Long Overdue . . . but with a Catch

A panel of the 4th District Court of Appeals in Santa Ana, Calif., last week ruled unanimously that health insurers are responsible for reviewing applications before issuing policies and should not wait until beneficiaries run up large medical bills,

Carriers have created too much ill will by rescinding coverage after the fact. This phenomena has received more press in California, but there have been incidences in other states as well.

The court also ruled that insurers cannot rescind a health insurance policy unless they show that the policyholder willfully misrepresented his or her health or that the insurance company had investigated the application before issuing coverage.

The good news is, this SHOULD reduce rescissions.

The bad news is, longer time in underwriting from the time the application was submitted until issue. Some carriers turn around an application in a few days while others routinely take a month or longer.

a company cannot continue to "collect premiums while keeping open its rescission option if the subscriber later experiences a serious accident or illness that generates large medical expenses."

Many times a known pre-existing condition does not come to light until after the policy has been issued. An applicant may be aware of symptoms but does not see a medical professional for a diagnosis until after the new coverage is in place. This is particularly true where an individual is without coverage now and makes application.

This happens with some frequency. Several times each month I will be contacted about health insurance to cover anything from pregnancy to extensive testing and possible surgery.

As this ruling reverberates through the market there are several things that can happen in addition to longer underwriting time frames.

Fewer policies may be issued, particularly to people who are not currently insured.

Some policies come with 30 day waiting periods for illness. Expect this to become more prevalent and possible longer waiting periods.

Carriers may be unwilling to issue coverage when minor symptoms are revealed on the application.

Fraud is an issue, but so is carrier abuse. I have had a few clients experience rescission, but fortunately this is not a regular occurrence. One individual made a deliberate choice to withhold information from the application. Two months later she was back in the hospital, receiving treatment for a pre-ex condition. The carrier investigated and rescinded coverage retroactive to the effective date.

In another situation a carrier attempted to rescind a group plan after the risk letter had been issued. I intervened on behalf of my client and got the carrier to reverse their decision and issue the policy.

Rescissions are never popular but sometimes they are a necessary tool to protect the carrier against willful fraud. It will be interesting to see how this plays out.