California Bans Discretionary Clauses in Disability

Discretionary Clauses in Disability Insurance Policies Banned in California

A new law in California bans "discretionary clauses" in disability and life insurance policies. The clauses allow insurers to decide on their own if an insured is disabled, despite doctors' opinions.

Imagine this Situation. You're the victim of an unexpected accident or illness and all of a sudden you're not well enough to return to work. Thankfully, you've been carrying disability insurance coverage for years, so you could protect yourself and your family in case something like this happened. You go see a series of doctors and specialists who investigate your ailment and document that you are unable to return to work.

You are finally able to rest easy, knowing now that your disability has been medically proven you will be able to rely on your disability coverage and continue to support your family. Then, out of nowhere, your insurance company invokes its "discretion" to disagree with medical evidence and decide that you are not disabled. It denies your claim, leaving you with nothing. This sounds like a terribly unfair situation. However, until recently, this sort of disability insurance claims practice was entirely legal - and unfortunately all too common - in the state of California.

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Law Protects Insured from Unreasonable Claim Denials

California has passed a law outlawing "discretionary clauses" in disability and life insurance policies. Discretionary clauses allow insurers to overrule doctors' opinions and decide that an insured is not disabled and therefore not entitled to benefits.

Insurance companies say the clauses help root out fraud and keep premiums low. However, according to consumer advocates including the California Department of Insurance, insurers use the clauses to deny valid claims because they know that it is very difficult, if not impossible, for the insured to challenge the decision in court. To prevail over the insurance company in a discretionary clause dispute, an insured has to show that the insurance company acted arbitrarily in denying the claim.

Starting January 1, 2012, this practice became a thing of the past in California.

In a press release, Insurance Commissioner Dave Jones championed the move saying that the prohibition "levels the playing field and gives consumers an even chance to prove that they are entitled to disability and other insurance."

California is one of several states to outlaw the clauses after the United States Supreme Court cleared the way by ruling in 2010 that individual states have the right to prohibit discretionary clauses in insurance contracts.

The change is most certainly a boon to disabled workers and their families, who will now be able to spend more time focusing on getting their lives back on track instead of pursuing costly and stressful insurance bad faith claims.

Unfortunately, the new law does not mean that insurance companies will always act in their insured's best interest.

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Attribution/Source(s): This quality-reviewed publication was selected for publishing by the editors of Disabled World (DW) due to its relevance to the disability community. Originally authored by Donahue & Horrow, LLP and published on 2011/11/11, this content may have been edited for style, clarity, or brevity.