Trade Group Sues Over New Calif. Insurance Rules

By SHAYA TAYEFE MOHAJER | August 23, 2010

A new regulation that makes it harder for health insurance companies to drop individual policyholders in California is being challenged in court by an industry trade group.

The California Department of Insurance’s new regulations require insurers to investigate the medical histories of those seeking individual policies before accepting any premiums. About 1.1 million individual health policies are regulated by the department.

The Association of California Life and Health Insurance Companies sued to stop the rules on Monday, accusing the state of acting “in excess of its jurisdiction and authority” by creating regulation that conflicts with the state’s insurance code.

The group’s spokesman, Richard Wiebe, called the new regulations unnecessary, saying they will impose new costs and inconveniences to insurers.

The regulations “require insurance companies to thoroughly review medical records dating back for years even though there’s no rescission being necessarily considered,” said Wiebe. It could take four to six weeks to complete such reviews, and the cost to do them would be built into premiums, he added.

Rescission refers to a term for dropping individual policyholders from coverage, often after they fall ill and try to make pricey claims. Rescission is legal when a policy is ill-gotten, typically because a policyholder lied or hid a serious previous illness on applications for coverage.

Insurance Commissioner Steve Poizner called the lawsuit “shortsighted and morally wrong.”

“Sometimes I think representatives in this industry have their heads permanently stuck in the sand. Illegal rescissions are a repugnant industry practice,” said Poizner.

In recent years, politicians and regulators have railed against the practice of rescission, in part because dropping individual policyholders after they’ve become ill usually makes it impossible for them to qualify for a new insurance policy.

Critics accused insurers of finding minor errors on applications and using them to drop coverage after policyholders fell ill.

To date, the Department of Insurance has assessed $4.6 million in fines in 4,000 policies that were allegedly dropped wrongly.

The state’s other insurance regulator, the Department of Managed Health Care, regulates 1.4 million individual policies, and has collected $13.7 million in settlements on rescission cases.

An expedited hearing has been scheduled to hear the case.

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