California To Pursue Fine on Insurer for Allegedly Violating Claims-Handling Laws, Rescinding Coverage

California Insurance Commissioner Steve Poizner on Thursday said the state would pursue a $12.6 million fine against Blue Shield of California Life & Health for more than 1,200 alleged violations of claims-handling laws and individual health insurance policy cancellations, the Sacramento Bee reports (Chan, Sacramento Bee, 12/14). The penalty marks the first time the department has taken legal action against an insurer over its policy cancellations.

The department charged Blue Shield with illegally canceling 229 policies involving hundreds of claims. Half of the alleged violations relate to the insurer's cancellations of individual policies after treatment claims had been submitted. Blue Shield contends that coverage is rescinded if a member's application contains errors about his or her medical history. The insurer said the cancellations are legal and necessary to prevent fraud. However, insurance regulators accused Blue Shield of failing to evaluate members' applications before issuing policies. The insurer argued that such a process is time-consuming and costly. Regulators also accused Blue Shield of routinely failing to attach the applications to the policies when they are issued.

The other half of the violations involved claims handling, in which the insurer was accused of failing to pay interest owed on claims, mishandling member appeals and delaying payments (Girion, Los Angeles Times, 12/13).

Company President Duncan Ross in a statement said that the state's interpretation of policy cancellation laws "is simply wrong," adding, "We are outraged by the excessive penalties for nonsubstantive issues" (Sacramento Bee, 12/14). Ross said that the penalties are "not justified by the facts, as we will fight them vigorously" (Colliver, San Francisco Chronicle, 12/14).

Poizner said he had directed insurance regulators "to target" illegal policy cancellations "on an industrywide basis, and we will continue to take appropriate action as needed." Meanwhile, the state Department of Managed Health Care is continuing an investigation of cancellation policies for Blue Shield's HMO members in California. The probe is expected to be completed in early 2008 (Los Angeles Times, 12/13).