Seeing as how I’ve written about discretionary clauses in the past, I thought that it was timely to alert everyone to a very recent update in the area of discretionary clause prohibitions. Last week, California Governor Jerry Brown signed SB 621 into law. This new law makes discretionary clauses in new or renewed life, disability and health insurance policies void and unenforceable, thus affording additional consumer protections. The legislation was authored by Senate Insurance Committee Chair Ron Calderon (D-Montebello) and sponsored by Insurance Commissioner Dave Jones.
Under the existing law, the Insurance Commissioner must not approve disability insurance policies containing any clause or provision that is “unintelligible, uncertain, ambiguous, abstruse, or likely to mislead a person to whom the policy is offered, delivered, or issued.” In 2004, the Insurance Commissioner issued the Letter Opinion dated February 26, 2004, and the Notice dated February 27, 2004, both citing Insurance Code sec. 10291.5, supporting the notion that discretionary clauses make a policy fraudulent and unsound. A federal court challenge ensued, but an agreement was reached.
The new law, creating Insurance Code sec. 10110.6, provides that a policy, contract, certificate, or agreement offered, issued, delivered, or renewed, whether or not in California, that provides or funds life or disability insurance coverage for any California resident and contains a provision reserving the insurer’s or the insurer’s agent’s discretionary authority to determine eligibility for benefits or coverage, or to interpret the terms of the policy, contract, certificate, or agreement, or to provide standards of interpretation or review that are inconsistent with the laws of California, that provision would be void and unenforceable. The definition of “discretionary authority” is a policy provision that has the effect of conferring discretion on an insurer or other claim administrator to determine entitlement to benefits or interpret policy language that, in turn, could lead to a deferential standard of review by any reviewing court. This new law codifies the Insurance Commissioner’s 2004 opinion, and expands it to include life and disability.
Please note, that under the new law, policies may include provisions that inform an insured that as part of its routine operations, the insurer applies the terms of its contracts for making decisions, including making determinations regarding eligibility, receipt of benefits and claims, or explaining policies, procedures, and processes, so long as the provision could not give rise to a deferential standard of review by a court.
The number of states that have some type of regulatory prohibition on discretionary clauses in insurance contracts remains at 14*.
*Alaska, California, Connecticut, Hawaii, Idaho, Illinois, Kentucky, Michigan, New Jersey, New York, South Dakota, Utah, Washington, Wyoming
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