The U.S. Supreme Court denied Standard Insurance Company’s request for the Court’s review (Standard Insurance Company v. Morrison) in May. This news is not surprising, considering the fact that the Supreme Court only agrees to hear about 1% of the 10,000 petitions filed for its review each year. The impact of the denial is that the Ninth Circuit Court of Appeals decision is upheld – the Montana DOI’s disapproval of insurance contracts containing discretionary clauses is not preempted by ERISA.
The insurer argued that the DOI’s disapproval of contracts with discretionary clauses is not specifically directed at insurance companies, because it is directed at ERISA plans and procedures. The appeals court decided that the DOI’s prohibition on use of discretionary clauses addresses an insurance-specific problem, because discretionary clauses generally do not exist outside of insurance plans.
What does it mean? It means the insurer’s argument that use of discretionary clauses saves money and controls costs for insurers (thus ultimately passing these savings onto its insureds) is not enough to overcome the perception of an unfair advantage favoring the insurer.
Currently, 14 states* have some type of prohibition on discretionary clauses in insurance contracts. The Supreme Court denial demonstrates that the prohibitions are safe for now and that we may see more states passing similar prohibitions in the future.
*Alaska, California, Connecticut, Hawaii, Idaho, Illinois, Kentucky, Michigan, New Jersey, New York, South Dakota, Utah, Washington, Wyoming
I guess I don’t know what a discretionary clause is possibly I cal it something else. Can you explaine it to me?
A discretionary clause is a provision in an insurance contract that preserves or claims to preserve, for an insurer, the discretion or freedom to interpret the terms of that contract.