Understanding State Bans on Discretionary Clauses in Insurance Policies
A single clause buried in your policy can decide whether a judge reviews your denial fresh, or simply asks whether the insurer's decision was "reasonable." Whether your state has banned that clause changes everything.
D.C. is not shown on this map (too small to render as its own shape at this scale) — see the table below for its status. Hover any state for its name.
On This Page
What Is a Discretionary Clause?
A discretionary clause is a provision in a life, disability, or accidental death and dismemberment (AD&D) insurance policy that grants the insurance company the authority to make the final decisions about your benefits — including whether you qualify at all, and how to interpret the policy's terms and conditions.
In practice, this means the insurance company becomes both the payer of benefits and the primary interpreter of its own rules. That concentration of power creates a real imbalance: the same entity that profits from denying your claim also gets to decide whether the denial was justified.
Washington State's own regulatory definition captures the scope of this authority well: the insurer's interpretation is binding, its eligibility decision is conclusive, there's no appeal from a denial, courts must defer to the insurer's interpretation, and judicial review falls short of a full re-evaluation of the case. New York regulators have separately warned that these clauses can undermine a policy's core protections and statutory appeal rights — potentially making the insurer's promise to pay effectively illusory.
If your policy contains a discretionary clause and any part of it can reasonably be read more than one way, the insurer gets to choose the interpretation — and it's rarely the one that favors you.
The Impact of Discretionary Clauses on Claim Disputes, Especially Under ERISA
When an employer-sponsored benefit plan governed by ERISA denies your claim, whether your policy contains a valid discretionary clause determines which legal standard the court applies if you sue.
No Discretionary Clause: "De Novo"
- The judge examines the evidence fresh, as if deciding for the first time
- No special weight given to the insurer's original decision
- The claimant's real chance to be heard on the merits
Valid Discretionary Clause: "Arbitrary and Capricious"
- The judge only asks whether the insurer's decision was "reasonable"
- The judge may personally disagree and still have to uphold the denial
- The insurer is presumed to have acted within its rights unless proven otherwise
This is precisely why insurers include discretionary clauses in the first place: it's far harder for a claimant to prove a decision was unreasonable than to simply show it was wrong. Even with strong evidence, "arbitrary and capricious" review can make winning extremely difficult.
The Growing Movement Towards State Bans
Recognizing the disadvantage discretionary clauses impose on policyholders, a growing number of states have banned or restricted their use — aiming to hold insurers accountable and ensure that when a dispute reaches court, the judge can review it with genuine objectivity.
The National Association of Insurance Commissioners (NAIC) has formally acknowledged the problem, adopting a model act states can use as a template to prohibit discretionary clauses in insurance contracts — a signal of broad recognition within the regulatory community that this power imbalance needs addressing.
The Impact of State Bans on ERISA Claims
When an ERISA-governed policy is issued in a state that bans discretionary clauses, that ban can render the clause void and unenforceable — even if the policy itself contains one. Federal courts in those states may then be required to review the denial de novo, examining the evidence fresh rather than deferring to the insurer.
This works because of how ERISA's preemption framework is structured. ERISA broadly preempts state laws that "relate to" employee benefit plans, aiming for uniform federal rules. But ERISA also contains a "Savings Clause" — an exception preserving state laws that regulate the business of insurance. Many courts have found that state bans on discretionary clauses qualify as insurance regulation, and are therefore protected from preemption.
Whether a specific ban actually helps your case depends on several factors: when the ban was enacted, whether it applies to policies issued elsewhere but covering residents of the banning state, and how federal courts in that jurisdiction have interpreted the law. California, for example, has explicitly stated its ban applies to policies covering California residents regardless of where the policy was issued — though even that isn't absolute, and courts have sometimes enforced a policy's own choice-of-law clause instead when the facts warrant it.
State-by-State Overview of Discretionary Clause Bans
Search by state, or filter by ban status. This reflects our own research as of August 2026, verified against current sources before publishing — but effective dates and scope can be complex, and Departments of Insurance sometimes discourage discretionary clauses informally even without a formal statutory ban. Confirm your specific situation with a qualified attorney.
Effective dates can apply differently to new policies versus renewals, and further research may be needed to confirm precise applicability to your specific policy.
The Crucial Role of ERISA Preemption and Self-Funded Plans
Even if your state has banned discretionary clauses, that ban might not apply to your benefits if your plan is "self-funded." This turns on a second piece of ERISA's preemption framework: the "Deemer Clause." It states that an employee benefit plan — including a self-funded one — is not to be treated as an insurance company for purposes of state insurance regulation, even though the Savings Clause otherwise lets states regulate insurance.
Fully Insured Plans
Your employer pays premiums to an insurance company, which assumes the financial risk of paying benefits. State insurance laws, including discretionary clause bans, generally do apply.
Self-Funded Plans
Your employer directly covers the cost of benefits, sometimes using an insurer or third-party administrator only to handle claims processing. Because no traditional insurance policy is involved, state bans on discretionary clauses generally don't extend to these plans.
The deciding question is simple to state, if not always simple to answer: is the plan funded through an insurance policy (the ban may apply), or directly by the employer (the ban generally won't)? If your long-term disability, life insurance, or AD&D benefits come through a self-funded ERISA plan, you may not get the protection of your state's ban even where one clearly exists.
Implications for Insurance Policyholders
Check Your State's Status
If your policy isn't part of a self-funded employer plan, find out whether your state bans discretionary clauses and whether your policy's issue or renewal date falls after the ban's effective date.
Determine Whether Your Plan Is Insured or Self-Funded
This distinction has real legal consequences. Your employer's HR department should be able to tell you which applies to your benefits.
Review Your Policy for Discretionary Language
Look for phrases granting the insurer "discretionary authority" to interpret terms or determine eligibility.
Get Legal Guidance If You're Facing a Denial
If your policy includes a discretionary clause and your claim has been denied, an attorney experienced in ERISA and insurance law can help you understand whether a state ban, a procedural failure, or another legal theory gives you a path forward.
Frequently Asked Questions
It's a provision giving the insurance company the final say over whether you qualify for benefits and how to interpret the policy's terms. It makes the insurer both the party paying claims and the party interpreting the rules that decide whether to pay them — a structural conflict of interest that tends to favor denial.
Under de novo review, a judge examines your case fresh, without giving the insurer's decision any special weight. Under "arbitrary and capricious" review — which applies when a valid discretionary clause exists — the judge only asks whether the insurer's decision was reasonable, and may have to uphold a denial even if they personally disagree with it. This single distinction is often the deciding factor in whether a denial gets overturned.
Not automatically. The ban has to survive ERISA preemption under the "Savings Clause," which most courts have found it does for insurance-regulating bans. But the outcome still depends on when the ban was enacted, whether it applies to your specific policy's issue date, whether your plan is fully insured or self-funded, and how courts in your jurisdiction have interpreted the state law. Each of these can change the result.
Generally, no. ERISA's "Deemer Clause" prevents states from regulating self-funded plans as if they were insurance companies. Since discretionary clause bans are treated as insurance regulation, and self-funded plans don't operate through a traditional insurance policy, most state bans don't extend to them — even in a state with a strong, clearly applicable ban.
It depends on the specific state and the specific facts. Some states, like California, have explicitly extended their ban to cover policies covering their own residents regardless of where the policy was issued. But courts don't always apply that reasoning automatically — some have enforced a policy's own choice-of-law clause naming a different state instead, particularly when that state has a genuine connection to the plan. This is exactly the kind of jurisdictional question worth getting legal input on early.
Yes. A discretionary clause makes winning harder, not impossible. Courts applying "arbitrary and capricious" review still overturn denials when the insurer's reasoning is genuinely unreasonable, ignores treating physician evidence without explanation, relies on biased file reviews, or otherwise falls short of what the law requires even under a deferential standard. Building a strong administrative record before litigation matters even more when a discretionary clause is in play.
Meet the Author
Know Which Standard Applies Before You Fight Your Denial
Whether your case gets a fresh look or a deferential one can determine the outcome before the facts are even argued. We'll help you find out where you stand.
The information provided here is for general knowledge and informational purposes only, and does not constitute legal advice. You should consult with a qualified attorney for guidance regarding your specific situation.