NAIC Model Act 170 and Model Regulation 71 Comments
By Daniel Veroff, Esq.
About the Author
Daniel Veroff is an insurance policyholder rights attorney in California. A
significant portion of his practice is dedicated to advising disability insurance
policyholders on all aspects of the insurance relationship and representing them in
litigation against their insurance companies, agents and brokers involving claims of
breach of contract, breach of the covenant of good faith and fair dealing, breach of
fiduciary duty, claims arising under the Employment Retirement Income Security
Act, claims arising under various provisions of the Insurance Code, and more. Mr.
Veroff has spoken publicly on disability insurance issues, and has worked with
United Policyholders, a non-profit organization that advocates for the rights of
policyholders, on various public interest projects.
Disability Income Insurance Should Have Its Own Model Regulation
Disability Income Insurance (“DI insurance”) should have its own model rule
because unlike traditional health policies, DI insurance replaces monthly income in
the event the insured is rendered unable to perform their occupation. The main
difference between DI insurance and traditional health policies are that while both
depend on the existence of some form of medical condition, traditional health
insurance policies cover treatment while DI insurance replaces income lost due to
the medical condition. Further, treatment typically involves one payment for one
treatment, while DI insurance typically involves a recurring monthly payment for as
long as a single disability lasts regardless of treatment, although some policies do
pay a lump sum for certain catastrophic disabilities such as paralysis or the loss of
sight. Thus, disability insurers commonly inform insureds making claims that the
existence of a medical condition itself does not necessarily constitute a “disability.”
Disabilities caused by accidental injury and/or sickness are covered under DI
insurance policies. Generally, there are two standards of disability in the DI
insurance context – the inability to perform one’s “own occupation” and the inability
to perform “any occupation.” Most states, such as California, have case law stating
how a disability is determined. In California, the definition of disability under an
“own occupation” policy is the inability to perform the material and substantial
duties of one’s own occupation with reasonable continuity and in the usual and
customary way. The definition of disability under an “any occupation” policy is the
inability to perform, with reasonable continuity and in the usual and customary
way, the material and substantial duties of any occupation the insured is reasonably
fitted for in light of his or her education, experience, age, training and station in life,
and which he or she has a realistic opportunity of obtaining.
DI policies also differ significantly in terms of what conditions are excluded
or subject to time-based limitations, maximum benefit periods, additional benefits
(e.g. waiver of premium), elimination periods, requirements related to an insured’s
treatment with physicians, and more. Other policies similar to DI insurance include
Business Overhead Expense policies, which provide a benefit to insured’s who are
liable for business expenses during periods of disability.
Based on the significant differences between DI insurance and traditional
health policies, it makes good sense for DI insurance to have its own model rule.
Problems with the Model Act 170 and Model Regulation 171
There are problems with the current model laws that demonstrate why DI
insurance should have its own model rule. These issues are also important to note
for when a new model rule is drafted. The comments below track the model rules.
Please note that these are not meant to be exhaustive.
Model Act 170
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Section 4, subsection A
o This section excludes key terms that apply to DI insurance,
including: exclusions, physician’s care / regular care of a
physician, residual disability, qualification period, and substance
abuse. A new model rule should address these key terms.
o This section also uses the outdated term “nervous disorder.”
Policies more commonly use the term “mental nervous disorder”
or “mental illness.” A new model law should include more modern
terms.
Section 4, subsection B
o Any new model rule with a similar section as this should also
include a provision that gives the commissioner the power to
specify prohibit conduct as well. For example, the commissioner
should be able to bar insurers from barring coverage for
disabilities due to domestic violence by claiming they are not
“accidental,” or from enforcing a “physician’s care” provision from
barring coverage when the insured undergoes experimental
treatment for a disabling terminal illnesses.
Section 5
o Any new model rule with a similar section as this also should
include a provision giving the commissioner the power to institute
a notice and hearing review process whereby the commissioner
can review all policy forms an insurer intends to issue and deliver
in the state. This process allows the commissioner to bar the sale
of any insurance policies that do not comply with state laws.
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o Likewise, any new model rule also should include a provision
providing that any DI insurance policy issued or delivered in the
state must comply with the laws and regulations of the state, and if
there is any conflict, the policy shall be read as if it complied with
the laws of this state. This prevents insurers from enforcing
contractual language that differs from the state requirements in
the instance (which does occur often) a policy that is noncompliant with state law is issued and delivered.
Section 6, subsection H
o If a section such as this is included in a new model rule, it should
also refer to “exclusions”.
Section 7, subsection A
o This subsection does not make sense in the DI insurance context
and as such demonstrates why DI insurance requires its own law.
It is too restrictive for a DI insurance policy. Many DI insurance
policies carve out an exclusion to the pre-existing condition rule
that allows for coverage for said pre-existing condition as long as
the condition is not disabling when the policy becomes effective.
In other words, an insured with a heart condition who can
nonetheless work full-time at the start of the policy period should
be able to collect disability income benefits at a later date if the
heart condition develops further and becomes disabling. DI
insurers often make up for this increased risk by raising the
premium levels or by adding a rider to the policy excluding
coverage for that condition altogether.
Section 7 A
o The pre-existing condition rule can apply differently in the DI
insurance context, and it should be amended to make it more
favorable to the consumer. For example, while a DI insurance
policy may exclude coverage for a medical condition for which the
insured sought treatment within a specified time period before the
application for coverage (e.g. 12 months), the better policies will
not exclude coverage for a disability claim if the insured was able
to work for a period of time (e.g. 12 months) without seeking
medical treatment in instances when the condition developed
after the policy became effective. Thus, under a typical provision
like this, an insured who was treated for a heart condition 11
months before applying for coverage can escape the pre-existing
condition rule if they become disabled from that same condition
13 months into the policy, as long as they were able to work
consistently for the first 12 months of coverage without treating
that heart condition. This often protects insureds who have minor
conditions that escalate much later in the policy period.
Additional provisions
o The commissioner should be granted the power to issue
regulations requiring DI insurers to set reserves and reserve a
certain amount of money per each claim. Reserves are important
in the DI insurance context because they ensure that money is set
aside for future benefit payments to an insured who is determined
to be disabled.
Model Regulation 171
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Section 5 B
o Subsection B2 regarding the definition of accident does not make
sense in the disability income insurance context. Disability insurance
does not pay benefits for a specific condition – it pays benefits for the
inability to work to a particular degree. This is an inconsistency
between health and disability insurance that may justify separate
regulations.
o Subsection B3 does not apply in the disability income insurance
context either. Whether one is disabled under such a policy should
never depend on whether other benefits or insurance is payable to the
insured for the same condition. In the disability income insurance
context, the policy may allow the insurer to deduct from the benefit
amount any income received from other sources, including worker’s
compensation, social security, etc., but this should never be a factor to
determine whether one is actually disabled under the policy in the
first instance. Otherwise, an insured under a disability income policy
might be precluded from a $10,000 monthly benefit just because they
also are entitled to receive $1,000 a month or similar benefit from
another source. Again, this is another inconsistency between
disability income policies and some health policies.
Section 5 F
o The definition of “mental nervous disorder” should be updated to
reflect modern psychological standards. For example, the terms
“neurosis” and “psychoneurosis” are no longer diagnosable disorders.
To bring it within modern standards, the definition should include “all
disorders and conditions listed in the most recent version of the
Diagnostic Statistical Manual (DSM), or, the guidelines chosen by the
American Psychological Association (APA) to replace the DSM
Section 5 M
o The definition of sickness is too restrictive in the context of disability
income insurance. There is no need to limit out sicknesses that
manifested before the insurance started. Sickness can exist and have
manifested before a policy’s effective date, but still not rise to a
disabling level until months or years after the policy’s effective date.
In other words, a sickness (or accident or injury) in and of itself does
not mean one is disabled in the disability income context. Insurers
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are of course free to increase premiums based on a history of sickness
(or accident or injury), or to add a rider excluding coverage for it at
all. However, the mere fact that it existed and manifested before the
policy became effective should not mean it is excluded.
o As with injury, sickness should not exclude a sickness that is paid for
by other insurance such as worker’s comp. If anything, there can be
an offset made for benefits paid under worker’s comp, but that should
not be used as a qualification for disability in the first instance.
Section 4. N
o The ideal definitions are as follows:
 “Totally Disabled from the insured’s Own Occupation” is
defined as: “the insured is unable to perform the material and
substantial duties of his or her specific occupation with
reasonable continuity and in the usual and customary way.”
“Own Occupation” means “that actual occupation the insured is
performing prior to their disability, including any specialty.”
 “Totally Disabled from Any Occupation” is defined as: “the
insured is unable to perform the material and substantial
duties of Any Occupation with reasonable continuity and in the
usual and customary way.” “Any Occupation” means “any
occupation that the insured can be reasonably expected to
perform on a full-time basis in light of their age, education,
experience, physical and mental capacity, and station in life.”
o Subsection 3 should be revised to state that the policy may require the
insured to seek reasonable care by a physician other than the insured
or a member of the insured’s family. It also should state that care is
deemed reasonable if it is prescribed by a physician or other specialist
licensed in the appropriate field. It also should provide that this
requirement must be waived it such a licensed physician or specialists
determines that further care will not have an effect on the insured’s
condition.
Section 6 C
o See above discussion regarding pre-existing conditions.
Section 6. F.2
o The phrase “drug addiction” should be replaced with “substance
abuse” to bring the phrase within modern standards.
Section 7. A
o The language in subsections 1-2 regarding policies that pay benefits
until age 65 or until Medicare eligibility does not make sense in the DI
insurance context. These provisions appear to take away benefits that
an insured can obtain by purchasing DI policies that provide lifetime
benefits, or which, allow for renewability past age 65. This provision
thus appears to only apply to health insurance claims.
o The provision in subsection 11 requiring that a loss occur within 90
days of an accident is too strict. It ignores the “process of nature” rule
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in certain states, which generally means that where a disability occurs
as a result of the process of nature following the covered accident or
injury, it relates back to the date of accident of injury.
Section 8. A
o Subsection 7 should include the words “substantial and material,”
“reasonable continuity,” “own occupation” and “any occupation”