In a victory for consumers, a state appeals court Tuesday opened the way for class-action lawsuits against insurers that may have improperly dropped individuals for alleged errors and omissions on applications after medical claims had been submitted.
The 2nd District Court of Appeal called into question California health insurers' practice of waiting until individual policyholders incurred medical expenses before scrutinizing individual policies for misstatements, then canceling coverage for omissions and errors.
The court said that if an insurer failed to properly attach a copy of the completed application to an individual's policy, the company forfeited the right to cancel. The practice of looking back at applications after medical claims are submitted, known as post-claims underwriting, "is flatly prohibited," the three-judge panel said in a unanimous decision.
Blue Shield of California Life & Health Insurance Co. maintains that state law allows insurers to cancel individual policyholders who make omissions or misstatements on coverage applications -- even if those discrepancies are discovered after medical claims are submitted. Still, the insurer says, it rescinds policies sparingly.
The company also contended that it complied with state law in making reference to the application in the policy.
Blue Shield spokesman David Seldin said the ruling was limited. "The only issue that the court was considering was the very narrow, technical issue on whether a class can be certified, and they ruled that a class can be certified," Seldin said. "And presumably this will now go forward as a class action."
But others following the controversy said that the decision, even though it is technical, bodes poorly for Blue Shield and could affect the outcome of similar suits against other insurers.
"This decision will likely invalidate thousands of health insurance recisions," said William Shernoff, a Claremont lawyer who represents policyholders.
These cases, examined in articles in the Los Angeles Times, are under scrutiny by the courts, state regulators and the Legislature. Bryan Liang, executive director of the Health Law Institute at California Western School of Law in San Diego, said the appellate court decision was "really going to open the doors to changes in policies by the insurers or a lot more lawsuits."
Dr. Richard Frankenstein, president of the California Medical Assn., said the ruling was "an important victory for patients."
"Denying coverage or payment to a policyholder after the fact creates a horrible situation for the patient," said Frankenstein, a Garden Grove lung specialist. "Hopefully, the courts are showing that they understand the importance of fairness to people who have tried their best to meet their obligation to have their healthcare paid for."
Jamie Court, a spokesman for the Santa Monica-based Foundation for Taxpayer & Consumer Rights, said regulators should determine how many policies have been canceled improperly under the standards set out in the decision and move to reinstate them so that patients in need of treatment won't have to wait for the legal process to play out. "If Blue Shield can't offer at least the due process of a staple and a photocopy, then it shouldn't be allowed to ruin people's lives by taking away their healthcare coverage and refusing to pay their big medical bills," Court said.
Noting that the case involves attaching the application to the policy, he quipped, "It appears that this time justice comes in the form of a staple."
The suit at issue was brought by a Los Angeles jeweler whose policy was canceled after he submitted medical bills for more than $100,000 incurred when his appendix burst.
Augusto Ticconi contended that Blue Shield investigated his application only after he submitted the bills in an effort to avoid paying them and that a reasonable inquiry would have determined his answers to the application questions about his medical history were truthful.
In any event, Ticconi contended, Blue Shield could not rescind his coverage over anything in the application because the company failed to attach his application to his policy when it initially issued it.
He also asserted that Blue Shield's failure to attach applications to policies invalidated all recisions based on them. And he asked a Los Angeles County trial judge to allow his case to move forward on behalf of others whose policies had been rescinded without proper attachment. Blue Shield contends that it complies with the law by incorporating the applications by reference in the policies. The company argued that the case should not proceed as a class action because the reasons for cancellation differ for each policy.
The trial court sided with Blue Shield, rejecting the class action. The appeals court said the lower court got it wrong and sent the case back.
Blue Shield reinstated Ticconi's coverage shortly after he filed suit. But his lawyer, Timothy Morris, said he wanted to proceed with the case on behalf of others. Ticconi died last fall, but Morris said he will replace him with a new lead plaintiff.
"It's a perfect case for class treatment," Morris said. "It's a procedural issue. All we're asking for is that Blue Shield reverse recisions" made on policies that didn't have applications attached.
The case involves health insurance policies purchased by individuals. Group coverage, such as that sponsored by employers, is not vulnerable to such cancellations because, by law, it must be extended to every member of the group who desires it.