AZ Circular Letter 1981-02: Department Investigation of Workers' Compensation Insurance Replacement

STATE OF ARIZONA

DEPARTMENT OF INSURANCE

JANE DEE HULL

2910 NORTH 44th STREET, SUITE 210

CHARLES R. COHEN

Governor

PHOENIX, ARIZONA 85018-7256

Director of Insurance

602/912-8456 (phone) 602/912-8452 (fax)

Former Director J. Michael Low issued the following Circular Letter on April 28, 1981:

DEPARTMENT INVESTIGATION OF WORKERS’

COMPENSATION INSURANCE REPLACEMENT

April 28, 1981

On March 31, 1981, the Arizona Department of Insurance conducted a public

hearing under Docket No. 3781, styled “In the Matter of the Investigation of Workmen’s

Compensation Insurance Replacement.” The purpose of the investigative proceeding

was to examine the legality of certain programs presently being offered to employers as

an alternative for workers’ compensation insurance. These programs typically provide a

package of life and health insurance benefits, including disability income benefits, under

group insurance policies covering those employees who choose to reject workers’

compensation coverage. The programs are chiefly represented as providing more

benefits than workers’ compensation insurance at a lower cost to the employer.

My review of the transcript of the public hearing persuades me that there are

obvious problems which arise whenever an attempt to replace workers' compensation

insurance with a package of life and disability insurance benefits is made. To begin,

A.R.S. § 20-443 prohibits the making of any misrepresentation to a policyholder for the

purpose of including such policyholder to lapse, forfeit, surrender, retain or convert any

insurance policy. Further, A.R.S. § 20-444 provides that no person shall make any

statement concerning the business of insurance which is untrue, deceptive or

misleading. To my way of thinking, the failure to disclose any material provision in an

insurance policy, particularly one relating to deductibles, waiting periods or medical

expense limitations, is a deceptive and misleading practice

any

insurance policy. Further, A.R.S. § 20-444 provides that no person shall make any

statement concerning the business of insurance which is untrue, deceptive or

misleading. To my way of thinking, the failure to disclose any material provision in an

insurance policy, particularly one relating to deductibles, waiting periods or medical

expense limitations, is a deceptive and misleading practice. Additionally, the failure to

inform a policyholder of the potential liability that may arise when an employee rejects

the workmen’s compensation act is an inherently deceptive practice. The disclosures

which would at a minimum need to be made in a careful and understandable manner

should include:

1) The fact that an employee who rejects the compensation benefits can sue an

employer for negligence relating to an industrial accident.

2) A description of the waiting periods, deductibles and co-insurance provisions

of the health insurance coverage.

April 28, 1981

Page 2

3) An adequate explanation of the “reasonable and customary charges” limitation

in an accident and health insurance policy.

4) A full description of any and all exclusions for preexisting conditions.

5) Any limitation on the definition of “physician” or other health care provider for

purposes of obtaining coverage under a health insurance policy.

6) A complete description of the requirements for renewal after lapse of

coverage.

7) Any limitation on disability income after age 65 or any Social Security offset

provisions.

8) Any limitation on benefits for the recurrence of any existing disability.

The above list is not intended to be exhaustive; still the foregoing represents

material facts which would need to be carefully considered in the event a health

insurance program was substituted for workers’ compensation insurance

Any limitation on disability income after age 65 or any Social Security offset

provisions.

8) Any limitation on benefits for the recurrence of any existing disability.

The above list is not intended to be exhaustive; still the foregoing represents

material facts which would need to be carefully considered in the event a health

insurance program was substituted for workers’ compensation insurance. Failure to

adequately address the limitations that exist in typical health and disability income

policies, particularly in the context of a sales solicitation designed to substitute such

coverages for workers' compensation insurance, constitutes false and deceptive sales

practices which will result in the appropriate disciplinary proceedings.

I do not believe that the Department has the authority to forbid outright any

attempt to sell a package of life and health insurance benefits in lieu of workers'

compensation coverage if all material disclosures are made in an understandable form.

However, I do believe that it is erroneous to view a health and disability income program

as being generically similar to the mandatory compensation benefits provided by law.

Therefore, it is hoped that this letter will put all interested parties on notice that the

Department intends to conduct disciplinary hearings based on any material

misrepresentation or material omission of fact that arises in connection with the

replacement of a workers' compensation insurance coverage.

J. Michael Low

DIRECTOR OF INSURANCE