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California Vs. Disability Insurers

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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 long-term 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.