New Bill Proposes Banning Discretionary Clauses in All ERISA-Covered Disability Policies
On May 12, 2022, Mark DeSaulnier, a democrat from the California House of Representatives, proposed new legislation that would ban discretionary clauses in ERISA-governed employer-sponsored disability insurance plans. The newly proposed Employee and Retiree Access to Justice Act would make sweeping changes in how courts review ERISA-governed disability benefits cases, and would make it easier for courts to overturn denials of such benefits. In other words, this new law would be favorable for employees denied ERISA-governed disability claims.
What is a discretionary clause?
Most ERISA disability plans include a discretionary clause. A discretionary clause is a plan provision that gives the plan administrator the authority to interpret the terms of the plan and to determine eligibility to receive benefits. As described below, plan administrators often use discretionary clauses to make it easier to defeat a lawsuit against them that challenges their decision to deny benefits.
Discretionary clauses make it harder to win LTD claims at court.
When a claimant files a lawsuit challenging a denial of benefits, the default rule is that courts will review the case using the “de novo” standard of review. The term “de novo” comes from the Latin expression meaning “from the beginning” or “anew.” In a legal context, the de novo standard of review permits the judge to decide the case without any deference to the plan administrator’s underlying decision. In other words, the judge simply decides whether the claimant is eligible for benefits.
However, if the disability plan includes a discretionary clause (as they commonly do), the standard of review changes from a “de novo” standard of review to a “deferential” standard of review (sometimes referred to as the “arbitrary and capricious” standard of review). As the name suggests, under a deferential standard of review, the court affords deference to the plan administrator’s underlying decision. This means that the judge does not get to decide whether the claimant is eligible for benefits; instead he or she must decide whether the plan administrator’s decision to deny benefits was reasonable (that is, not arbitrary and capricious). If the judge finds that the plan administrator’s decision was reasonable—even if he or she does not necessarily agree with the decision—the judge must rule in the plan administrator’s favor and uphold the denial of benefits.
Discretionary clauses do not apply in all states or to non-ERISA LTD claims.
Currently, the laws regarding discretionary clauses vary from state to state. If you live in one of the 20 states that have already banned discretionary clauses, we have good news—your LTD claim is unlikely to be impacted by a discretionary clause, even if it is included in the policy. These states include:
• New Jersey
• New York
• South Dakota
Wisconsin law allows discretionary clauses in ERISA plans, so the proposed federal law would directly affect Wisconsin employees seeking reversal of denied ERISA disability claims.
Additionally, disability claims not governed by ERISA are not impacted by discretionary clauses. In other words, judges review non-ERISA LTD cases under the de novo standard of review regardless of whether the plan includes a discretionary clause. You can find out whether your claim is governed by ERISA here.
However, that still leaves the vast majority of claimants vulnerable to the impact of discretionary clauses when fighting for their LTD benefits.
How would the proposed bill change things?
As indicated above, the Employee and Retiree Access to Justice Act would prohibit discretionary clauses in ERISA disability policies and make any pre-existing discretionary clauses unenforceable on a nation-wide scale. This would mean all claimants—regardless of the state in which they live—would have the right to have a judge decide their eligibility for benefits without deference to the plan administrator’s underlying decision. In turn, denials of benefits would be more likely to be overturned in court.
When to contact an ERISA disability attorney.
It is important to contact an experienced ERISA benefits attorney as soon as you receive notice that your LTD claim has been denied. Doing so will give you the best possible chance of successfully appealing the denial and, if necessary, receiving a favorable decision in court.
In many cases, our ERISA benefits attorneys are able to offer a free consultation to discuss your claim. You can contact our office here to schedule a time to speak with one of our experienced LTD attorneys.