Health insurers can't wait until a policyholder is sick or injured to investigate the person's medical history and then abruptly cancel the policy on the grounds that important information was left out of the original application, a state appeals court has ruled.
On Monday, the Fourth District Court of Appeal in Santa Ana called a halt to a practice that lawyers for policyholders claim is widespread. Known as "post-claims underwriting," it has led to numerous lawsuits - mostly unsuccessful so far - and state enforcement actions against insurers.
The court stopped short of a strict pro-consumer standard advocated by state regulators and plaintiffs' lawyers. But the justices said health insurers can rescind policies after the fact, because of misinformation on the application, only by showing that they conducted a reasonable investigation before issuing the policy, or that the applicant deliberately lied.
California law requires insurers to verify applicants' health information before issuing a policy, rather than waiting until they file a claim, the court said. The purpose is "to prevent the unexpected cancellation of health care coverage at a time coverage is needed most," said Justice Richard Aronson in the 3-0 ruling.
The ruling, the first by an appellate court on the issue, sets a precedent for other cases around the state. It applies only to health plans and insurance policies issued to individuals and their families and not to employer-based coverage, which does not require individual applications.