Casualty Insurance in the United States

Introduction to Casualty Insurance

Unjustified Health Insurance Rescissions in California

By Jeanette Borzo, who was a senior editor at California Lawyer.

Attorney William M. Shernoff, in an article, argued that Blue Shield’s policy applications were designed to confuse, so that misstatements would provide an excuse for rescission should a policyholder ever require expensive treatment. “At a time when the policyholders are seriously ill, the insurance company walks away, leaving them uninsured, uninsurable and buried in debt,” wrote Shernoff, a pioneer in the field of bad faith litigation and an amicus in the plaintiff’s appeal (Hailey v. California Physicians’ Service).

Los Angeles Chief Assistant City Attorney Jeffrey B Isaacs used to combat consumer fraud using California’s Unfair Competition Law (UCL). And if health insurance rescission was part of a pattern and practice, it can be use the UCL.

In early December 2007 it was the intention of a multifaceted, statewide campaign against unjustified policy cancellations. Attorney William M. Shernoff, in March 2006, filed 10 lawsuits on a single day against Blue Cross of California and Blue Cross Life & Health.

Two days later John Garamendi, then state insurance commissioner, spoke approvingly of the litigation and revealed his office’s ongoing investigation of Blue Cross’s large profits. The state Department of Managed Health Care (DMHC) also responded, promising to launch a separate investigation of Blue Cross. The Los Angeles Times covered the court filings and launched a series of reports on health insurance cancellations.

The lawsuits also attracted some powerful allies in the medical profession: doctors and hospitals that had been stuck with unpaid medical bills after a patient’s health coverage was rescinded. By April 2007 the California Medical Association and the California Hospital Association had joined a class action filed in Los Angeles Superior Court against Blue Cross of California. And other plaintiffs attorneys meanwhile were filing their own suits and class actions.

Shernoff told the city attorneys of various enforcement actions by the DMHC, including a $1 million fine levied against Blue Cross of California in March 2007. Two months after that, in settling a class action with Shernoff, Blue Cross promised not to cancel individual health insurance policies unless the company could show deliberate misrepresentation. But that settlement later fell apart. Nearly all the critical public policy issues – including uniform standards for legal rescissions, notification procedures for policyholders, plain-language requirements for health insurance applications, and the possible need for legislation to address the recent outbreak of rescissions in the state – were still unresolved.

Clearly, health insurance rescissions had attracted a dog pile of plaintiffs lawyers. But city attorneys and local DAs can bring several things to bear that the plaintiffs bar cannot: They can launch criminal investigations, use the UCL to assess civil penalties against insurers, and sue on behalf of the People of California without having to certify a class (See Cal. Bus. & Prof. Code §§ 16759, 17200-17210 & 17508).

The threat of health care policy rescission directly affects about 3 million Californians, most of whom don’t have employer-provided insurance. These individuals often have middle-class jobs as hairdressers, plumbers, or actors and must buy health insurance on their own as part of the so-called individual/family plan group.

Though insurers say that only a minuscule percentage of such policies are ever rescinded, the numbers appear to be rising. Certainly, complaints about the practice have increased, according to the DMHC. And the Los Angeles city attorney claims in court documents that insurance companies rescinded the policies of more than 8,000 Californians from 2002 to 2007. During that period, Blue Cross rescinded insurance on at least 6,000 policyholders, Health Net on 1,600, and Blue Shield on 850.

Bryan A. Liang, executive director of the Institute of Health Law Studies at California Western School of Law in San Diego, suggests that the rise in rescissions follows a broader trend: As fewer companies offer insurance to their employees, more people have to buy individual policies – and the number of rescissions rises in tandem. “This has been brewing for a while, as people have been losing their group insurance,” says Liang, who is both a physician and a lawyer. “For at least the past 15 years, the individual [policy] market has been exploding.”
That explosion has been driven by a deep-seated fear of living without health insurance. For example, one attorney on Isaacs’s staff asked to be excused from working on the rescission cases, because she feared potential retribution from her health insurer. “There is a visceral reaction to these cases …, a ‘There but for the grace of God go I’ feeling,” says Isaacs.

Whether they’re justified or not, such apprehensions convinced Isaacs that the social damage from health insurance rescission extends far beyond the thousands of Californians who are directly involved. “Consumers may change their behavior because of the way insurers approach their obligations to policyholders,” Isaacs says. “Are you not going to the doctor because you’re thinking of changing jobs and don’t want something harmful on your health record?”
Insurers, on the other hand, view policy rescissions as a legitimate means of controlling consumer fraud. When an individual files a major claim shortly after taking out a policy, companies may suspect that the insured knew about a preexisting condition and either failed to disclose it or misrepresented it on the application. (…) With some 45 million Americans lacking health insurance, it’s not hard to imagine that some applicants would lie to obtain it.

At the center of these rescission-related cases is the duty of good faith and fair dealing: When an insurer cancels a policy because of misstatements or omissions on the application, is the company combatting fraud – or using deliberately complicated forms to later avoid paying for treatment? Conversely, when applicants misstate or omit details of their medical histories, are they simply forgetful or confused – or hiding preexisting conditions?

Insurers may have initially used rescissions to control fraud. But now it appears to have evolved into a cost-savings method. Some insurers even have a list of “rescission diagnostic codes” – a group of medical conditions that, when reported on claims, trigger an investigation into potential falsehoods on a policyholder’s application that might justify rescission.

Misinformation found in applications often means the forms are so confusing and ambiguous that almost anyone could be subject to rescission. In December 2007 Court of Appeal Justice Richard M. Aronson stated as much in a unanimous opinion in Hailey that reversed the summary judgment and remanded the case for trial (158 Cal. App. 4th 452). Blue Shield’s application form, Judge Aronson wrote, “although understandable upon close examination and reflection, is no model of clarity, and lends credence to [wife] Cindy’s explanation of her omission of Steve’s health information.” Facts in the case, Aronson continued, “raise an inference Blue Shield may have acted in bad faith by delaying its decision to rescind the policy.”

In the ruling, Aronson points to a key point of contention in many rescission cases: post-claims underwriting. This practice of evaluating a policyholder’s insurability after coverage has been issued violates state law (Cal. Ins. Code §§ 10380-10390; Cal. Health & Safety Code § 1389.3). Aronson noted that to rescind a policy for material misrepresentation or omission, the insurer would first have to show either that it had reasonably investigated the application before it issued coverage, or that the policyholder willfully misrepresented information on the application.

If that weren’t complicated enough, two codes regulate health insurers in California, making bad faith law even more complex to litigate. Shared-risk insurers, which issue policies to preferred-provider organizations, are covered under the Insurance Code and regulated by the Department of Insurance. Health maintenance organizations are, in general, covered under the Knox-Keene Health Care Service Plan Act of 1975 (Cal. Health & Safety Code §§ 1340-1345) and regulated by the DMHC. “There is confusion because you have two regulatory schemes,” says Isaacs. “These are very complex cases. You get bounced back and forth between the different statutes.”

One key difference between the codes involves willful misrepresentations on policy applications: Under the Insurance Code, neither intentional nor unintentional misrepresentations justify rescission if the insurer has not completed its medical underwriting prior to issuing a policy. But under the Health and Safety Code, “willful misrepresentation” appears to be sufficient justification for rescission.

In February 2008, Jeffrey B. Isaacs, the chief assistant city attorney in Los Angeles, disclosed his office’s criminal investigation of Health Net’s alleged practice of basing employees’ bonuses, in part, on the number of health care policies they had canceled. That investigation is ongoing and includes the question of whether Health Net employees made false statements to the DMHC regarding the bonus payments. Isaacs also filed a civil case against Health Net and two of its subsidiaries – under both the UCL and the False Advertising Law (Cal. Bus. & Prof. Code §§ 17500-17509) – for unjustified rescissions that led to claim payments being either denied or delayed. How many consumers, he asks in the complaint, can be expected to respond accurately when asked if they have ever had “any signs or symptoms” of phlebitis, pyelonephritis, or Raynaud’s disease?

Then, in April 2008 , Isaacs filed a similar civil case against Well Point and two of its Blue Cross subsidiaries. In July 2008 he filed a third case, against Blue Shield of California and a subsidiary. All three complaints carry maximum potential fines of $1 billion.

In a February 2008 arbitration, retired Judge Sam Cianchetti granted Shernoff’s motion for summary judgment that Health Net had breached the insurance contract of Patsy Bates, a self-employed hairdresser whose policy was rescinded after she developed breast cancer. Cianchetti also found, as a matter of fact, that the company had a policy of awarding bonuses based, in part, on whether an employee met certain rescission goals. “It’s difficult to imagine a policy more reprehensible than tying bonuses to encourage the rescission of health insurance that keeps the public well and alive,” Cianchetti wrote. Furthermore, he found that Health Net kept a list of several hundred medical conditions that, if found in claims information, could trigger an investigation that might lead to rescission. He awarded Bates nearly $1 million in compensatory damages and an additional $8.4 million in punitive damages. (…)

Insurance defense attorneys frequently complain that because their clients are bound by privacy provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) (42 U.S.C. §§ 1320d-1 through 1320d-8), media coverage of cases against them can appear biased. Consumers can disclose any information they want, while insurers must remain silent about many particular facts, says John M. LeBlanc, a partner at Barger & Wolen in Los Angeles and Blue Shield’s outside counsel. “What you hear in the media is one side of the story,” he says. “But when Blue Shield defends itself in the courts, it has been very effective.”

In fact, according to the finding in Bates, Health Net rescinds fewer than 7 percent of the policies issued from applications it investigates. A spokesperson for Blue Cross claims the company rescinds “less than 1 percent” of all individual policies.

In the summer of 2008, the combined efforts of attorneys, the press, and regulators to halt unjustified rescissions had begun to have an impact. The DMHC announced the first of a series of agreements with insurers to reinstate thousands of individuals and to pay fines for rescinding their policies. By July 2008 three of California’s largest insurers – Blue Cross, Blue Shield, and Health Net – had stipulated that they would notify canceled policyholders to advise them of their various options for reinstatement or recovery of past medical expenses. The three companies were fined a total of $18.3 million, including a $10 million fine against Blue Cross of California that replaced the earlier fine of $1 million levied by the DMHC. Insurance Commissioner Steve Poizner then announced similar settlement agreements with Health Net in September and with Blue Shield in January.

The DMHC settlements and fines offered some relief for health care consumers, but they also produced tactical splits among consumer advocates. In particular, there were tensions between the plaintiffs bar and regulators at the DMHC over how hard to push insurers in revising rescission standards. “Somebody in Sacramento made a decision that we’re going to stop fighting the insurance plans,” Isaacs contends. “They flipped back to appeasement. Talk about an about-face.”

The bad feelings were evident at a daylong settlement conference held last September at the Central Civil West Courthouse in Los Angeles. Superior Court Judge Peter D. Lichtman had summoned the opposing sides to see if they could resolve more than 30 rescission cases pending against Blue Cross. Isaacs, Shernoff, Gianelli, and several other plaintiffs lawyers gathered early to map settlement strategy. (…)

Though the DMHC had categorized recent settlement agreements as historic wins for consumers, Gianelli summed up the plaintiffs bar’s dissatisfaction with the agency: “DMHC did get the insurance companies to agree to give coverage to those people [with rescinded policies], but beyond that, they didn’t do much.”

Added Shernoff, “These [settlement] agreements are designed to minimize payouts for the insurance plans,” and he noted that a new arbitration mechanism for seeking damages doesn’t permit testimony or expert witnesses.

Two weeks later, negotiations between the parties in the Blue Cross cases were officially declared dead. Plaintiffs attorneys say they later realized that when they began settlement hearings with Blue Cross and Judge Lichtman in the spring, the DMHC was already conducting its own negotiations directly with the insurers. “We found out that the DMHC had been secretly negotiating with all of California’s major insurers, including Blue Cross,” Shernoff says. “But they were not saying a word to the court or to us about those negotiations. You would think it was professional courtesy, if nothing else.” (A DMHC spokesperson says the department was under no obligation to disclose the negotiations.)

More bad feelings linger after an effort last year to pass a health insurance reform bill sponsored by Assemblymember Hector De La Torre (D-Los Angeles). The measure, AB 1945, would have established an independent review process for health care policy rescissions, and required an insurer to prove that a policyholder had willfully misrepresented any preexisting conditions before it could rescind coverage.

The L.A. City Attorney’s office backed the bill, offering suggestions for changes as the measure gathered support in Sacramento. In his State of the State address last year, Gov. Arnold Schwarzenegger also indicated support. He talked about “Todd,” a San Diego resident whose insurance company “went back through all of his records looking for a reason to cut him off” after his diagnosis of lymphoma. “They pointed to a knee problem, unrelated to cancer, and they noted that now he weighed less than he did when he applied for the insurance,” Schwarzenegger said. “Well, duh. Of course he did, because now he was sick with cancer. But they cut him off. … Todd died eight months later.
“We are taking action,” Schwarzenegger said, “so that what happened to Todd will not happen to any other Californian.”

And yet in September 2008, after AB 1945 passed both houses of the Legislature, Schwarzenegger vetoed the bill, explaining that it had been “written by the attorneys that stand to benefit from its provisions,” and that “real consumer protections” were not included. L.A. City Attorney Delgadillo released his own message following the veto, stating that Schwarzenegger “cares more about protecting the profits of the large corporations who’ve bankrolled his campaigns than he does about the health and welfare of California’s working families.”

By in the fall of 2008, the DMHC had filed an amicus brief in support of Health Net in one case and Blue Cross in another (in which it also filed a writ petition in an effort to block discovery).

According to the DMHC’s amicus brief for Blue Cross, the city attorney’s suit “would impermissibly impinge upon the department’s exclusive jurisdiction to regulate and enforce the [Knox-Keene] Act against health plans in California.” That could lead to the UCL and the False Advertising Law (FAL) being used to “second-guess” regulatory decisions in favor of terms the plaintiff may like.

For the record, Cindy Ehnes, director of the DMHC, says she doesn’t dispute the Los Angeles city attorney’s authority to file actions against health plans – unless those suits “concern the very laws and regulations the DMHC is charged with regulating.”

Resources

Further Reading

• Information about Casualty Insurance in the Gale Encyclopedia of American Law.