BILL ANALYSIS
AB 1868
Page 1
ASSEMBLY THIRD READING
AB 1868 (Jones)
As Amended April 13, 2010
Majority vote
INSURANCE 8-4 APPROPRIATIONS 12-5
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|Ayes:|Solorio, Caballero, |Ayes:|Fuentes, Ammiano, |
| |Charles Calderon, Carter, | |Bradford, |
| |Feuer, Hayashi, Salas, | |Charles Calderon, Coto, |
| |Torres | |Davis, Monning, Ruskin, |
| | | |Skinner, Solorio, |
| | | |Torlakson, Torrico |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Blakeslee, Anderson, |Nays:|Conway, Harkey, Miller, |
| |Hagman, Niello | |Nielsen, Norby |
| | | | |
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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 that reserves 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 that
reserves 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,
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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 IC notifies that insurer, in writing, that the filed
form of that policy does not comply with the requirements of
law.
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% on account of age of the insured, except for
certain misstatements of age; and,
c) If it does not provide for a grace period of at least
seven 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 : One-time fee-supported special fund costs to
the Department of Insurance to establish oversight of the
prohibition on discretionary clauses.
COMMENTS :
AB 1868
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1)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)Under existing law, the IC has the authority to disapprove
disability insurance policies containing any clause or
provision that is "unintelligible, uncertain, ambiguous, or
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
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of 2008, a dozen states had limited or barred the use of
discretionary clauses in at least some form of insurance.
3)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.
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)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
AB 1868
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contract that assumes a claims risk.
5)There are two bills that have a code conflict with this bill.
They are AB 2110 (De La Torre) and AB 2470 (De La Torre).
Double-jointing amendments are needed to avoid a chaptering
out problem.
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086
FN: 0004584