There is a commonly held belief that every disability insurance policy sold to the public has been actually reviewed and approved by the California Department of Insurance.  Indeed, California Insurance Code section 10291.5 requires the Insurance Commissioner to reject a proposed new disability insurance policy form if it does not meet certain requirements set forth in the Insurance Code.  However, prior to the recent ruling of Ellena v. Department of Insurance, 2014 Cal. App. LEXIS 883 (1st Dist. Oct. 1, 2014), the California Department of Insurance was not following this code provision, and in fact maintained that it did not have a duty to review each new disability insurance policy form.  There is now no question that the Department of Insurance has a mandatory duty to review all new disability insurance policy forms that insurers wish to sell in California.

Cassaundra Ellena was an employee of the County of Sonoma who was insured under a group disability insurance policy sold and administered by Standard Insurance Company (“Standard”).  Unfortunately, Ellena was diagnosed with lupus and was unable to continue working.  Ellena filed a claim for long-term disability benefits with Standard, but Standard denied her claim, forcing Ellena to file a lawsuit to collect her disability benefits.  Along with naming Standard as a defendant for various causes of action including breach of contract and bad faith (also known as the breach of the covenant of good faith and fair dealing), Ellena also named the California Department of Insurance as a defendant.

Ellena asserted a cause of action for mandamus against the Department of Insurance, alleging that the Department had a mandatory duty to review the policy to make sure it complied with California law before approving the policy.  Ellena alleged that the policy was in violation of California law because it improperly allowed Standard to define “own occupation” as other than the one Ellena performed for the City of Sonoma, and also that the policy’s definitions of “disability” and “any occupation” were also improper.

The trial court granted the Department of Insurance’s demurrer, ruling that “Ellena had not sufficiently alleged a violation of a specific mandatory duty and that a writ of mandate could not be based on general enforcement provisions or statutes involving the DOI’s exercise of discretion.”  The Department of Insurance was dismissed from the lawsuit, and Ellena timely appealed.

On appeal, a large focus of the Court of Appeals’ ruling turned on what exactly Ellena was seeking through her lawsuit.  The Court of Appeals noted that “[w]hile a party may not invoke mandamus to force a public entity to exercise discretionary powers in any particular manner, if the entity refuses to act, mandate is available to compel the exercise of those discretionary powers in some way.”  Ellena acknowledged that the Department of Insurance “has the discretion to decide whether to approve a policy, but maintains that the [Department of Insurance] must exercise that discretion by reviewing the policy to determine whether it does or does not comply with California law.”  The Department of Insurance argued that the Insurance Code only requires that an insurance company submit its draft policy for review, but that it had no actual duty to review and approve the policy before it is sold to the public.

After reviewing the Insurance Code and characterizing the oversight function of the Department of Insurance as “a matter of great public interest,” the Court of Appeal ruled:

The clear language of this statute is that “[t]he commissioner shall not approve any disability policy for insurance or delivery …” unless it meets a number of requirements. (§ 10291.5, subd. (b), italics added.) “The commissioner shall require from every insurer a full compliance with all the provisions of this code” (§ 12926, italics added) and the commissioner has an obligation to fulfill the duties imposed by the Insurance Code under section 12921.5.

…

The plain meaning of these provisions is that the commissioner has a mandatory duty to review the policy prior to approving it and the commissioner must review the disability policy to ensure it meets the requirements set forth in section 10291.5, subdivision (b). The Insurance Code imposes on the commissioner the duty to review the policy to ensure it complies with the law.

The Court noted that if the Department of Insurance did not actually review each policy that was submitted for review, “how could the commissioner responsibly disapprove any disability policy containing provisions that are ‘unintelligible, uncertain, ambiguous, or abstruse, or likely to mislead a person to whom the policy is offered, delivered or issued,’ as required by subdivision (b) of [section 10291.5]?”  The Court further noted the “legislative history to [the 1949 amendment to section 10291.5] supports the conclusion that the statute requires the commissioner to review the disability policy form prior to approving it.”  Accordingly, the Court of Appeal concluded that “the Insurance Code requires that the commissioner review a disability policy form prior to approving the policy.”

This is a victory for consumers and policyholders as the Department of Insurance will now be required to review every potential disability policy before it is sold to the public.  The Insurance Commissioner and Department of Insurance should now ensure that policies, such as the one sold to Ellena, are in compliance with California law.  This decision is also of practical procedural significance to attorneys who engage in insurance litigation against insurers as naming the Department of Insurance will destroy diversity of citizenship jurisdiction thus precluding insurers from removing such cases to federal court.