BILL ANALYSIS C.S.S.B. 597 By: Ratliff Economic Development 4-24-95 Committee Report (Substituted) BACKGROUND Currently, there are no protections in Texas law for an elderly person who fails to maintain premium payments on life or health insurance policies due to a loss of mental capacity. PURPOSE As proposed, C.S.S.B. 597 provides for the mandatory reinstatement of certain life insurance policies in case of mental incapacity of an insured. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not grant any additional rulemaking authority to a state officer, institution, or agency. SECTION BY SECTION ANALYSIS SECTION 1. Amends Chapter 3, Insurance Code, by adding Article 3.44d, as follows: Art. 3.44d. REINSTATEMENT OF CERTAIN POLICIES Sec. 1. SCOPE OF ARTICLE. (a) Provides that this article applies to all individual life insurance policies issued to residents of this state that are subject to lapsing on and after the effective date of this Act issued by an insurer authorized to do business in this state including stipulated premium companies and fraternal benefit societies. (b) Provides that this article does not apply to a life insurance policy that provides nonforfeiture benefits in accordance with the requirements of this code. Sec. 2. REINSTATEMENT REQUIRED. (a) Requires a policy to be entitled to reinstatement under this article if it: (1) has been in effect continuously for at least five years immediately preceding the lapse; (2) has been without default in the payment of premiums during such period; and (3) there is a subsequent unintentional default in premium payments caused by a mental incapacity of the insured. (b) Requires a policy to be reinstated within one year from the date of lapse if it is an eligible policy as described by this section, on payment of arrears of premiums with interest. Prohibits the rate of interest from exceeding six percent per annum. Sec. 3. MENTAL INCAPACITY. (a) Provides that for purposes of this article, mental incapacity means lacking the ability, based upon reasonable medical judgment, to understand and appreciate the nature and consequences of a decision regarding failure to pay a premium when due and the ability to reach an informed decision in the matter. (b) Requires a mental incapacity to be established by the clinical diagnosis of a physician licensed in this state and qualified to make the diagnosis. Sec. 4. PROCEDURE FOR REINSTATEMENT. (a) Authorizes a request for reinstatement of coverage under this article and proof of mental incapacity to be filed with the insurer by certain persons. (b) Requires the proof of mental incapacity and accompanying request for reinstatement to be made no later than the first anniversary date after lapse of a policy eligible for reinstatement. Sec. 5. EFFECT OF REINSTATEMENT. (a) Requires an insurer subject to this article, after the requirements of Section 4 of this article have been satisfied, to reinstate, without evidence of insurability, coverage that has lapsed under the circumstances described by Section 2. (b) Authorizes an insurer to require, as a condition of reinstatement, payment of premiums plus interest owed for the period from the date of initial lapse to the date of reinstatement. (c) Provides that on reinstatement of the coverage, the original contractual provisions apply as if coverage had been continuous and without interruption. Sec. 6. REDUCTION IN BENEFITS. Requires an insurer to pay the amount of benefits owed under a policy that is eligible for reinstatement under this article, reduced by the amount of premiums and interest owed and unpaid on the date on which the benefits are paid, if there is an uncontroverted claim for benefits that exceed the amount of premiums and interest owed. Sec. 7. EXCEPTION. Provides that an insurer is not required to reinstate coverage or pay benefits under this article if the insured first became mentally incapacitated after the expiration of an applicable grace period contained in the policy. Sec. 8. REQUIRED DISCLOSURE. Requires each licensed entity to disclose fully to each of its policyholders, contract holders, or covered persons the requirements of this article following lapse of each policy, contract, certificate or other insurance coverage. Requires such disclosure to be made in the form and manner prescribed by the commissioner after notice and hearing. SECTION 2. Effective date: September 1, 1995. SECTION 3. Requires the disclosure required by Section 8 of Article 3.44d, Insurance Code, as added by this Act, to be sent to persons who are policyholders on the effective date of this Act following lapse of a policy. Authorizes a disclosure on a new policy issued on or after the effective date of this Act to be made by including the disclosure in the policy or endorsement thereto. SECTION 4. Emergency clause.