Settlement with UnumProvident could have broad ramifications for the industry

Washington

California Insurance Commissioner John Garamendi hopes to use his new settlement with UnumProvident Corp. to rewrite the rules governing all insurers that sell long-term disability insurance in California.

The California insurance department also has begun the process of establishing new policy forms and has requested that insurers provide regulators with their current disability policies.

The department said it will hold a meeting in San Francisco on Nov. 17 to discuss disability coverage issues with insurance companies.

“Our goal is that at the end of the process, provisions that are determined to be lawful and appropriate to be in existing policies that are being offered for sale in California will henceforth be approved in new policy forms filed with the Department, and provisions that are determined not to be lawful and appropriate will no longer be offered for sale in California,” the department said in a letter to insurers.

In November 2004, most state insurance regulators resolved complaints about LTD claims-handling practices at UnumProvident Corp., Chattanooga, Tenn., by signing on to a multistate settlement that was implemented in January.

California and Montana were the 2 states that opted out.

Montana is still talking to UnumProvident, but the company last week announced that it settled with California by agreeing to pay an $8 million fine and set aside $75 million to cover the cost of reassessing and, in some cases, paying old claims.

“We are pleased, after more than 2 years of discussions with California, to have reached a settlement that eliminates the regulatory uncertainty around claims handling in this important market,” says UnumProvident President Thomas Watjen in a statement.

The deal should help UnumProvident move beyond questions about past claims-handling practices, Watjen says.

The older, multistate deal required UnumProvident to pay $15 million in fines and reopen 215,000 cases involving claims that were terminated or denied between January 2000 and November 2004.

The deal with California provides a longer time period for claims reassessments.

Under the settlement, UnumProvident will send reassessment notices to about 26,000 California individuals whose claims were denied or terminated between Jan. 1, 1997, and Sept. 30, 2005.

If the California reassessment process upholds the original claim denial or termination, the claimant can ask for an independent review. The results of the independent review will not be binding on UnumProvident.

In addition, UnumProvident has agreed to extend the reassessment period for claimants in states other than California. UnumProvident now will send notices to claimants in the other states for claims denied or terminated in calendar years 1997 through 1999.

Although the multistate agreement gave 1997-1999 claimants the right to ask for a reassessment of their claims, UnumProvident was not required to send notices to those claimants.

For insurers, the most important aspect of the California settlement may be provisions that will require UnumProvident to change many of the definitions it uses in LTD contracts.

Garamendi says he wants to apply the definition provisions in the UnumProvident agreement to all other disability insurers selling coverage in California.

“California’s disability insurers now have a new standard, one that will provide a better sense of security for policyholders, which is what disability insurance is really all about,” Garamendi says in a statement about the settlement.

“To ensure that all insurers are in compliance with the standards set by the agreement, Commissioner Garamendi will soon commence a data call for purposes of reviewing all outstanding policies of other carriers writing disability insurance in California,” according to the California Department of Insurance.

Complying with the new rules could hurt UnumProvident’s operating income, at least in the near term, and the company probably will have to increase prices to cope with higher claims costs, according to analysts at Moody’s Investors Service, New York.

“Higher prices could hurt policy retention and further dampen sales, particularly if other competitors do not respond by increasing their prices,” the Moody’s analysts write in a comment on the settlement.

Moody’s analysts are particularly concerned about the first definition revision in the settlement agreement, which deals with the definition of “total disability” that UnumProvident is supposed to use in California.

During the initial “usual” or “own-occupation” period, when the standards are more lenient, “total disability” is supposed to mean, “a disability that renders one unable to perform with reasonable continuity the substantial and material acts necessary to pursue his or her usual occupation in the usual and customary way,” according to a copy of the settlement agreement filed with the Securities and Exchange Commission.

Later, during the “another” or “any-occupation” period, total disability will be defined as, “a disability that renders one unable to perform with reasonable continuity the substantial and material acts necessary to pursue his or her usual occupation in the usual and customary way and to engage with reasonable continuity in another occupation in which he or she could reasonably be expected to perform satisfactorily in light of his or her age, education, training, experience, station in life, physical and mental capacity.”

In the following section, on “discretionary authority,” UnumProvident agrees not to include any provisions giving the company “discretionary authority” in contracts issued once the settlement takes effect, unless statutes or case law require the company to include such provisions.

Still other definition changes deal with self-reported conditions, mental and nervous conditions, pre-existing conditions, Social Security Disability Income benefits, and mandatory rehabilitation requirements.

UnumProvident has agreed, for example, that “policy language requiring participation in a mandatory rehabilitation program will no longer be included in California contracts” after the settlement agreement takes effect, according to the settlement agreement.

A copy of the California settlement agreement is on the SEC Web site, at http://www.sec.gov/Archives/edgar/data/5513/000119312505195355/dex101.htm.

Allison Bell and Matt Brady contributed to this article.

California Insurance Commissioner John Garamendi wants to extend the terms of a settlement with UnumProvident to all long-term disability insurers in his state.