BILL ANALYSIS
AB 1868
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1868 (Jones)
As Amended August 10, 2010
Majority vote
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|ASSEMBLY: |48-28|(June 1, 2010) |SENATE: |23-12|(August 23, |
| | | | | |2010) |
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Original Committee Reference: INS.
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.
The Senate amendments define the term "discretionary authority"
as a policy provision that has the effect of conferring
discretion on an insurer or other claim administrator to
determine the entitlement to benefits or interpret policy
language that, in turn, could lead to a deferential standard of
review by any reviewing court.
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.
2)Expresses its purpose in connection with disability insurance
to prevent 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:
AB 1868
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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;
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.
AS PASSED BY THE ASSEMBLY , this bill:
1)Prohibited 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)Made 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,
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.
FISCAL EFFECT : One-time fee-supported special fund costs to
the Department of Insurance to establish oversight of the
prohibition on discretionary clauses.
COMMENTS :
1)The purposes of this bill are to prohibit life and disability
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insurance policies from containing a discretionary clause, and
to prohibit the IC from approving disability insurance
policies that contain a discretionary clause.
2)While disability insurance policies offered as employment
benefits are primarily governed by federal law, federal courts
have carved out a role for the states, including regulating
discretionary clauses. The author reports that the Ninth
Circuit Court of Appeals, in Standard Insurance Company v.
Morrison, 584 F.3d 837 (2009), held that the federal law known
as the Employee Retirement Income Security Act (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 that 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 National Association of
Insurance Commissioners in 2002 issued Model Act 42 to urge
states to adopt regulations to prohibit the use of
discretionary clauses in insurance policies.
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086
FN: 0006110