Jill Overmyer

Texas recently joined 22 other states in banning discretionary clauses from insurance policies.

Beginning Feb. 1, 2011, for disability policies and June 1, 2011, for health and life policies, insurance companies no longer will have the final say on whether a condition or treatment will be covered under the policy. Policyholders also will have the right to sue for unfair denial of benefits.

What is a discretionary clause?

Nearly all health and disability plans have discretionary clauses, which allow the insurance company to determine whether a treatment or illness will be covered in the policy, regardless of what the policy states. A policy may state that a certain procedure is covered, but under the discretionary clause, the insurance company reserves the right to deny the claim based on its own interpretation.

According to supporters of the new law, discretionary clauses are usually exercised over cancer treatments and drugs, mental health coverage, and home-based treatments for diabetes and other conditions.

Support for the ban

Supporters of the new law include a number of consumer protection agencies, the AARP and the Office of Public Insurance Council in Texas. They believe the ban of discretionary clauses results in the following benefits:

  • Consumer protection. Many advocates say the law protects policyholders from unfair determinations regarding coverage by no longer allowing insurance companies free reign to deny a claim for any reason.
  • Economic benefits. According to a 2009 study from the American Journal of Medicine, 62 percent of all U.S. bankruptcies are the result of medical bills. In many of these cases, the person had health insurance and expected the policy to cover treatments. The ban could help eliminate this guessing game so policyholders can more accurately plan their finances around medical care.
  • Removal of conflict of interest. When discretionary clauses are in place, it is extremely difficult for a policyholder to successfully argue an insurance company's final decision. The insurers not only have the power to deny a claim, but also to determine whether their own denial of a claim was justified if a policyholder challenges the decision. Banning discretionary clauses removes this conflict of interest, according to the Office of Public Insurance Council, and allows consumers to complain or sue.

Support for discretionary clauses

Supporters of discretionary clauses feel the ban will merely add costs to insurance companies for increased filing fees and removal of discretionary clauses from forms. They also think it will result in higher litigation costs. A January 2009 regulatory update from MetLife, for example, raises the concern of consistency when different judges (without health insurance backgrounds) determine the validity of claims on a case-by-case basis.