Discretionary Clause Bans & ERISA Preemption

By Pathak, Radha A. | South Dakota Law Review, Fall 2011 | Go to article overview

Discretionary Clause Bans & ERISA Preemption


Pathak, Radha A., South Dakota Law Review


I. INTRODUCTION

The Employee Retirement Income Security Act of 1974 (ERISA) is a comprehensive federal statute that governs employee benefits. As its name suggests, it was enacted primarily to stabilize employer-provided retirement income, specifically pensions. (1) But even at the time of its passage, ERISA explicitly regulated employer-provided health care and disability benefits. (2) Such benefits have only increased in importance because a significant number of Americans receive health care through their employers. (3) While federal health care reform has taken center stage recently, (4) states have historically played a central role in regulating the interrelated areas of health care and insurance. Since ERISA's passage in 1974, however, states have had to contend with its preemptive effect, and the Supreme Court has weighed in on the relationship between ERISA and these traditional areas of state regulation on a number of occasions. (5) States' ability to exercise their traditional regulatory power has been upheld in a number of instances, (6) but the Court has been resistant to state efforts to enforce historically available remedies for behavior that is now regulated by ERISA. (7)

This article focuses on a particular preemption question that is beginning to make its way through the Circuit Courts of Appeal. This potential preemption battle concerns state efforts to regulate--usually by banning--clauses within insurance contracts that purport to confer discretion upon the insurer in determining the meaning of the terms within the insurance contract, most importantly for the purpose of determining the insured's eligibility for insurance benefits. (8) Such a clause may read as follows: Insurer has full discretion and authority to determine the benefits and amount payable as well as to construe and interpret all terms and provisions of the plan." (9)

The proposition set forth in such clauses--that the insurer's position about the meaning and applicability of the insurance contract carries more weight than the insured's position about those same issues--is contrary to the law in most states. States' regulatory regimes of insurance generally include private judicial enforcement, and the doctrines at play in those lawsuits generally seek to protect consumers, rather than favor insurers. That is, a person denied an insurance benefit can sue the insurer for breach of contract, and states have developed robust doctrines to govern such suits. If an insured is successful in proving that the insurer breached the insurance contract, the insured will receive the contested benefit as well as consequential damages of the breach and possibly also punitive damages if the insurance contract was breached in bad faith. More importantly for the purposes of this article, in such breach of contract cases, any ambiguity in the contract is interpreted against the insurer (because the insurer is the drafter). Contractual clauses that purport to confer interpretive authority upon the insurer are legally irrelevant.

As a result of ERISA, however, such contractual provisions--commonly referred to as discretionary clauses--can have legal effect. The presence of such discretionary clauses can alter the standard of review--to the detriment of the insured--that a court will use in deciding whether an insurance benefit has been wrongfully denied. This point will be discussed in more detail below, but it suffices for the moment to note that the presence of such discretionary clauses has a totally different effect under federal law than it does under state law. In a benefits dispute governed by ERISA, such discretionary clauses may be accurate; a federal court may defer to the insurer's decision about the meaning of the insurance contract. In a benefits dispute that is governed by state law, on the other hand, such discretionary clauses have no legal effect. Consequently, the practical effect of such clauses (before the dispute arises) may well be to mislead the consumer, because the consumer is likely to believe that his or her rights in the event of a dispute with the insurer are less robust than they actually are. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Discretionary Clause Bans & ERISA Preemption
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.