BILL ANALYSIS                                                                                                                                                                                                    




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           1868 (Jones)
          
          Hearing Date:  8/2/2010         Amended: 7/15/2010
          Consultant: Katie Johnson       Policy Vote: BFI  10-0
          _________________________________________________________________ 
          ____
          BILL SUMMARY: AB 1868 would prohibit the approval by the  
          California Department of Insurance of an insurance policy,  
          contract, certificate, or agreement offered, issued, delivered,  
          or renewed whether or not in California that includes a  
          discretionary clause that would permit the insurer to determine  
          eligibility for benefits or coverage.
          _________________________________________________________________ 
          ____
                            Fiscal Impact (in thousands)

           Major Provisions         2010-11     2011-12       2012-13     Fund
                                                                  
          CDI review of insurer policy        likely minor       Special*
          filings to ensure compliance

          *Insurance Fund
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          ____

          STAFF COMMENTS: 
          Costs to CDI to continue to review and approve insurance  
          policies would be minor and absorbable. CDI is funded through  
          assessments paid by the insurers it regulates. Staff recommends  
          that the bill be amended to clarify that this prohibition of  
          approving any policy that would contain a discretionary  
          authority clause would become effective January 1, 2011.

          This bill would prohibit the California Department of Insurance  
          (CDI) from approving any disability policy, which would include  
          life and health insurance policies, for issuance or delivery in  
          California that would include 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 California laws. This bill would state that  
          any discretionary authority clause within any policy, contract,  
          certificate, or agreement would be void and unenforceable;  










          however, this bill would not require CDI to re-approve all  
          policies to remove such clauses. This bill would define  
          "discretionary authority" to mean a policy provision that has  
          the effect of conferring discretion on an insurer to determine  
          entitlement to benefits or to interpret language that could lead  
          to a deferential standard of review by any reviewing court. 

          This bill would codify a decision made by then Insurance  
          Commissioner Garamendi in 2006 that it was CDI's departmental  
          policy that discretionary clauses violate the Insurance Code.  
          The department has since enforced that policy. Also, in Standard  
          Insurance Company v. Morrison, 584 F.3d 837 (2009), the Ninth  
          Circuit Court of Appeals held that a state Insurance  
          Commissioner's practice of disapproving discretionary clauses is  
          not preempted by the Employee Retirement Income Security Act  
          (ERISA), a federal law that governs certain insurance policies.