State Court Rules on Calif. Rescission Rules

By ALLISON BELL

California Superior Court Judge Michael Kenny has sided with insurers on some issues and with regulators on others in a ruling on tough new California rescission regulations.

The Association of California Life & Health Insurance Companies (ACLHIC), Sacramento, Calif., filed a suit, Association of California Life & Health Insurance Companies vs. California Department of Insurance, et al., Case Number 34-2010-80000637-CU-WM-GDS, in August 2010, an effort to keep California from enforcing anti-rescission regulations that were issued in July 2010.

Kenny, a judge in Sacramento, has ruled that ACLHIC that can bring the suit, and that the California Department of Insurance lacked the statutory authority to define a variety of rescission-related practices as unfair claim settlement practices.

The California department does have the authority to establish deadlines insurers must meet when trying to rescind policies, Kenny says.

THE REGULATIONS

A rescission is a procedure that a health insurer uses to rescind, or take back, a health insurance policy and return the former customer and itself to the states they were in before the policy existed.

California regulators have accused health insurers of using rescissions to cancel policies issued to individuals who made innocent mistakes on applications or left out information that was not relevant to their current health problems.

California tried to require insurers to:

– Complete investigations of possible omissions of material information from health insurance applications within 15 days of learning of the omissions.

– Complete investigations within 90 days.

– Send an investigation target a notice about an investigation every 30 days.

– Send the target a written notice about the final determination within 7 days of concluding the investigation.

THE SUIT

ACLHIC filed a petition contending that the regulations are too expensive and too difficult to implement, and that former California Insurance Commissioner Steve Poizner exceeded his authority when he developed the regulations.

The California Department of Insurance has questioned whether ACLHIC – an association of insurers, rather than an insurer – has standing to file the suit.

In California, an association can bring a suit if its members have standing to sue in their own right and it is seeking to protect interests that are germane to its purpose, Kenny says.

One section of the proposed regulations would require an insurer to follow specific medical underwriting guidelines if it wants to have the right to rescind a policy or otherwise change the policy terms after an insured files a claim.

The California department does not have the statutory authority to promulgate the section, Kenny says.

The language in the section would define violations of the rescission rules as an unfair claims settlement practice, and the California Legislature already has given a specific description of unfair claims settlement practices and given itself the sole right to define unfair practices, Kenny says.

Another anti-rescission regulation section would require an insurer that wanted the authority to rescind policies to send a complete copy of the application to the insured at the time a policy is delivered. That provision is invalid for the same reason that the medical underwriting requirements section is invalid, Kenny says.

The California department does have statutory authority to establish “reasonable timeframes within which an insurer must conduct a cancellation investigation after submission of a claim,” Kenny says. “The Court cannot conclude that the Department acted arbitrarily, capriciously, or without reasonable or rationale basis” in adopting the section.

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