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Insurance Industry Sues to Halt Anti-Rescission Rules in CA

Cheryl Clark, for HealthLeaders Media, August 20, 2010

California insurance regulators Thursday said they will fight a lawsuit filed this week by a group of 38 insurance companies who seek to invalidate new rules to prevent health policy rescissions.

"These regulations are unnecessary and will impose new costs, inconvenience and privacy intrusions on consumers," said Richard Wiebe, spokesperson for the Association of California Life and Health Insurance Companies, which filed the lawsuit in Sacramento Superior Court.

"Federal healthcare reform, effective on September 23, limits rescission to instances of fraud or intentional material misrepresentation.  Health insurers in the individual market have already instituted new standards, which include a clear explanation of underwriting requirements and independent, external reviews of rescissions."

But California Insurance Commissioner Steve Poizner Thursday vowed to fight the association's complaint. He said the insurance industry's lawsuit is "unconscionable" and accused its leaders of having "their heads permanently stuck in the sand.  Illegal rescissions are a repugnant industry practice. In this current environment this lawsuit is simply short-sighted and morally wrong."

"Previously, insurance companies took advantage of ambiguity in existing laws to inappropriately rescind health insurance policies for individuals when they need health insurance coverage the most—after filing claims for medical treatment," Poizner said in a statement.

The association's lawsuit alleges, in part, that the state acted outside of its jurisdiction and that the state has "attempted to create new law.  This is the province of the Legislature, not of an administrative agency such as the CDI (California Department of Insurance)."

A key portion of the new rules, which took effect Wednesday, seeks to put more of the burden of determining the health status and history of a health policy applicant on the insurance underwriter.

"For example," the lawsuit reads, "under the (new) regulations if an underwriter made any error when evaluating whether to offer coverage to an applicant, the insurer is prohibited from later seeking to rescind the policy if it learns that the insured misrepresented or concealed significant aspects of his medical history when applying for coverage."

The lawsuits adds that the new regulations, in contrast with the existing state statute, "are in conflict, and favor an insured who has acquired his policy through insurance fraud over an insurer who made a minor and unrelated mistake in underwriting coverage."

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