California Insurance Commissioner Seeks Disability Changes

By | January 21, 2009

For the second time in two months, Insurance Commissioner Steve Poizner is being accused by his predecessor, Lt. Gov. John Garamendi, of proposing regulation changes that will weaken consumer protections.

The latest dispute involves Poizner’s proposal to roll back regulations that prohibit insurers from reducing group disability insurance benefits to account for pensions, workers’ compensation payments or wages that the policyholder might receive.

Poizner, a Republican who succeeded Garamendi as California’s chief insurance regulator in January 2007, said the regulations are unnecessary. He maintains the insurance commissioner already has the authority under state and federal law to ban insurers from including so-called offset clauses that reduce benefits in disability policies.

“Given that it’s already illegal, it strikes me that we should be striving to simplify the government code and not layer additional regulations to make something even more illegal,” said Darrel Ng, a Poizner spokesman. “This is the essence of cutting red tape.”

But Garamendi and some attorneys who deal with disability insurance issues say the state would be treading on shaky legal ground if it attempted to control the offsets without the regulations.

“If the regulations go away, insurance companies will go back to doing what they’ve been doing for the last 30 years,” said Glenn Kantor, a Northridge attorney who deals with disability issues. “They’ll do what they want.”

Garamendi, a Democrat, said removing the regulations would be a “disaster for policyholders.”

“No way will he be able to protect them without those regulations in place,” said Garamendi, who, like Poizner, is considering a run for governor next year. “There is no basis, no foundation for protection.”

Disability insurance pays benefits when the policyholder is unable to work because of an illness or injury. Policies can provide benefits if a disability prevents someone from performing a particular job or working in a certain profession, or from doing a range of jobs for which the policyholder is suited by education or experience.

The coverage is offered as a benefit by many employers and typically replaces half or more of a worker’s income.

More than 4.5 million Californians have disability insurance, either through group policies or individually purchased coverage.

Garamendi said he proposed the regulations because of “some very severe problems” with group disability insurance policies.

“Some of the biggest scandals in the last decade took place in the disability sector: denial of claims, denial of coverage and using offsets…,” he said. “All sorts of things were going on to deny benefits to policyholders, so I wrote regulations to deal with that.”

“Poizner is, apparently at the behest of the insurance industry, going to remove those insurance protections.”

Garamendi said he tried to clamp down on offset clauses during his second term as commissioner without regulations but was sued by insurers. They argued he did not have the authority to act without rules spelling out what was banned.

“Now Poizner is going back to where we started, which was ad hoc enforcement of existing laws…,” Garamendi said. “He’s positioning the department to be unable to enforce the existing laws because there are no regulations.”

The regulations, drafted by Garamendi and implemented after he left the commissioner’s office, cover group disability policies and prohibit insurers from cutting benefits to account for the following factors:

-The estimated amount of pension payments the policyholder would receive if he or she retired.

-Temporary disability benefits that the policyholder could receive from the worker’s compensation system but that had not been awarded.

-Permanent disability benefits from the worker’s compensation system, which are supposed to help make up for lost earning potential created by job-related illnesses or injuries.

-Estimated earnings received by a policyholder while disabled unless there was a “good faith reasonable basis” for the calculation.

Jim Keenley, an Oakland attorney, said eliminating the regulations could put additional burdens on retirement systems by encouraging disabled workers to tap pension benefits earlier than they normally would to make up for disability insurance reductions.

Scrapping the regulations also could lead to the “gaming” of the worker’s compensation system to try disguise those disability benefits, he added.

“The more insurers are allowed to offset disability benefits by various things, the more illusionary disability insurance is,” he said. “Personally, I don’t think that’s a good way to run a disability insurance system.”

The Association of California Life and Health Insurance Companies and the American Council of Life Insurers, whose members write the majority of disability insurance policies in California and the United States, support scrapping the regulations.

The groups say that banning deductions to account for other income would boost insurance prices and encourage policyholders to file false claims and delay returning to work if they recover.

“Long-term disability policies are priced with the actuarial assumption that a portion of eligible claimants will receive income from other sources,” the California association said in a statement. “As a result, the insurance company is able to offer a more competitive price.

“Naturally, removing the ability to offset for sources of other income would cause premium prices to increase. Depending upon the claim experience of the group, the cost may become so prohibitive that the employer and/or the employee could not afford (disability) coverage.”

The debate over the disability regulations follows criticism last month by Garamendi and consumer advocates of Poizner’s proposal to alter a series of rules affecting rates charged for auto, homeowner and most other kinds of insurance.

Opponents say those changes would lead to millions of dollars in higher rates. Ng says they mainly are intended to make it easier for insurers to lower rates.

The Department of Insurance has held hearings on both the disability and rate-setting regulations and is considering the comments before deciding whether to amend the proposals, Ng said.

The regulation changes would have to be approved by the Office of Administrative Law, which determines if regulations are authorized by law.

The debate over Poizner’s handling of insurance regulations is likely to become an issue if he runs for governor in 2010. Garamendi has announced his candidacy for governor, while Poizner has formed an exploratory committee to consider running.

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