Disability Insurers Challenge “Underground Regulations” in Court

Insurance companies filed a lawsuit against California Insurance Commissioner John Garamendi, challenging what they called “underground regulations” that would boost the cost of disability insurance.

“Left unchallenged, the commissioner’s actions would drive the cost of disability insurance beyond the reach of many employers who provide this benefit to their employees,” Brad Wenger, president of the Association of California Life & Health Insurance Companies, said in a statement.

As a result, he said more Californians who cannot work because of disability would be forced to rely on government programs.

Garamendi Spokesman Norman Williams said the department was merely trying to enforce existing law and make sure disability policies “are delivering what they’re supposed to.”

“Everything we’re trying to do is already on the books in California,” he said. “It’s law.”

Private disability insurance supplements Social Security and disability insurance from the state for people who are unable to work because of illnesses or injuries that are not related to their jobs.

The suit was prompted by a letter that notified insurers in October that the department intended to review disability policies to make sure they did not violate seven standards. That would include a ban on discretionary clauses that give the insurer the authority to interpret terms and provisions in the policy.

The standards also prevent polices from including certain requirements for obtaining benefits, such as a mandate to receive regular medical care. Policies also cannot limit disability benefits to make up for an insured receiving other income, according to the state.

“Our goal is that at the end of the process, provisions that are … determined not to be lawful and appropriate will no longer be offered for sale in California,” Gary Cohen, the department’s general counsel, said in the letter.

A representative for the insurers, however, said the state standards amounted to “improper underground regulations.” The standards should be vetted by the state Office of Administrative Law to make sure the Department of Insurance has the authority to enforce them, said Gene Livingston, an attorney for the insurers and a former director of the Office of Administrative Law.

The suit was filed in Sacramento County Superior Court by Wenger’s group and America’s Health Insurance Plans, the American Council of Life Insurers and the California Chamber of Commerce.