Mich. Issues New Rules on Discretionary Clauses for Policy Forms

June 12, 2007

The Office of Financial and Insurance Services (OFIS) announced it has issued new administrative rules that prohibit insurers from inserting discretionary clauses in insurance policy forms.

Discretionary clauses give insurers the ability to determine whether a policyholder is eligible for benefits, when benefits may be denied, and the ability to interpret the terms in the policy, according to the statement released by OFIS. As a result of these clauses policyholders are bound in future proceedings, including those in a court of law, to the discretionary decisions made by the insurer.

The prohibition against the use of discretionary clauses in new or revised policies took effect on March 1, 2007. Insurers had until June 1 to submit to OFIS a list of forms currently in use that contain discretionary clauses, or a letter certifying that the company has no forms containing discretionary clauses in effect in Michigan. Companies cannot reduce or deny coverage to a policyholder on the basis of a discretionary clause in the meantime.

OFIS will take enforcement action against companies that were not in compliance by June 1.

The rules were issued in response to a 2005 Michigan Supreme Court decision which held that courts were powerless to strike down unreasonable clauses from insurance policies and that the Legislature had designated the Commissioner to control the reasonableness of terms in insurance policy forms.

In its Rory v Continental decision, the Supreme Court ruled that “a court must construe and apply any unambiguous contract provisions as written,” and “the judiciary is without authority to modify unambiguous contracts.”

Source: Michigan Office of Financial and Insurance Services

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