Aug 02, 2006
In This Issue
A group of insurance trade associations and the California Chamber of Commerce have settled a state court suit they brought last year in Sacramento challenging certain “underground regulations” regarding disability insurance promulgated by the California Department of Insurance (the “CDI”). A copy of the settlement is located here.
The settlement is expressly not binding on insurers, but insurers can invoke the settlement in defense of policy language. (Paras. 3-4.) Under the terms of the settlement, the CDI will withdraw approval for previously approved forms, and decline approval for pending or future forms, that (1) contain discretionary clauses (paras. 10-14); (2) do not “describe total or partial/residual disability concepts” with language set forth in the agreement (paras.15-17); (3) do not contain the definition of “pre-existing condition” spelled out in the settlement (paras. 26-27); or (4) provide for benefit reductions due to offsets that are not among the types of permissible offsets described in the settlement (paras. 21-25).
There is one potentially significant qualification regarding the discretionary clauses part of the settlement. The CDI will not withdraw approval for policy forms on account of discretionary clauses if Hartford Life Insurance Co. ultimately prevails in other state court litigation in San Francisco in which it challenged the CDI’s authority to withdraw approval on that basis. (Paras. 11-12.) In that litigation, however, the trial court has already issued a proposed decision in favor of the CDI. Hartford has submitted objections to the proposed decision. Of course, if the trial court sticks to its proposed decision, the decision will be subject to challenge in higher courts.
The settlement defines “discretionary clause” as “an express policy provision that has the effect of conferring discretion on an Insurance Carrier or other claim administrator to determine entitlement to benefits or interpret policy language that, in turn, could lead to a discretionary standard of review.” (Para. 14.)
The total disability and partial/residual disability language set forth in the agreement is rather detailed. Indeed, insurers can choose from among alternative sets of language. (Para. 17.) In its press release announcing the settlement, the CDI attempts to distill the total disability language, stating: “Basically, if a person cannot perform with reasonable continuity all of the substantial and material acts required by his/her occupation, then that person is totally disabled from performing that occupation.”
According to the CDI’s press release, “[t]he definition of what constitutes a pre-existing condition has been substantially narrowed and clarified” and “[a] claimant must now have received treatment for a diagnosed condition in order for it to qualify as a pre-existing condition.” This is a bit of an oversimplification. Under the settlement, a condition – even an undiagnosed condition – can also qualify as a pre-existing condition if (1) the insured failed to disclose, or misrepresented, the condition, (2) the insured had received advice or treatment from a physician about the condition, or the condition caused symptoms for which a prudent person would seek advice or treatment, and (3) the disability caused or substantially contributed to by the condition begins within a period set forth in the policy (not to exceed 24 months) after the inception of the coverage. (Para. 27.)
The settlement describes three types of permissible offsets: (1) offsets for money actually paid to the insured as a result of the same disability (the settlement expressly states that this may include, inter alia, salary continuation, personal time off, and retirement pay) (para. 22); (2) offsets for work earnings after the insured became disabled, except that, during at least the first year after “benefits are payable while working,” the offset amount is limited to the work earnings that – along with the benefits – exceed the insured’s pre-disability earnings (indexed for inflation) (para. 23); and (3) offsets for estimated benefits owed to the insureds under certain enumerated types of plans and laws (e.g., Canadian Pension Plan, Jones Act, workers comp, SSA), provided that (a) the policy clearly sets forth the insured’s obligation to apply for such benefits, (b) the insured has failed to apply for the benefits or pursue them with reasonable diligence, and (c) the insurer has a reasonable, good faith belief that the insured is entitled to the benefits and a means of reasonably estimating the benefits (para. 24). In addition, the settlement states that "CDI agrees to promulgate regulations to address the issue of whether Insurance Carriers should be able to estimate and deduct for" four categories of benefits, as well as earnings for work while disabled. (Para. 25.) If the CDI fails to issue a notice that it is going to promulgate such regulations by December 1, or if it then fails actually to promulgate such regulations by November 30, 2007, then carriers are free to submit forms with provisions for such estimation and deduction and the CDI will not refuse to approve them on the basis of such provisions. (Para. 25.)
The Chamber of Commerce and trade groups (the “petitioners”) filed their court challenge in Sacramento after the CDI sent a letter to disability insurers announcing its intent to withdraw approval for previously approved forms, and deny approval for pending or future forms, that did not conform to its specifications in seven areas of the policy forms. These included the areas that the settlement purports to regulate (use of discretionary clauses, the definition of disability, the definition of pre-existing condition, and offsets provisions), as well as the use of additional benefit triggers, the use of language in substitution for uniform compulsory language, and the payment of benefits to persons other than the insured. The court challenge embraced all seven areas.
The petitioners advanced procedural and substantive arguments. Procedurally, they argued that the policy specifications announced in the CDI’s letter amounted to unlawful “underground regulation” – that is, that the CDI cannot adopt and enforce regulations without pursuing the formal rule-making process required by the California Administrative Procedures Act. Substantively, the petitioners argued that each of the seven policy specifications was not consistent with California law. For example, they argued that various courts have upheld the use of discretionary clauses and rejected the CDI's contention that the Insurance Code categorically prohibits discretionary clauses.
As for the three out of seven areas that the settlement does not purport to regulate, the settlement provides that the CDI will not withdraw approval for, or decline to approve, forms on the basis of the specifications set forth in its letter. Regarding additional benefit triggers (paras. 18-20) and payments to persons other than the insured(paras. 31-33, the settlement indicates that any regulation will be via the normal process for adopting regulations under the Administrative Procedures Act. As for the substitution of other language for the uniform compulsory language, the settlement indicates that the CDI will not rigidly reject substitutions as its letter indicated it would do, but will instead act on a form-by-form basis and, where it finds the language unacceptable, will afford an opportunity to carriers "to explain or negotiate a change to the disputed language." (Para. 30.)
Under the settlement, carriers have 30 days from July 21 (the effective date of the settlement) to submit notices of intent to file new forms, or amendments to forms, that contain language provided for in the settlement. (Para. 7.) The CDI will not issue any notices of withdrawal to carriers who submit such notices of intent (on the basis of the issues identified in the notice) until after 60 days from July 21, during which time carriers may file new or amended forms. (Para. 7.) The settlement contemplates that new policies will be in effect by December 20 (or the next rate change date after December 20 for in-force group disability policies with renewal dates). (Para. 8.)
Carlos E. Needham Mr. Needham’s practice focuses on insurance coverage, complex litigation matters involving product liability, science-related issues, mass tort claims, consumer class actions and environmental matters. He has a broad-based litigation and trial practice, primarily representing large companies in the defense of suits in the areas of insurance coverage, product liability, and commercial contracts.
Joseph E. LaskaPartner
Jeremiah P. SheehanCounsel
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