Retroactive Cancellation/Rescission of Individual Health Plans

For a variety of reasons, more and more people are buying individual health insurance plans. The market now includes more than 16 million people nationwide. People buy individual health insurance policies to pay medical expenses (medical expense insurance) or to replace lost income when disabled (disability income insurance). People revert to individual medical expense policies because their employer doesn’t offer group health insurance (39% of all employers), because they retire before Medicare eligibility, because they are between jobs, going to school, or temporarily unemployed and, with increasing frequency, because they are self-employed. Disability insurance is only sold on an individual basis.

The major difference between group health insurance (job-based coverage) and individual health insurance is underwriting. Underwriting is the process by which the insurance company obtains and reviews information about the insurance applicant (and family, if applicable) that it deems relevant to making a decision whether or not to insure that person. Not surprisingly a key component is health history. Regardless of the size or type of insurance sought, the first formal step in the making of a health insurance contract is the completion and signing of a written application by the person who seeks to obtain the insurance.

If the application is for group health insurance through an employer, the application may be relatively brief. No underwriting of the individual is involved. The individual is viewed as part of the group. If coverage is declined, it is the entire group of employees that is declined. If coverage is accepted, all employees applying for insurance are accepted. Once covered, always covered.

If the application is for individual health insurance, the insurance company has a laundry list of questions. Typically, it asks and closely scrutinizes your health history as detailed on the medical questionnaire and other information (such as occupation, avocation, etc.) in order to determine the terms of the contract between both of you. But here’s the kicker. It also has the opportunity, after the contract is issued, to re-evaluate that history, if new information is presented to it. If the new information scopes out that you failed to mention treatment or history of arteriosclerosis, epilepsy, alcohol abuse, varicose veins and so forth, and, if your insurance provider concludes it would not have issued you a policy in the first place or it would have been issued under more restrictive terms, your carrier can cancel (rescind, in insurance jargon) your plan. Formally, it will declare it void and return all your premiums paid on the policy. The result: you are on the hook for medical costs.

There are legitimate cases when this practice is appropriate. If the questions on the application are clear and if you provide dishonest or incomplete answers and if honest, complete answers would have caused the insurer to decline to issue and the insurer subsequently learns of this deceit, it is the insurer’s responsibility to rescind in order to keep its costs down and premiums low. Read “What Triggers a Rescission of a Health Insurance Policy” for more information. Sadly, however, the concern is that the practice is becoming more prevalent as some insurance companies seek to use this legitimate process in an inappropriate manner to avoid liability for expensive claims.

For a limited period of time called the contestable period (usually 2 years from the date of application), insurance companies are allowed to look back at prior medical history to see if there is anything that was either misrepresented or omitted on the application. Good companies don’t engage in this practice unless there is uncertainty about medical records on a current claim, that something in the insured’s prior medical history may be a bit fuzzy. Some companies, however, proactively use this tool to initiate an extensive investigation of prior medical history in hopes of finding something that will give them a reason to rescind the policy and dump the policyholder to avoid expensive claims. Insurance companies are getting more and more aggressive in investigating the health history of every insured with a large claim because large claims cost them money.

WATCH OUT! This practice is referred to in the industry as “post claim underwriting”. A recent egregious example of this involved an insurance company that basically offered its underwriters a bounty (they called it a “bonus”) for every claim on which they could find a pre-existing health condition not mentioned on the application that would give them a basis for rescinding the policy and, thereby, avoiding payment on the claim – even when the claim medical records did not provide “probable cause” to further investigate.

If you feel your policy may have been improperly cancelled, you may have the basis for legal action against the insurance company to get your coverage reinstated and, perhaps, to obtain additional damages. Click here for more information to help you decide whether you should seek the advice of an bad faith attorney.

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