Full and Final Discretion Clauses in Group Health Contracts

Bulletin 103

FULL AND FINAL DISCRETION CLAUSES IN GROUP HEALTH CONTRACTS

May 8, 2001

This Bulletin is directed to all insurance companies that offer group health insurance in Indiana.

It has come to the attention of the Indiana Department of Insurance that some insurance

companies are writing into their group health contracts a provision that purports to give the company full

and final discretion in interpreting benefits and administering the contract. Some such provisions state

that all determinations by the company are binding and conclusive on all insured persons. Some state that

benefits will be paid only if the company decides in its discretion that an insured person is entitled to

them. These provisions are often at the end of the contract or booklet, among other general or

administrative provisions.

The Department recognizes that these provisions are a response to the decision of the United

States Supreme Court in Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101 (1989) and subsequent

cases interpreting employee benefit plans under the federal Employee Retirement Income Security Act

(29 U.S.C. 1001 et seq.) ("ERISA.") See e.g., Southern Indiana Health Operations, Inc. v. George, 696

N.E. 2d 476 (Ind. App. 1998), transfer denied. The Department takes no position on these cases or on the

interpretation of employee benefit contracts governed by ERISA.

The Department finds, however, that in group accident and sickness insurance policies governed

by state law, these provisions are inequitable and deceptive, and tend to mislead consumers. Under state

law, an insurance policy is subject to the same rules of interpretation and construction as other contracts,

and where the policy is ambiguous or silent, it is construed by courts against the company that drafts it.

Meridian Mutual Insurance Co. v. Cox, 541 N.E. 2d 959 (Ind. App. 1989), transfer denied

w, these provisions are inequitable and deceptive, and tend to mislead consumers. Under state

law, an insurance policy is subject to the same rules of interpretation and construction as other contracts,

and where the policy is ambiguous or silent, it is construed by courts against the company that drafts it.

Meridian Mutual Insurance Co. v. Cox, 541 N.E. 2d 959 (Ind. App. 1989), transfer denied. These

provisions could lead consumers and companies to believe that the company has the last word on whether

benefits will be paid, regardless of other terms in the contract, and contrary to the right of the insured

group to have a court interpret the contract.

To the extent that insurers wish to include such language in policies issued to employee benefit

plans, they may include a statement substantially similar to the following: "This provision applies only

where the interpretation of this Policy is governed by the Employee Retirement Income Security Act

(ERISA), 29 U.S.C. 1001 et seq." Otherwise, forms including a full and final discretion clause will be

subject to objection and disapproval by the Department of Insurance under Ind. Code s 27-8-5-1.

Sally McCarty, Commissioner