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Blue Cross of California recently entered a settlement agreement to resolve a class action lawsuit against the health insurer concerning the nature of its individual health insurance business practices. Blue Cross had been accused of using innocent mistakes on poorly worded insurance applications to rescind policies after insureds submitted costly claims. After concluding that it would lose money based on costly claims, the company allegedly undertook a campaign to find the slightest misrepresentations on the application for insurance and rescind the policy leaving individuals without coverage and with thousands of dollars in unpaid medical claims.

As a condition of the settlement, Blue Cross agreed to modify its health insurance application form to make it more readable and user friendly. Also, Blue Cross agreed to only rescind individual health insurance policies when policy applications contained intentional and wilful lies. In other words, insureds in California who make honest mistakes in an application for health insurance cannot have their policies taken away from them when they submit claims and need insurance the most.

According to the Los Angeles Times, Blue Cross of California agreed to a series of changes in business practices to help the consumer health insurance policy-holders:

The move is part of an effort to settle a class-action lawsuit on behalf of as many as 6,000 people canceled since late 2001. It is an about-face for Blue Cross in what had become known as “use-it-and-lose-it” health coverage because the cancellations were often triggered by patients’ claims for treatment.

The insurer’s new stance is aimed at ending rescissions based on policyholders’ honest mistakes, inadvertent errors and other inconsistencies about their medical histories on applications for coverage. Consumers contend that the forms are purposely confusing, increasing the odds that applicants will make mistakes.

“This is a very significant consumer health victory … something we believe they should have been following all along,” said Cindy Ehnes, director of the state Department of Managed Health Care.

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“What we have tried to say to the plans is the process that you use to make those determinations is very flawed,” Ehnes said. “First you go back way too far in someone’s medical history. Most of us can’t remember what we ate for dinner last night, much less what the doctor told us 20 years ago.”

Among other changes, Blue Cross agreed to consult policyholders about application problems in deciding whether a rescission was justified.

An easier to read application makes it more difficult for an insurance carrier to claim rescission based upon poorly worded ambiguous application questions. Also, requiring the carrier to prove the consumer intentionally lied on the application before rescinding the insurance policy provides the consumer with protection for innocent yet incorrect application responses. Lastly, providing an appeals process after a policy has been taken away provides the consumer with an efficient tool to contest the company’s decisions. All of these concessions negotiated in the context of a class action lawsuit against Blue Cross protect individual policy-holders and demonstrate the benefit of that litigation. I congratulate Plaintiffs’ attorney William Shernoff, the California state Department of Managed Health Care and Blue Cross of California for their efforts.

I applaud Blue Cross of California’s decision to change its conduct and hope that health-insurance companies in Arizona do the same thing. Hopefully Arizona health insurance providers will enact similar measures and abandon efforts to use innocent yet incorrect responses on poorly worded and confusing insurance applications as a basis to take away health insurance policies when consumers need protection the most.

Do you have an individual health insurance policy in Arizona? Have you had similar problems? What do you think about the settlement in California? Do you believe health insurance companies in Arizona should enact the same changes here?

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