Discretionary clauses in long-term disability (LTD) benefits are provisions commonly found in insurance policies or employer-sponsored plan documents that grant the insurer or plan administrator broad authority to interpret the policy’s terms, determine eligibility for benefits, resolve factual questions, and decide the amount or duration of payments.
In practice, these clauses give the administrator significant leeway in evaluating claims, including how to apply definitions of disability in the plan or handle ambiguous language. Under ERISA (which governs most employer-provided group LTD plans), the addition of a discretionary clause typically means that courts will review a benefits denial under a deferential “abuse of discretion” or “arbitrary and capricious” standard rather than conducting an independent (de novo) review. This may make it more difficult to appeal a denial, although some states have enacted laws or regulations prohibiting or limiting discretionary clauses in disability insurance policies to protect claimants.
No, In Wisconsin and throughout the country, discretionary clauses in ERISA long-term disability (“LTD”) policies are not only allowed but have a significant impact on the claimant’s disability benefit recovery. The first question in every LTD case is what standard applies to the court’s review of the claimant’s ERISA claim. Generally, ERISA plans give an administrator discretion to determine eligibility for benefits, which the court reviews under the arbitrary and capricious standard. Jenkins v. Price Waterhouse Long Term Disability Plan, 564 F.3d 856, 860-61 (7th Cir. 2009) (citing Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115, 109 S. Ct. 948, 103 L. Ed. 2d 80 (1989).) This standard of review is highly deferential, with the court looking only to ensure that the LTD administrator’s decision has “rational support in the record.” Id.; see also Jackman Fin. Corp. v. Humana Ins. Co., 641 F.3d 860, 864 (7th Cir. 2011) (“Under the arbitrary and capricious standard, we overturn the administrator’s decision only where there is an absence of reasoning to support it.”); Mote v. Aetna Life Ins. Co., 502 F.3d 601, 606 (7th Cir. 2007) (court must uphold plan administrator’s decision so long as administrator “makes an informed judgment and articulates an explanation for it that is satisfactory in light of the relevant facts”). In conducting an arbitrary and capricious review, courts are generally limited to reviewing the administrative record. Perlman v. Swiss Bank Corp., 195 F.3d 975, 981 (7th Cir. 1999) (“Deferential review of an administrative decision means review on the administrative record.”); Dragus v. Reliance Standard Life Ins. Co., 882 F.3d 667, 674 (7th Cir. 2018) (district court properly declined to consider evidence outside the administrative record when conducting arbitrary and capricious review). In contrast to an arbitrary and capricious review, if the LTD policy does not grant discretion to the administrator, the court will take a fresh look at the evidence, including information outside of the administrative record. This is known as a de novo review by the court.
Key Takeaways
- Wisconsin law allows discretionary clauses in ERISA long-term disability policies.
- These clauses affect how courts review disability claims under the arbitrary and capricious standard.
- This standard grants administrators discretion in determining eligibility for benefits, resulting in highly deferential court reviews.
- If no discretion exists in the policy, courts conduct a de novo review, examining all evidence anew.
