NEW YORK – The New York Insurance Department on March 27 issued Circular Letter No. 8, declaring that the use of discretionary clauses in health and disability insurance policies and contracts violates state law.
According to the letter issued by Charles Rapacciuolo, chief of the Health Bureau at the New York Insurance Department, discretionary clauses will no longer be approved by the department. Further, insurers, article 43 corporations and health maintenance organizations must remove such clauses from existing policies and contracts.
Rapacciuolo says discretionary clauses give an insurer, Article 43 corporation or health maintenance organization “unrestricted authority to determine eligibility for benefits and to interpret terms and provisions of the policy or contract.” Rapacciuolo says that though historically the provisions were allowed, the department re-examined their use to check compliance with New York insurance law. He cites recent federal case law, which has interpreted discretionary clauses under the Employee Retirement Income Security Act as restricting the court’s ability to exercise de novo review.
Wide Latitude
“Such wide latitude in the insurer’s, Article 43 corporation’s or HMO’s discretion serves to negate the essential features of policies and contracts, as well as statutorily required appeal rights. As a result, policies and contracts may be rendered illusory by nullifying the insurer’s, Article 43 or HMO’s responsibility to pay,” Rapacciuolo says.
He says the department has found that the use of discretionary clauses violates Section 3201(c) and 4308(a) of New York Insurance Law.
Evan Schwartz of Quadrino & Schwartz in Garden City, N.Y., says the impact of this decision is “tremendous.” Federal judges will decide for themselves whether a claim should have been paid rather than “rubber stamping” the decision of an insurer, Schwartz said in a press release addressing the Circular Letter.
“This ruling is a major step toward ensuring that the New York workforce gets a fair chance in court when insurance companies deny or terminate a claim,” Schwartz said.
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