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Insurance companies have the right to rescind policies when they discover that policyholders failed to disclose important, or material, information about themselves in the applications for insurance. When used correctly, the practice of rescinding policies protects insurance companies from fraud. However, when used incorrectly, it damages consumers in more ways than most people realize.

How rescission damages consumers

Rescission is a very serious matter. It generally means that the insurance company is accusing the policyholder of being untruthful. It puts consumers in a very bad situation because other insurance companies generally won’t insure someone who’s had a policy rescinded – leaving them damaged and virtually ‘uninsurable’.

A growing trend

Many insurance companies have discovered that rescinding policies absolves them from paying claims that they don’t want to pay. There is a growing trend of insurers who now rescind policies at just the ‘hint’ of a misrepresentation instead of discovering a flat out lie. Consumer advocates have accused insurance companies of deliberately creating vague or confusing applications that make it easier for insurance companies to rescind policies.

Going too far

One insurer seems to have taken the practice a bit further. Health Net was recently accused of tying an employee’s bonus structure to finding ways to rescind policies. In an arbitration hearing, a judge discovered documents that explained how the employee allegedly saved the company over $35 million of dollars over a six year period by rescinding nearly 1600 policies. While the company did everything they could to keep the documents from going public, the judge thought that Health Net simply went too far and made the documents public – something that is sure to spark litigation and fines from the state.

Fines have little effect

State insurance departments will generally fine insurance companies that rescind policies without just cause. Blue Cross, Kaiser Permanente and Mega Life have all been fined in the past few years – however, not much seems to have changed. The fines seem to have little effect on insurance companies as they are small in comparison to the astronomical amounts of money that insurance companies earn every year. Consumer advocates have stated that insurance companies are more in the ‘money management’ than the ‘risk management’ business these days, so when faced with a decision to pay a relatively small fine versus a hefty claim, they’ll just pay the fine.

Consumers have options

When insurance companies wrongly rescind policies, they are acting in bad faith. Consumers can sue insurance companies when this happens and may be entitled to not only getting their claims paid, but also for damages that they may have incurred. While litigation is something that many people avoid, it’s an important option that consumers have – and one that many are using as additional scandals, such as the allegations against Health Net, continue to be uncovered.

If your insurance company wrongly rescinded your policy, consider contacting an attorney who understands how insurance companies operate. To contact an attorney whose practice focuses in this area of law, please click here.