Considered a victory for consumers, a California recently court ruled that Blue Shield of California Life & Health Insurance Company must stop their practice of post-claims underwriting – a practice used by many insurance companies to avoid paying valid claims.

The case

A California man sued Blue Shield after the company rescinded his health insurance policy when he submitted claims for over $100,000 due to a burst appendix. He alleged that Blue Shield did not attach a copy of his application to his policy and was prohibited from rescinding his insurance. The lower court sided with Blue Cross, but the California 2nd District Court of Appeals unanimously reversed that decision saying that the practice of post-claims underwriting, or looking back at the policy for errors once a claim is submitted, is “flatly prohibited”. The court also ruled that a class action lawsuit may be filed against Blue Shield.

A victory for consumers

The court’s ruling is considered a victory for consumers. Rescinding insurance policies is a common practice in California and elsewhere. Insurers are allowed to rescind policies in order to combat fraud; however, many insurers quickly realized that rescinding policies is easy and not that many policyholders fight the decision because they are either ill, don’t know the process or feel threatened by taking on a huge insurance company.

Policy rescission is a double whammy for consumers. Not only do they lose their insurance and have to pay their own medical bills, but they will also have a hard time finding insurance elsewhere as other insurers will generally shy away from someone whose policy has been rescinded.

Not just a problem with Blue Shield

Blue Shield is not the only insurance company wrongfully rescinding policies. Health Net, Inc. was recently fined $1 million by the California Department of Managed Health Care for paying employees bonuses to find ways to rescind policies and then lying to the Department about its practices. The company allegedly saved over $34 million in claims over six years. Some industry experts have been critical of the fine because, while Health Net had to pay $1 million, they also saved $34 million – a drop in the bucket by comparison. Other insurers, including and Kaiser Permanente, have also been fined the Department for wrongfully rescinding policies – a sign that the practice is fairly widespread.

Wrongful rescissions: what to do

Insurance companies have a duty to treat their policyholders in good faith and deal with them fairly. When they wrongly rescind a policy, they are breaching that duty and may be acting in bad faith. When that happens, contact an attorney whose practice focuses on insurance bad faith to find out your options. For a free consultation with an experienced attorney, please click here.