BILL ANALYSIS
AB 1868
Page 1
Date of Hearing: April 7, 2010
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 1868 (Jones) - As Amended: April 5, 2010
SUBJECT : Life Insurance and Disability Insurance
SUMMARY : Prohibits the Insurance Commissioner (IC) from
approving any disability 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 and it contains a
provision that reserves discretionary authority to the insurer.
Specifically, this bill :
1)Prohibits the IC from approving any disability policy if it
includes a provision purporting to reserve discretionary
authority to the insurer, or an agent of the insurer, to
determine the 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.
2)Makes a provision of a policy or agreement void and
unenforceable if the policy or agreement offered, issued,
delivered, or renewed, whether or not in California, provides
or funds life insurance or disability insurance coverage for
any California resident that contains a provision purporting
to reserve discretionary authority to the insurer, or an agent
of the insurer, to determine eligibility for benefits or
coverage, to interpret the terms of the policy, contract,
certificate, or agreement, or to provide standards of
interpretation or review that are inconsistent with the laws
of this state. "Renewed" is defined as continued in force on
or after the policy's anniversary date.
EXISTING LAW :
1)Makes it illegal for any insurer to issue a disability policy
if the Insurance Commissioner (IC) notifies that insurer, in
writing, that the filed form of that policy does not comply
with the requirements of law.
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2)Establishes a law regarding disability insurance which has the
purpose of preventing fraud, unfair trade practices, and
insurance economically unsound to the insured. This law also
has the purpose of assuring that the language of all
disability insurance policies can be readily understood and
interpreted.
3)Prohibits the IC from approving any disability policy under a
series of circumstances including, but not limited to, the
following:
a) The IC finds that it contains any provision or
description of its contents which is ambiguous,
unintelligible, or likely to mislead a person to whom the
policy is offered or issued;
b) If it contains a provision reducing the original benefit
more than 50 percent on account of age of the insured,
except for certain misstatements of age;
c) If it does not provide for a grace period of at least 7
days for policies providing for a weekly payment of
premium, at least 10 days for policies providing for
monthly payment of premium, and at least 31 days for all
other policies.
FISCAL EFFECT : Undetermined.
COMMENTS :
1)Purpose . The purposes of this bill are to prohibit life and
disability insurance policies from containing a discretionary
clause, and to prohibit the IC from approving disability
insurance policies that contain a discretionary clause.
The author 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.
2)Background . Under existing law, the IC has the authority to
disapprove disability insurance policies containing any clause
or provision that is "unintelligible, uncertain, ambiguous, or
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abstruse, or likely to mislead a person to whom the policy is
offered, delivered, or issued."
Because many disability insurance policies are offered as
employment benefits, they are subject to federal preemption
under the Employee Retirement Income Security Act (ERISA).
According to the author, under federal case law, a denial of
ERISA benefits is reviewed by a court de novo unless the
policy gives the plan's administrator discretionary authority
to determine eligibility for benefits or to interpret the
terms of the policy. If the policy contains a discretionary
clause, the court instead uses an abuse of discretion
standard, which is the most deferential standard of review.
That standard limits the court's review to the administrative
record, and the plan administrator's decision will not be
overturned unless it was arbitrary or capricious. The author
states this essentially allows insurance companies to lower
the intensity of judicial review of benefit denial cases
through prospectively including a discretionary clause in the
policy.
Even though this area is primarily governed by federal law,
federal courts have carved out a role for the states,
including regulating discretionary clauses. The author
reports that recently the Ninth Circuit Court of Appeals, in
Standard Insurance Company v. Morrison, 584 F.3d 837 (2009),
held that ERISA does not preempt state laws or administrative
practice disallowing discretionary clauses. Thus, the author
contends that states are able to regulate in this area and, as
of 2008, a dozen states had limited or barred the use of
discretionary clauses in at least some form of insurance.
3)Arguments in Support . The author states that an inherent
conflict of interest exists when an insurance company both
determines eligibility for benefits and bears the financial
burden of paying for them. The abuse of discretion standard
of review flies in the face of California's long-standing
principle of interpreting a contract against the drafter,
rather than against an unsophisticated policyholder, and needs
to be corrected. This bill would give insured people who are
denied benefits a fair hearing in court. Instead of limited
judicial review dictated by an insurance company's inclusion
of a discretionary clause in a policy, a court would engage in
a more balanced review of denial of benefits decisions.
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The California Labor Federation states that discretionary
clauses give so much discretion to insurance companies that
they can easily justify their denials in court, even when the
medical evidence overwhelmingly supports the case of the
disabled policyholder. According to the Labor Federation,
this practice leaves many disability insurance policyholders,
who have dutifully paid their premiums, without benefits at a
time when they are disabled and most in need. The National
Association of Insurance Commissioners (NAIC) in 2002 issued
Model Act 42 to urge states to adopt regulations to prohibit
the use of discretionary clauses in insurance policies.
4)Arguments in Opposition. The Association of California Life
and Health Insurance Companies (ACLHIC) and the American
Council of Life Insurers (ACLI) state that this bill would
outlaw the use of discretionary clauses in disability
insurance products and likely expand the ban to many other
types of insurance including life, annuity, and health
products. ACLHIC and ACLI also state concerns that banning
discretionary clause language may prohibit lawful contract
language that the Department of Insurance currently approves.
The California Association of Health Underwriters (CAHU) states
that this bill will remove insurers' ability to contract and
to adjudicate claims. CAHU states that as part of the
insurance process it is necessary to make a decision on the
validity of the claim. Insurers need to have stability and
uniformity in the claims paying process in order to execute a
contract that assumes a claims risk.
5)Purporting verses Reserving Discretionary Authority. The bill
would void provisions in life insurance and disability
insurance policies that purport to reserve discretionary
authority to the insurer to determine eligibility for benefits
or coverage. The bill is silent on provisions in these
policies that reserve discretionary authority to the insurer
to determine this eligibility. Since "purport" means
presenting the false appearance or intending to do something,
the bill could be amended to cover both "purporting to reserve
discretionary authority" and "reserving discretionary
authority" to the insurer to determine eligibility for
benefits or coverage.
REGISTERED SUPPORT / OPPOSITION :
AB 1868
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Support
California Labor Federation, AFL-CIO
Opposition
American Council of Life Insurers
Association of California Life and Health Insurance Companies
California Association of Health Underwriters
National Association of Insurance and Financial Advisors of
California (NAIFA-California)
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086