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Health Insurers Must Review Applications For Accuracy Before Issuing Policies

Armen Hareyan's picture

A panel of the 4th District Court of Appeals in Santa Ana, Calif., lastweek ruled unanimously that health insurers are responsible forreviewing applications before issuing policies and should not waituntil beneficiaries run up large medical bills, the Los Angeles Timesreports. The court also ruled that insurers cannot rescind a healthinsurance policy unless they show that the policyholder willfullymisrepresented his or her health or that the insurance company hadinvestigated the application before issuing coverage.

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In the case, Blue Shield of Californiais accused of inappropriately terminating an individual healthinsurance policy after authorizing more than $450,000 in medicalservices for a member. A lower court dismissed the case without atrial, but the appeals court overturned that decision and declared thatinsurers are obliged to verify information included in health insuranceapplications before extending coverage.

According to thedecision, the facts of the case "raise the specter that Blue Shielddoes not immediately rescind health care contracts upon learning ofpotential grounds for rescission but waits until after the claimssubmitted under that contract exceed the monthly premiums beingcollected." The court ruled that a health plan "may not adopt a'wait-and-see' attitude after learning of facts justifying rescission,"adding that a company cannot continue to "collect premiums whilekeeping open its rescission option if the subscriber later experiencesa serious accident or illness that generates large medical expenses."Blue Cross is considering an appeal of the decision.

The rulingsets the stage for similar cases against insurers to move forward intrial courts. Insurers and attorneys for policyholders say that courtspreviously have dismissed such lawsuits without trials, making itpossible for health insurance companies to settle claims privately outof court (Girion, Los Angeles Times, 12/25/07).

Reprinted with permission fromkaisernetwork.org.You can view the entire KaiserDaily Health Policy Report, search the archives, andsign up for email delivery at kaisernetwork.org/email. The Kaiser Daily Health Policy Report ispublished for kaisernetwork.org, a free service of The Henry J.Kaiser Family Foundation.