California Department Forces Changes In LTD Definitions

Although the multistate agreement gave 1997-1999 claimants the right to ask for a reassessment of their claims, UnumProvident was not required to send notices to those claimants.

For insurers, the most important aspect of the California settlement may be provisions that will require UnumProvident to change many of the definitions it uses in LTD contracts.

Garamendi says he wants to apply the definition provisions in the UnumProvident agreement to all other disability insurers selling coverage in California.

"California's disability insurers now have a new standard, one that will provide a better sense of security for policyholders, which is what disability insurance is really all about," Garamendi says in a statement about the settlement.

"To ensure that all insurers are in compliance with the standards set by the agreement, Commissioner Garamendi will soon commence a data call for purposes of reviewing all outstanding policies of other carriers writing disability insurance in California," according to the California Department of Insurance.

Complying with the new rules could hurt UnumProvident's operating income, at least in the near term, and the company probably will have to increase prices to cope with higher claims costs, according to analysts at Moody's Investors Service, New York.

"Higher prices could hurt policy retention and further dampen sales, particularly if other competitors do not respond by increasing their prices," the Moody's analysts write in a comment on the settlement.

Moody's analysts are particularly concerned about the first definition revision in the settlement agreement, which deals with the definition of "total disability" that UnumProvident is supposed to use in California.

During the initial "usual" or "own-occupation" period, when the standards are more lenient, "total disability" is supposed to mean, "a disability that renders one unable to perform with reasonable continuity the substantial and material acts necessary to pursue his or her usual occupation in the usual and customary way," according to a copy of the settlement agreement filed with the Securities and Exchange Commission.

Later, during the "another" or "any-occupation" period, total disability will be defined as, "a disability that renders one unable to perform with reasonable continuity the substantial and material acts necessary to pursue his or her usual occupation in the usual and customary way and to engage with reasonable continuity in another occupation in which he or she could reasonably be expected to perform satisfactorily in light of his or her age, education, training, experience, station in life, physical and mental capacity."

In the following section, on "discretionary authority," UnumProvident agrees not to include any provisions giving the company "discretionary authority" in contracts issued once the settlement takes effect, unless statutes or case law require the company to include such provisions.

Still other definition changes deal with self-reported conditions, mental and nervous conditions, pre-existing conditions, Social Security Disability Income benefits, and mandatory rehabilitation requirements.

UnumProvident has agreed, for example, that "policy language requiring participation in a mandatory rehabilitation program will no longer be included in California contracts" after the settlement agreement takes effect, according to the settlement agreement.

A copy of the California settlement agreement is on the SEC Web site, at http://www.sec.gov/Archives/edgar/data/5513/000119312505195355/dex101.htm.

Allison Bell and Matt Brady contributed to this article.

California Insurance Commissioner John Garamendi wants to extend the terms of a settlement with UnumProvident to all long-term disability insurers in his state.