By Allison Bell, SENIOR EDITOR/WEB EDITOR, National Underwriter Life & Health.
Empire State regulators have posted a version of a proposed regulation that would prohibit annuity issuers and life and health insurers in the state from using contracts that include discretionary clauses.
The New York State Insurance Department defines a discretionary clause as a policy form provision that "grants an insurer, plan administrator or claims administrator the discretionary authority to determine eligibility for benefits, resolve disputes, or interpret the terms and provisions," or "reserves a right to an insurer, plan administrator or claims administrator to develop standards of interpretation or review."
Insurers and others have argued that they have the best understanding of a policy, and that they can interpret policies only within the confines of strict state insurance laws and regulations.
But New York department officials believe that, when discretionary clauses are used, "policy form provisions may be rendered illusory by nullifying the insurer's responsibility to pay," officials write in a provision in the regulation draft that explains the purpose of the proposed regulation.
"Even where there is a conflict of interest because the plan administrator is both determining benefit eligibility and paying claims, the court will apply an arbitrary and capricious standard when the contract contains a discretionary clause," officials write.
The proposed regulation would prohibit a nonprofit health carrier, a health maintenance organization, or "an insurer licensed to write accident and health insurance (including disability income), life insurance or annuities," from using discretionary clause in a policy form.
"A contravention of this part shall be deemed to be an unfair method of competition or an unfair or deceptive act and practice in the conduct of the business of insurance in this state, and shall be deemed to be a trade practice constituting a determined violation," officials write.
Public comments on the proposed regulation are due May 5.
More information about the proposed New York discretionary clause ban is available here.
This article has been reprinted with permission of National Underwriter Life and Health.© Copyright 2010 National Underwriter Life & Health. A Summit Business Media publication. All Rights Reserved.
Allison Bell is Senior Editor of National Underwriter Life & Health, with responsibility for covering health and disability insurance as well as employee benefits. She is also Web Editor for the online National Underwriter L&H Daily News. She can be reached at abell@sbmedia.com.