California 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 : //www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/Notice-February-27-2004.pdf
“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.