The California Department of Insurance has agreed to go through a formal implementation process before trying to withdraw approval for disability insurance policies.

California regulators accepted that restriction Monday to settle a legal dispute with a group of plaintiffs led by America’s Health Insurance Plans, Washington, and the Association of California Life & Health Insurance Companies, Sacramento, Calif.

The parties agreed that the insurers would comply with California’s tough new disability policy standards, but that they will do so by submitting revised policies through a new, streamlined approval process.

Regulators have agreed to require changes only the disability policy provisions that must be updated as a result of the adoption of the settlement agreement, according to the text of the proposed settlement agreement.

Regulators also have agreed to delay withdrawing support for any disability policy because it violates the provisions of the settlement while waiting for a similar court case, Hartford Life Insurance Company vs. State of California, which was filed in a state court in San Francisco, to be resolved.

The judge at the trial court level in the Hartford Life case has proposed ruling in favor of the California Department of Insurance, but Hartford Life, Hartford, has filed objections to the proposed decision, and the matter remains with the trial court, according to the proposed settlement agreement.

California regulators will not withdraw approval for disability policies if the Hartford Life trial court decision is appealed and a court issues a stay of the trial court decision pending appeal, according to the proposed settlement agreement.

The effective date of the agreement could be Friday, according to the proposed settlement agreement.

California regulators said in October 2005 that they have the legal authority to withdraw approval for disability policies that appear to violate consumer protection standards simply by giving insurers written notice.

The regulators have been particularly critical of discretionary clauses, which give policy issuers the authority to interpret the terms of the policy.

California regulators also want insurers to adopt standardized definitions of terms such as “total disability.”

In addition to AHIP and the California carrier association, the plaintiffs include the American Council of Life Insurers, Washington; the National Association of Insurance and Financial Advisors-California, Sacramento; and the California Chamber of Commerce, Sacramento.

The plaintiffs sued in a California state court in Sacramento in November 2005 in an effort to keep the California department from going ahead with efforts to use written notices to withdraw approval disability policies.

AHIP and the other plaintiffs said the California department would be engaging in “underground regulation” if it started withdrawing approval of policies without going through a formal rulemaking process.

The plaintiffs argued that California’s effort to withdraw approval for existing policies could discourage insurers from selling disability policies there at reasonable rates.

AHIP President Karen Ignagni has put out a statement welcoming the California settlement. The settlement agreement “gives our members a clearer definition of the ground rules under which we can make our products available in the state,” Ignagni says.