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California Bans Discretionary Clauses in Life, Disability Policies

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CA Insurance Commish JonesCalifornia Gov. Jerry Brown banned discretionary clauses in life, health, and disability insurance policies Monday by signing into law  legislation sponsored by state Insurance Commissioner Dave Jones.

The law makes discretionary clauses in new or renewed policies void and unenforceable.

In 2004, California had banned discretionary clauses in a ruling, which was challenged in federal court. The new law codifies the ban.

Since 2004, many states have already taken action in issuing memos or passing  laws banning and voiding discretionary clauses, including Texas early this year.

The NAIC adopted (MDL-42) a model law prohibiting discretionary clauses around  2004 to  “ensure that health insurance benefits and disability-income protection coverage are contractually guaranteed,” and pointed straight to the “conflict of interest that occurs when the carrier responsible for providing benefits has discretionary authority to decide what benefits are due.”

Also in February 2004, the California department sent a bulletin noting it was withdrawing any approval of certain companies’  forms that contained discretionary clauses : // 

“Discretionary clauses are policy provisions that give the insurer the sole discretion to interpret the policy and to decide if an insured is entitled to benefits,” California’s insurance department stated.   The insurer gets to weigh in on eligibility, sometimes in contradiction to a health care professionals’ opinion.

California contended that insurers “use the discretionary clauses to deny claims, knowing that if challenged the consumer has a very high and insurmountable legal burden to overcome to prove that the insurance company acted arbitrarily.”

Insurance companies and lawyers had argued that banning discretionary clauses would make the cost of policies rise.

However, sister publication Agent’s Sales Journal wrote earlier this year that 22 other states have banned discretionary clauses, with little visible effect on premiums.       

Most notably, the tables turned on the insurance industry when the Ninth U.S. Circuit Court of Appeals ruled against discretionary clauses two years ago in the landmark Montana case of Standard Insurance Company vs. Morrison, upholding states insurance laws’ precedence  in regulatory matters over ERISA at the same time. 

America’s Health Insurance Plans, (AHIP) which has weighed in over the past decade against efforts to ban the clause in policies, said it believes the law will raise the cost of disability insurance in California.

The California Insurance Department did not return calls by presstime.