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.