BILL ANALYSIS �
SB 621
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Date of Hearing: June 22, 2011
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
SB 621 (Calderon) - As Amended: June 16, 2011
SENATE VOTE : 37-0
SUBJECT : Life and disability insurance: discretionary clauses
SUMMARY : Invalidates any provision in a life insurance or
disability insurance policy that provides discretionary
authority to the insurer to determine eligibility for benefits
or coverages. Specifically, this bill :
1)Provides that if any life insurance or disability insurance
policy reserves discretionary authority to the insurer or
agent to determine eligibility for benefits or coverage, or
provides standards of interpretation that are inconsistent
with the laws of this state, then that provision is void and
unenforceable.
2)Defines "discretionary authority" to be a policy provision
that has the effect of conferring discretion on an insurer or
other administrator to determine entitlement to benefits or to
interpret policy language that could lead to a deferential
standard of review by a reviewing court.
3)Specifies this bill applies to both group and individual
insurance products.
4)Authorizes the Insurance Commissioner (IC) to adopt
regulations to implement this bill.
5)Specifies that the authority provided by this bill is
self-executing. If a life insurance or disability insurance
policy, contract, certificate, or agreement contains a
provision rendered void and unenforceable by this bill, then
the parties to the policy, contract, certificate, or agreement
and the courts shall treat the provision as void and
unenforceable.
EXISTING LAW :
1)Requires the IC to disapprove any disability insurance policy
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that the IC finds contains any provision which is
unintelligible, uncertain, ambiguous, or abstruse, or likely
to mislead.
2)Requires the IC to disapprove any disability insurance policy
that fails to conform in any respect with any law of this
state.
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)Purpose . The purpose of this bill is to prohibit life and
disability insurance policies from providing "discretionary
authority" to insurers.
The Department of Insurance explains that a discretionary
authority provision 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 must not approve any
disability insurance policy that contains a provision that is
unintelligible, uncertain, ambiguous, abstruse, or likely to
mislead the policyholder. In 2002, the National Association
of Insurance Commissioners (NAIC) adopted Model Law 42 to
assure that health insurance benefits and disability-income
protection coverage are contractually guaranteed, and to avoid
the conflict of interest that occurs when the insurer
responsible for providing benefits has discretionary authority
to decide what benefits are due.
3)Legal opinion . Subsequent to the adoption by the NAIC of
Model Law 42, Insurance Commissioner Garamendi's General
Counsel issued a letter opinion in 2004 on the question of
whether discretionary clauses were legal under California law.
The opinion concluded they were not.
The following are excerpts from the 2004 Commissioner Garamendi
letter opinion:
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"It is this Department's position that all such
discretionary clauses in disability insurance contracts
violate California law and deprive insureds of protections
to which they're entitled. . . We note that "disability"
insurance includes coverage types classified under CIC
Section 106 such as disability income insurance and health
insurance.
Discretionary clauses render the contract "fraudulent or
unsound insurance" within the meaning of CIC Section
10291.5. Although the contract contains the insurer's
promise to pay benefits under the stated conditions, the
discretionary clause makes those payments contingent on the
unfettered discretion of the insurer, thereby nullifying
the promise to pay and rendering the contract potentially
illusory.
In the case of group, employer-sponsored disability
contracts that are governed by ERISA, the presence of a
discretionary clause has the legal effect of limiting
judicial review of a denial of benefits to a review for
abuse of discretion. An insurer's denial of benefits will
not be overruled by the court unless the insurer's decision
is found to be "arbitrary and capricious." This standard
of review deprives California insureds of the benefits for
which they bargained, access to the protections in the
Insurance Code and other protections in California law.
It has sometimes been argued that ERISA requires all
benefit determinations under ERISA-governed insurance
contracts to be discretionary. There is, however, no such
requirement in the statute. Under ERISA, states are free
to determine the contents of insurance contracts. . . .
ERISA does not preclude California's authority to prohibit
the use of discretionary clauses in insurance contracts.
It is this Department's position that discretionary clauses
have great legal significance because they act to nullify
the bargained contract provisions and create an illusory
contract. In the ERISA context, they place a severe burden
on insureds and effectively shields insurers who deny
meritorious claims. Under ERISA law, state insurance
regulation is exempt from federal preemption thereby
permitting states to prohibit discretionary clauses if they
violate state law. Under California law, discretionary
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clauses violate the rights of the insured and render the
insurance contract "fraudulent or unsound insurance."
4)Support . The Department of Insurance (DO)I) 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. Instead of a 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 a benefits decision.
The Consumer Attorneys of California (CAOC) states that under
current law, when an ERISA 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. CAOC also states that 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 where the consumer's hands are tied. 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 nearly impossible for the
consumer to have a fair and impartial hearing.
The DOI notes that this bill is similar to AB 1868 (Jones) of
the 2009-10 Legislative Session which was vetoed by Governor
Schwarzenegger who stated the bill was unnecessary since the
IC already has authority to prohibit discretionary clauses.
The DOI states this bill is needed because the IC does not
have the authority to prohibit the use of all discretionary
clauses. The IC has the statutory authority to prohibit the
approval of new policies with discretionary clauses but does
not have the statutory authority to prohibit the use of
previously approved or renewed policies.
5)Suggested technical amendment . The bill proposes to authorize
the IC to adopt regulations to implement the bill. It is
recommended that this provision be rewritten as follows: "The
commissioner may adopt regulations reasonably necessary to
implement the provisions of this section." This language
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would be similar to that placed in other bills approved by the
Insurance Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Department of Insurance (Sponsor)
CA Conference Board of the Amalgamated Transit Union
CA Conference of Machinists
CA Official Court Reporters Association
California Teamsters Public Affairs Council
Consumer Attorneys of California
Engineers and Scientists of California
International Longshore and Warehouse Union
Professional and Technical Engineers, Local 21
UNITE HERE!
United Food and Commercial Workers - Western States Conference
Utility Workers Union of America, Local 132
Opposition
None received.
Analysis Prepared by : Manny Hernandez / INS. / (916) 319-2086