Woodland Hills insurer Health Net has agreed to pay as much as $14 million to settle a pair of lawsuits brought on behalf of 800 former policyholders whose coverage was dropped after they submitted substantial medical bills.

Under the deal, which won preliminary court approval Wednesday, individuals whose health insurance policies were canceled since 2004 are eligible for payments of up to $218,000. The average payment is expected to be $7,836.

The settlement would resolve a class-action lawsuit filed by Claremont lawyer William Shernoff, as well as a suit filed by Los Angeles City Atty. Rocky Delgadillo.

In addition to the payments to customers, it requires Health Net to pay a fine of $2 million to the city attorney and to contribute $500,000 to charities. Shernoff’s firm will earn $2.1 million.


It follows a two-year crackdown by state regulators on the widespread and controversial practice known as rescission. In deals with regulators, insurance providers Health Net, Anthem Blue Cross and Blue Shield all have agreed to make substantial changes in the way they sell individual coverage in an effort to reduce the number of rescissions.

In all, Health Net has agreed to pay more than $40 million to resolve the regulatory actions and litigation over rescission.

Health Net is the only company that has been forced to defend rescission at trial. Nearly a year ago, an arbitration judge awarded $9 million to Patsy Bates, a Gardena hair salon owner whose coverage Health Net dropped after she was diagnosed with breast cancer. The rescission forced her to suspend her chemotherapy treatments for several months.

That was one of 1,600 rescissions that helped Health Net save $35.5 million over several years, according to trial documents. The trial also revealed that Health Net paid bonuses to an employee based in part on how many rescissions she carried out.


Health Net stopped those bonuses and, under the settlement, agreed not to reinstate them.

“This case proved that no matter how much money these organizations make, they are not above the law,” said Invia Betjoseph, a San Jose family therapist who served as the lead class member in the suit against Health Net.

Betjoseph was left with about $8,000 in medical bills and went for more than a year without health insurance when Health Net rescinded his coverage three years ago. He said Health Net accused him of lying on his application for coverage.

Specifically, he said, Health Net alleged that he knew beforehand, but didn’t divulge in his application, that he had a benign mass, which he had surgically removed shortly after his policy took effect.

But Betjoseph said doctors didn’t discover the mass until after he had signed up with Health Net. His doctor wrote Health Net a letter in an effort to get his coverage restored.

“It said, ‘Mr. Betjoseph didn’t know about the mass because I, his surgeon, didn’t know,’ ” Betjoseph said.

The letter apparently was ignored, he said: “You work hard all your life, follow the rules and do the right thing, and, when you need them, they abandon you.”

Health Net said it was simplifying its coverage application and would do a better job of checking applicants’ health history in the future. It also said it was committed to broad-based insurance reforms that would end the practice of rescissions.


“Health Net believes all Americans should have access to high-quality and affordable healthcare,” it said in a statement. “To that end, we have been working with our regulators and the Legislature to reform the entire system in support of guaranteed issue and an individual mandate, which would make rescissions obsolete.”

Health Net’s class-action settlement is the first of its kind. Shernoff, the lawyer representing rescinded policyholders, said it was unusual in that it makes payments to class members without requiring them to submit claims.

Typically, he said, class-action settlements that require claims result in a very small number of actual payouts. He said class members would have the option of forfeiting the payout and filing a suit on their own.

Anthem and Blue Shield also face class-action suits alleging they gamed state insurance laws so they could cancel people’s coverage after they got sick and thereby avoid paying their medical expenses.

Delgadillo also has enforcement actions pending against the other insurers and said he hoped the Health Net settlement would “serve as a model for other companies which stand accused of engaging in unlawful rescission practices.”

The Health Net agreement includes provisions that parallel earlier settlements with regulators, including an offer to extend coverage to the affected consumers without regard to preexisting conditions.

It also requires Health Net to reimburse medical expenses paid out of pocket by former policyholders after they were rescinded.

In addition, Health Net agreed to extend its self-imposed moratorium on rescissions until lawmakers or regulators establish standards for them -- or until the company establishes a third-party review process that is acceptable to the judge overseeing the case.