Congress Considers Total Ban on Discretionary Clauses in ERISA Plans

Discretionary Clauses in ERISA

Earlier this month, the Employee and Retiree Access to Justice Act (H.R. 7740) was introduced in the U.S. House of Representatives. A companion bill was also introduced in the Senate as S. 4219. The bill seeks to ban discretionary clauses in all employer-sponsored benefit plans governed by ERISA. If passed, this federal ban on discretionary clauses would return ERISA cases to the de novo review standard that the U.S. Supreme Court designated as the default rule. The bill would dramatically affect cases involving wrongly denied disability claimslife insurance and accidental death and dismemberment (AD&D) claims, and health insurance claims.

What makes the bill so significant? Many ERISA plans use discretionary clauses so that courts will apply the “abuse of discretion” standard for factual determinations in accordance with Pierre v. Connecticut General Life Insurance Co., 932 F.2d 1552 (5th Cir. 1991). The difference between the de novo and abuse of discretion standards of review can lead to drastically different results. Unfamiliar with these two standards of review?  No need to worry — they’re actually quite simple.

When a court applies the de novo standard of review, it does not defer to the decision of the ERISA benefits plan administrator. It considers the issue as though it were doing so with a “blank slate”. When a court applies the abuse of discretion standard of review, it is expected to defer to the decision of the ERISA benefits plan administration, unless the decision is found to be unreasonable.

The bill under consideration would amend ERISA to prevent any plan for including plan post-dispute arbitration, class action waiver, representation waiver, or discretionary clauses. Any existing clauses would be rendered unenforceable.

The movement to ban discretionary clauses started on the state level more than 15 years. At present, at least 23 states have banned discretionary clause, including Texas.

So how might it affect the average plan participant? Courts would no longer give deference to the claims decisions made by plan and claim administrators with discretionary authority under the terms of the plan to make such decisions. The decisions made by insurance companies, who have an inherent conflict of interest in their dual role as decider of claims and payor of benefits, would be substantially more likely to be challenged in court.