3rd May 2011

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Post-claims underwriting; Insurance Code

Insurers subject to the INSURANCE CODE, not the Health and Safety Code, are governed by Insurance Code § 10384 as it relates to post-claims underwriting. [Nazaretyan v. California Physicians Service (2010) 182 Cal.App.4h 1601, 1608, 107 Cal.Rptr.3d 137] Insurers licensed under the HEALTH AND SAFETY CODE must comply with Health and Safety Code § 1389.3 as it relates to post-claims underwriting. [Nazaretyan v. California Physicians Service (2010) 182 Cal.App.4th 1601, 1608, 107 Cal.Rptr.3d 137] See § U11:2 Post-claims underwriting; health insurance, infra.

In Nieto v. Blue Shield of California Life and Health Ins. Co. (2010) 181 Cal.App.4th 60, 103 Cal.App.3d 906, the Court of Appeal affirmed on multiple grounds the insurer’s rescission based upon intentional or unintentional failure to disclose material information in an application. [Nieto v. Blue Shield of California Life and Health Ins. Co., 181 Cal.App.4th at pages 76-77] Nieto, supra, held that the ‘medical underwriting requirements’ in Hailey v. California Physicians Service (2007) 158 Cal.App.4th 452, 463, 69 Cal.Rptr.3d 789 do not apply to an insurer licensed under the insurance code. [Nazaretyan v. California Physicians Service (2010) 182 Cal.App.4th 1601, 1608-1609, 107 Cal.Rptr.3d 137] See “Medical Underwriting” defined, infra.

Department of Insurance regulations adopted 2010; regulations define prohibited post-claims underwriting and set detailed standards insurers must meet before rescission can take place

The Department of Insurance has adopted regulations governing the Insurance Commissioner’s evaluation of the clarify and simplicity of questions on a health history questionnaire intended to be used for medical underwriting by the insurer. The regulations prohibit insurers from rescinding, cancelling or limiting an insurance contract unless they can meet the standards set for avoiding prohibited post claims underwriting or if the insurer is unable to prove fraudulent claims or fraudulent assertions on the applications for coverage. The regulations define prohibited post-claims underwriting and set detailed standards that insurers must meet before they can legally rescind an individual’s health insurance coverage. [Title 10 Cal. Code Regs. §§ 2274.70 – 2274.78 (2010)] See § APPENDIX K (Insurance Commissioner Regulations enacted 2010).

Procedures for investigations regarding rescission or cancellation of health insurance

Immediately, but in no event later than seven (7) days after an insurer’s decision to commence an investigation or review regarding whether an insured misrepresented or omitted material information prior to the issuance of a policy, the insurer must send a written notice to the insured that it is conducting an investigation. [Cal. Code Regs. § 2274.78(d)] The insurer must clearly describe, in lay terms, the reason for the investigation and the substantive information on which the investigation is based. It must include with the notice copies of any applicable documents, such as claims, medical records, or other information in the insurer’s possession at the time of the notice. The insurer must provide to the insured all documents the insurer uses in its investigation that provides the basis for initiating the investigation, except an insurer is not required to provide documents that are otherwise protected by law. [Cal. Code Regs. § 2274.78(e)] The insurer conducting the investigation cannot seek information that is not reasonably required for or material to the resolution of the investigation. The insurer must now request information from the insured that it can obtain directly, including but not limited to medical records. [Cal. Code Regs. § 2274.78(f)] The investigation must be completed promptly, but in no event later than ninety (90) days after delivery of the notice of investigation, unless good cause for the delay exists. [Cal. Code Regs. § 2274.78(g)] No later than seven (7) calendar days after concluding this investigation, the insurer must send a written notice to the insured, which shall include detailed findings and the insurer’s final determination regarding the insured’s health insurance coverage. [Cal. Code Regs. § 2274.78(h)] The notice of findings must state that if the insured believes the decision is incorrect and wishes to dispute it, he or she may have the matter reviewed by the Department of Insurance. The insurer cannot require the insured to file an appeal with the insurance company before seeking assistance from the Department of Insurance. [Cal. Code Regs. § 2274.78(i)]

Applicant’s inability to recall or remember information when filing out application

Questions on an application for health insurance must offer the applicant an opportunity to indicate the applicant’s inability to recall or remember the information requested. To the extent that such response choices impede the insurer’s ability to apply its medical underwriting guidelines, the insurer must pursue alternative methods of obtaining such information including but not limited to telephone interviews, medical records or other sources of information. [Cal. Code Regs. § 2274.73(d)(5)]

Application questions must provide each applicant with the opportunity to state whether he or she is unsure of the answer, does not know how to respond to any individual health history question, or does not understand the question. Health history questions must offer response choices IN ADDITION to yes or no, such as not sure. [Cal. Code Regs. § 2274.73(d)(4)]

Format of questions contained in an application for health insurance

To avoid unclear, ambiguous, or abstruse questions which may be likely to mislead, an application for health insurance cannot:

1. include compound questions requiring a single answer or questions containing double negatives;

2. include questions that are unlimited in time and scope unless the insurer’s medical underwriting guidelines based on sound actuary principles reasonably require an unlimited time and scope;

3. include questions requiring the applicant to evaluate or understand the significance of a physical symptom, or the cause of physical symptoms;

4. include questions requiring applicant to guess or speculate regarding the kinds of symptoms that may be significant to the health insurer;

5. include questions phrased to require an applicant to guess or speculate about the significance of symptoms, conditions, disorders or impairments;

6. ask the applicant to make an overall appraisal of the applicant’s general health or draw general conclusions about the applicant’s medical health status;

7. include any questions which solicits or is reasonably calculated to solicit information regarding an HIV test result. [Cal. Code Regs. § 2274.73(e)(1)-(7)] See § A78 APPLICATION [§ A78:10 Rescission by insurer; CGL policy].

Required review by insurer of application information prior to issuance of a health policy

Insurers must review the applicant’s responses in, or submitted with, the application for health insurance and identify all responses contained within the application or information submitted with the application that appeared to be (1) inconsistent, ambiguous, doubtful or incomplete, (2) in conflict with information reported elsewhere on the application in conflict with any other information the insurer is aware of or in the insurer’s possession, including but not limited to medical records, “personal health record” (PHR) defined at Cal. Code Regs. § 2274.72(d), prior claim history for an application submitted for coverage provided by the insurer on an earlier date or information provided by an assisting agent. [Cal. Code Regs. § 2274.74(b)(2)]

The insurer must conduct reasonable and appropriate follow-up of any inadequate, unclear, incomplete, doubtful or otherwise questionable or inconsistent material information on the application before issuing a policy. [Cal. Code Regs. § 2274.74(b)(3)] The insurer must obtain clarification from the applicant, as reasonable and necessary, and resolve all inconsistencies, doubts and questions prior to issuing a health policy, and document such resolution and explanation of such inconsistencies, doubts and questions. [Cal. Code Regs. § 2274.74(b)(4)] With regards to questions the applicant did not understand, or partially answered, or had doubts about the answer to the question, or omitted or provided answers that conflict with other information, the insurer must resolve any such identified uncertainties, questions, conflicts or doubts. [Cal. Code Regs. § 2274.74(b)(5)]

Insurer prohibited from rescinding policy; circumstances

Unless the insurer has complied fully with the above, the insurer is prohibited from rescinding, cancelling, limiting a policy or certificate, or increasing the rate charged, after receiving: (1) a request for authorization of service or verification of eligibility for benefits, (2) notice of a claim, (3) a claim or a request for a change in coverage or (4) any other communication that puts the insurer on notice of a claim. [Cal. Code Regs. § 2274.74(c)]

Insurer must return a completed application for health insurer to the insured

At the time of issuance and delivery of a health policy, the insurer must return to the insured a complete copy of the application for health insurance attached to the health policy with an express instruction to the applicant to review the copy of the application. [Cal. Code Regs. § 2274.77(a)] Applicant will be asked immediately to contact the insurer if there are any discrepancies on the application compared with the information submitted by the applicant. [Cal. Code Regs. § 2274.77(b)] An insurer must not use information on the application unless the application is attached to or endorsed on the policy at the time the policy is delivered to the insured. [Cal. Code Regs. § 2274.77(c)]

“Medical underwriting” means the process of determining the relative risks of providing health insurance coverage to an individual by examining medical and other information and applying medical underwriting guidelines. The purpose of medical underwriting is to reject or accept the proposed insurance risk and, if accepted, to set the level of coverage and the rate that will be offered. [Title 10 Cal.Code Regs. § 2274.72(f)] Medical underwriting includes, but is not limited to (1) obtaining applicant’s personal health record, (2) obtaining and evaluating commercially available medical underwriting information for each applicant such as commercially available claims data, claims data from prior insurers if available, or commercially available pharmaceutical information, (3) reviewing and evaluating such information, (4) verifying that the information submitted by the applicant is accurate and complete, (5) assessing the prospective risk to the insurer, (6) determining whether to accept the identified risk. [Title 10 Cal.Code Regs. § 2274.74(a)(1)-(7)]

* BOLD references are to Mr. Cornblum’s 2-Volume legal treatise CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE. The new 3-Volume 2011 Edition to be published by West Publishing mid-2011. You may purchase the treatise by clicking here.

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