Ban of Discretionary Clauses in Insurance Contracts Sought in Texas

November 30, 2009

The Texas Office of Public Insurance Counsel wants the Texas Department of Insurance to adopt a rule OPIC banning discretionary clauses in insurance policies. The OPIC says discretionary clauses give the insurer broad discretion to interpret policy terms and evaluate an insured’s claim for benefits, according to information posted on the OPIC Web site,

According to OPIC, such provisions also instruct reviewing courts to presume the insurer’s decision is correct making it nearly impossible to overturn. The agency posted the following example of a discretionary clause:

“The company has full, exclusive, and discretionary authority to determine all questions arising in connection with the policy, including its interpretation, and when making a benefit determination under the policy, the company has the discretionary authority to determine your eligibility for benefits and to interpret the terms and provisions of the policy.”

OPIC believes these clauses are harmful to consumers by effectively nullifying a carrier’s promise to pay benefits owed. These clauses may also deny Texans the protections of the insurance and other laws of this state, according to OPIC. Further, these clauses create an inherent conflict of interest as the insurer responsible for providing benefits also has discretionary authority to decide what benefits are due, OPIC says.

The agency says 22 states have enacted legislation, adopted rules, or issued bulletins prohibiting the use of discretionary clauses. In 2004, the National Association of Insurance Commissioners (NAIC) adopted the Discretionary Clause Prohibition Act, which several states have also adopted.

A public meeting on the issue is scheduled for Dec. 9 at 2:00 p.m. before Texas Insurance Commissioner Mike Geeslin.

Source: Texas Office of Public Insurance Counsel

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