This summer, Blue Cross entered into a proposed class action settlement and agreed to rescind coverage only when it could show that a policyholder
willfully misrepresented information on an application. Blue Cross also reserved the right to change that policy if a court upheld a lesser standard. Much to their surprise,
that may happen next week…
Post claim underwriting
At the crux of this issue is post claim underwriting – an insurance industry practice of selling someone insurance without carefully reviewing their application and later rescinding it when they do review it – typically after a claim is filed. The practice is prohibited, but it happens frequently – often leaving policyholders with no coverage at all.
The case that may change it all
The case that may change the way insurance companies rescind policies is currently in front of California’s 4th District Court of Appeals. It involves a Blue Cross policyholder that purchased coverage and was severely injured in a car accident shortly afterwards.
Blue Cross rescinded his coverage claiming that he lied about his weight and medical history on his application. Because of the insurer’s actions, he had to wait six months to receive much needed surgery for a torn urethra and other injuries.
Insurance industry experts say that these practices occur too frequently and that insurers are rarely clear with policyholders about the reasons for rescissions. The California Health & Safety Code addresses post claim underwriting by stating that health care plans must resolve all reasonable questions about an application before entering into an insurance contract for insurance. However, this doesn’t leave the insurer completely unprotected as they are still entitled to rescind policies in cases of fraud. Unfortunately, many insurers just claim misrepresentation when they don’t want to pay a claim – leaving well meaning and honest insureds standing in the dark.
What the case means
If the court decides that insurance companies cannot rescind policies without a clear showing of a willful misrepresentation, victims of wrongfully rescinded policies may be able to let a jury decide their fate. Initially, it may mean more litigation; however, insurers might eventually change their criteria for rescinding policies to avoid litigation.
