BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 621| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 445-6614 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 621 Author: Calderon (D) Amended: 3/31/11 Vote: 21 SENATE INSURANCE COMMITTEE : 8-0, 3/23/11 AYES: Calderon, Gaines, Anderson, Corbett, Lieu, Lowenthal, Price, Wyland NO VOTE RECORDED: Correa SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8 SUBJECT : Insurance: life: disability: discretionary clauses SOURCE : Department of Insurance DIGEST : This bill invalidates any discretionary clause contained in a life and disability insurance policy and prohibits the Insurance Commissioner from approving disability insurance policies that contain such a discretionary clause. ANALYSIS : Existing law generally regulates life and disability insurance policies, and requires the Insurance Commissioner to disapprove any disability policy for issuance or delivery in this state in specified circumstances. This bill: CONTINUED SB 621 Page 2 1. Makes void and unenforceable a provision in a life insurance or disability insurance policy, contract, certificate, or agreement that is issued, delivered or renewed, as defined, for a California resident, if the provision reserves discretionary authority to the insurer, or its agent, to: Determine eligibility for benefits or coverage; Interpret the terms of the policy, contract, certificate, or agreement; or Provide standards of interpretation or review that are inconsistent with the laws of this state. 2.Defines "renewed" as continued in force on or after the policy's anniversary date. 3.Provides that nothing in the bill prohibits an insurer from including contract language informing their insured that as part of its routine operations the insurer applies the terms of its contracts for making decisions, including making determinations regarding eligibility, receipt of benefits and claims, or explaining policies, procedures, and processes, so long as the provision could not give rise to a deferential standard of review by any reviewing court. 4.Prohibits the Insurance Commissioner from approving a disability policy that reserves discretionary authority to the insurer or its agent to Determine the eligibility for benefits or coverage; Interpret the terms of the policy; or Provide standards of interpretation or review that are inconsistent with the laws of this state. Comments Purpose of the bill . This bill, sponsored by the Department of Insurance, prohibits life and disability CONTINUED SB 621 Page 3 insurance policies from containing a discretionary clause, and prohibits the Insurance Commissioner from approving disability insurance policies that contain a discretionary clause. The Department of Insurance explains that a discretionary clause is a provision that reserves discretionary authority to the insurer to determine eligibility for benefits or coverage, to interpret the terms of the policy, or to provide standards of interpretation or review that are inconsistent with the laws of this state. Under existing law, the Insurance Commissioner must not approve disability insurance policies containing any clause or provision that is "unintelligible, uncertain, ambiguous, abstruse, or likely to mislead a person to whom the policy is offered, delivered, or issued." In 2002, The National Association of Insurance Commissioners, in recognition of the issues this bill seeks to address, adopted a Model law (Model 42) which it describes as follows: "(MDL-42) This models helps ensure that health insurance benefits and disability-income protection coverage are contractually guaranteed, and helps avoid the conflict of interest that occurs when the carrier responsible for providing benefits has discretionary authority to decide what benefits are due." Prior legislation . This bill is identical to AB 1868 (Jones), 2009-10 Session, which was vetoed in 2010. In the veto message of AB 1868, Governor Schwarzenegger stated: "I am returning Assembly Bill 1868 without my signature. "This bill would prohibit the Insurance Commissioner from approving any disability or life insurance policy if it includes a provision that would reserve discretionary authority to the insurer to determine eligibility for benefits, and voids certain provisions of a policy or agreement if it provides or funds life insurance or disability insurance coverage. CONTINUED SB 621 Page 4 "This bill is unnecessary, as the Insurance Commissioner already has the authority to prohibit the use of discretionary clauses." FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No SUPPORT : (Verified 4/11/11) Department of Insurance (source) Congress of California Seniors Consumer Attorneys of California United Policyholders ARGUMENTS IN SUPPORT : The Consumer Attorneys of California state: "Under current law, when an ERISA ÝEmployee Retirement Income Security Act] disability carrier in California decides a claim, the consumer has the right to an administrative appeal (before a different reviewer, employed by the same insurance company). Most ERISA disability policies reserve broad discretion to interpret the language and terms of the contract. Thus, if the consumer chooses to appeal his or her claim, it must be done in Federal Court. But, the claimant's hands are tied and he or she must show that the insurance company abused its discretion in reaching its decision without the ability to bring in new information or facts. This makes it near impossible for the consumer to have a fair and impartial hearing." DLW:kc 4/12/11 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED