California Vs. Disability Insurers
BY ALLISON BELL
America’s Health Insurance Plans and
the American Council of Life Insurers are
fighting in court to keep California
regulators from eliminating discretionary
clauses from disability insurance policies.
Caryn Montague, a North Miami Beach,
Fla., personal producing general agent who
now serves as an expert witness in disability
insurance court cases, says she thinks the
outcome of the court battle could have an
effect on how other states go about applying
a model act approved in 2002 by the
National
Association
of
Insurance
Commissioners, Kansas City, Mo., that
prohibits use of discretionary clauses in
disability insurance policies.
California regulators “just stepped up to
the plate first,” Montague says.
W. Harold Petersen, a Valencia, Calif.,
broker who is president of the new
International DI Society, Seal Beach, Calif.,
says insurance regulators, consumer
advocates and others should remember that
the number of insurers in the disability
insurance market has fallen to 26, down
from more than 500 back in the 1980s.
The International DI Society is not
taking any position on California disability
policy standards, but Petersen says he hopes
all parties in the discussion will remember
that consumers need affordable disability
insurance. Otherwise, he warns, “we’re
going to have more wards of the state.”
“The older our work force becomes, the
higher the probability of suffering a longterm disability,” says Robert Taylor, the
executive director of another new disability
insurance group, the Council of Disability
Insurers, Portland, Maine.
When tough 1990s disability claim
reviews triggered suits, many complaints
focused on discretionary clauses, or contract
provisions that give the insurer the freedom
to interpret policy provisions in any way that
is not “capricious or arbitrary.”
Insurers say they need discretionary
clauses to keep insureds with weak claims
from gaming the system, but angry
policyholders say the clauses give insurers
too much room to avoid paying valid claims.
In February 2004, California Insurance
Commissioner John Garamendi issued a
notice withdrawing approval for any
disability insurance policies that include
discretionary
clauses.
“Because
the
discretionary clause effectively negates
operative terms of the contract, the contract
becomes
unintelligible,
uncertain,
ambiguous, abstruse and likely to mislead
the insured,” Garamendi says in the notice.
Garamendi says the notice summarized
existing rules, but insurers say it issued new
“underground regulations.”
A hearing officer sided with Garamendi
in March 2005. The Association of
California Life & Health Insurance
Companies, Sacramento, Calif., sued in a
Sacramento state court in November 2005
together with AHIP, Washington; the ACLI,
Washington; and the California Chamber of
Commerce, Sacramento.
Garamendi’s policy withdrawal could
leave insurers without any disability policies
to sell in California because, “historically, it
has taken years for CDI to approve new
policies,” the plaintiffs contend.
The ACLHIC coalition has persuaded
California regulators to wait at least until
April 15 before issuing any withdrawal
notices, according to Gene Livingston, the
plaintiffs’ lawyer.
Insurance company units of Hartford
Financial Services Group Inc., Hartford,
have filed a separate suit opposing the
policy withdrawal in a state court in San
Francisco.
Meanwhile, in October 2005, California
regulators announced a settlement with
UnumProvident Corp., Chattanooga, Tenn.,
that requires UnumProvident to end the use
of discretionary clauses and make other
changes in policies and claims processing.
Because the new California policy
standards have been in effect at
UnumProvident only since October 2005, “it
is too early to comment on any specific
effects beyond training of all California
claims specialists,” a UnumProvident
spokeswoman says.
AHIP says the California policy
standards
could
increase
individual
disability insurance rates 33% and group
long-term disability insurance rates 46%.
In the long run, if California regulators’
policy standards prevailed, “a lot of
employers probably would not be able to
afford [disability] policies,” Livingston says.
Montague says disability insurers should
charge enough to cover the cost of paying
the promised benefits. Until policy standards
like the California standards stick, “we’re
not going to know what the real premiums
should be,” she says.
Petersen says he would like to open
channels of communication by setting up a
town hall meeting for everyone with a stake
in the future of the California disability
insurance market.
When the California department invited
representatives for disability insurers to a
meeting in late 2005, “the insurance
company representatives present said very
little,” Alice Gates, senior staff counsel with
the California Department of Insurance, said
through a spokeswoman. Instead, Gates said,
a lawyer who was representing the insurers
as a group simply read from a complaint.
But Petersen says disability insurance
executives who attended the meeting were
told that the meeting was an announcement,
not a discussion. In the future, “we’ve got to
listen to all points of view,” Petersen says.
A coalition has persuaded California regulators to wait at least
until April 15 before issuing any withdrawal notices, says a
lawyer
Caption
In February 2004, California Insurance Commissioner John Garamendi issued a notice withdrawing approval for any
disability insurance policies that include discretionary clauses, which precipitated a flurry of lawsuits by industry
groups.