This updates our June 1, 2010 posting.

The Texas Department of Insurance (“TDI”) has officially banned the use of discretionary clauses in insurance contracts with an order issued on December 3, 2010 (the “Order”). The ban is the result of a petition filed by the Texas Office of Public Insurance Counsel (OPIC) on October 28, 2009 requesting the ban. Subsequent to the petition, the TDI held a public hearing on July 12, 2010.

Discretionary clauses allow insurers to interpret policy terms and evaluate an insured’s claim for benefits. In justifying the ban, Insurance Commissioner Mike Geeslin noted among other reasons that “[d]iscretionary clauses are unjust, encourage misrepresentation, and are deceptive because they mislead consumers regarding the terms of coverage.”

The Order will be effective for health, life, and disability forms offered, issued or renewed on or after June 1, 2011, except that any forms which include disability income protection coverage providing for periodic payments during disability due to sickness and/or accident will have an earlier effective date of February 1, 2011. The Order does not apply retroactively to forms that have already been issued or delivered and do not contain a renewal date until there is a rate increase or any change, modification, or amendment to the form occurring on or after June 1, 2011.

Click here for a copy of the Order.