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We all make mistakes. When we do, we apologize and generally try to make the situation better. Insurance companies also make mistakes and we expect the same response from them. However, sometimes that doesn’t happen, and too often those mistakes come at a hefty price for the consumer.

Case in point – BC Life

The California Department of Insurance recently released a report showing the results of an investigation it did with BC Life. The results showed that the company rescinded over 1800 individual healthcare policies in 2004 and 2005. The department reviewed 93 of those policies and found violations in 67. Here’s a breakdown of the violations:

• Failure to effectuate prompt, fair and equitable settlements of claims in which liability had become reasonably clear (32 violations)
• Failure to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under its insurance policies (27 violations)
• Failure to represent correctly to claimants, pertinent facts or insurance policy provisions relating to any coverage issue (4 violations)
• Failure to maintain all documents, notes and work papers in the claim file (2 violations)
• Persistent seeking of information not reasonably required for or material to the resolution of a claim dispute (1 violation) • Failure to provide the written basis for the denial of the claim (1 violation)

While the report was just released in June 2007, BC Life has basically responded that it was understaffed and therefore may have wrongly rescinded some policies.

A broken system?

Is it enough for an insurance company to say they’re sorry and leave the consumer without any form of healthcare insurance? Steven Poizner, the new Insurance Commissioner of California, says ‘no’. His department plans to investigate other insurers such as Blue Shield, HealthNet, Cigna and Aetna.

While that sounds like progress, many consumer groups and plaintiffs’ attorneys feel that the system is just plain broken. They point to long standing, but nonsensical, rules that prohibit the agency from releasing certain investigatory results – unless someone sues. They also point out that this type of behavior on the part of insurers runs rampant in the industry and think that insurers would rather pay the fines associated with a wrongful rescission than make the situation right with the consumer.

Valid reasons for rescission

Rescinded policies leave a black mark on consumers’ records and make it difficult for them to obtain coverage from other insurers (think of someone who has 20 auto accidents in a month and tries to get coverage from an insurance company…). So, what are valid reasons for rescission? Generally speaking, an insurer may rescind a policy due to a material misrepresentation that the insurer relied upon when issuing a policy. Each of those terms has a specific meaning – here’s a quick summary:

Misrepresentation: You lied or concealed information on the application submitted; for example, failing to disclose information about a liver disorder, cancer treatment or smoking history when directly asked.

Materiality: If what is hidden or concealed on your application would have affected the insurer’s decision to issue a policy or issue one under more restrictive terms, the insurer can rescind. Leaving off the details, such as asthma, in an otherwise clean bill of health, is material. If the information given by the applicant is false, but the insurance company would have issued the same policy anyway, then it is not material.

For example, if you lie about visiting a doctor, but the visit was to obtain free sample medications for a mild seasonal allergy, the insurer cannot rescind even though you lied in response to a question inquiring at to whether you have seen a doctor in the last 12 months.

Reliance: At the time the policy was issued the insurance company must have reasonably relied on the information based in the application. An insurance company cannot avoid liability if it did not actually rely on the applicant’s misrepresentation in making its decision to issue the policy.

For example, if there are sufficient indications in your answers to the application questions (such as an incomplete answer that clearly suggests an unmentioned extensive prior treatment history for a serious health condition) that reasonably suggest that further investigation by the insurer is warranted, and if that investigation would reasonably be expected to have provided the insurer with a true picture, many courts will not allow the insurer to rescind if the insurer did not follow through with that investigation.

Other Requirements: Some states require the insurance company to prove fraud in order to rescind. This is a difficult burden for the insurer since it is required to prove intent. Some states require that the insured not only intend to deceive but also know that the deception is material to the risk. This is even more difficult for the insurer to prove: it must establish that you knew that your misrepresentation would affect the insurer’s decision to issue; in other words, that you know the insurer’s underwriting guidelines that tell them when to issue and when to not issue or to issue with limitations on coverage. In these states, it is very difficult for an insurer to rescind a policy. Some states require that the facts misrepresented must contribute to the claimed loss. The insurer cannot properly rescind unless, for example, there is a claim for cancer and the misrepresentation discovered by the insurer is for treatment of cancer.

If you’ve been denied coverage due a wrongful rescission, you need an attorney who understands how insurance companies operate so that you won’t have to fight the rescission alone and risk being turned down for insurance coverage in the future. To consult with an attorney near you, click here.