds Montana’s Decision to Ban ‘Discretionary Clauses’

A federal judge has upheld a ruling by State Insurance Commissioner John Morrison prohibiting “discretionary clauses” in group health and disability insurance policies in Montana.

The ruling by U.S. District Judge Donald Molloy of Missoula means insurers no longer can rely on obscure contract language to avoid paying claims, Morrison said.

“This is a milestone for Montana workers and businesses,” he said. “These clauses allowed insurance companies to deny claims with practically no reason. Having coverage doesn’t do much good if your claims don’t get paid.”

Discretionary clauses are contained in nearly every group health and disability policy and give insurance companies discretion over whether to pay claims, Morrison said.

Standard Insurance Co., based in Portland, Ore., sued Morrison in September 2006 challenging his statewide disapproval of employee benefit plans that contain discretionary clauses. The company claimed Morrison’s action was pre-empted by federal law and exceeded his authority.

In a ruling issued last week, Molloy disagreed, saying Morrison’s decision to ban the clauses was “straightforward regulation of insurance” that federal law “expressly saves from pre-emption.”

Justin Delaney, vice president of public affairs for Standard Insurance, said the company “respectfully disagrees” with Molloy’s ruling and will determine shortly whether it will file an appeal. He declined further comment.

Discretionary clauses affect people who get insurance through their jobs, a group that includes most insured Montanans and most insured Americans, Morrison said. They are “obscure and confusing for average citizens but give the insurance companies wide berth in denying claims,” he said.

Courts have interpreted discretionary clauses as requiring that claim denials be upheld unless a claimant can prove the insurer abused its discretion — a “high legal bar to clear,” Morrison said.

Removal of the clauses means the “abuse of discretion” standard no longer will be used in claim disputes. Instead, claims will be paid when the balance of evidence supports payment, restoring “broad, fundamental rights to tens of thousands of Montanans,” Morrison said.

The National Association of Insurance Commissioners adopted a model rule several years ago banning discretionary clauses. Since then, the clauses have been prohibited by insurance commissioners in several states, including Montana, New York, Michigan, Illinois and California.

Morrison said he believes Molloy’s ruling was the first federal court opinion upholding a ban on discretionary clauses in the U.S.; it was followed by a similar decision in Michigan two days later.

“This is an excellent opinion that will influence other courts across the country,'” Morrison said.