By Joshua Foster
Since the Supreme Court’s landmark decision in Firestone Tire
& Rubber Co. v. Bruch, circuits have routinely upheld the use
of discretionary clauses in insurance policies. As the name
implies, discretionary clauses allocate significant discretion to
plan administrators, and decisions made by the administrators are
reviewed under an arbitrary and capricious standard as opposed to
de novo. In early 2006, the New York Insurance Department
issued two advisory circular letters maintaining that the use of
discretionary clauses in insurance policies violates New York
Insurance laws, and threatened to pass legislation banning their
use. However, allowing the New York Insurance Department to
succeed in eliminating discretionary clauses will deprive the
judicial system of its discretionary function in direct
contradiction to the trust law the insurance scheme is built
upon. Additionally, many policy concerns including cost to
policyholders and principles of judicial efficiency would be
undercut by these changes. This note argues that the
legislature should not change the current scheme and consequently
alter the judicial role, because the current scheme adequately
protects the interested parties and is consistent with trust law
that underlies ERISA and state insurance law.