An oxymoron is a rhetorical figure in which incongruous or contradictory terms are combined. Rescission is an equitable remedy that has existed before the American Revolution and is an essential part of British and American common law. In California the remedy of rescission is governed by statute. To call a rescission “illegal” is to state an oxymoron.
Regardless, the California Insurance Commissioner stated that “Illegal rescissions are a repugnant industry practice.” Because rescission is a remedy available to parties to a contract it cannot, by definition, be illegal. It might be unenforceable or exercised in bad faith, but it can never be “illegal.” Similarly, the U.S. Congress, in its more than 2,000-page health insurance statute, limits the right of insurers to rescind a policy.
The Assn. of California Life & Health Insurance Cos. (ACLHIC) filed a lawsuit in an effort to keep California from enforcing new anti-rescission regulations presented by the California Dept. of Insurance (CDOI), which attempts to change California statutory and common law. ACLHIC, based in Sacramento, alleges in a petition filed in a state court in Sacramento that the regulations are too expensive and too difficult to implement, and that California Insurance Commissioner Steve Poizner exceeded his authority when he developed the regulations. Poizner has put out a statement calling the suit “unconscionable.”
A regulator is not a legislator. A regulator cannot, and should never, attempt to change a statute and deprive a party of the right to obtain a remedy hoary with age by a mere regulation.As early as 1937, the California Supreme Court confirmed the rule of law of rescission in California as follows:
A false representation or a concealment of fact whether intentional or unintentional, which is material to the risk vitiates the policy. The presence of an intent to deceive is not essential. Telford v. New York Life Insurance Co. (1937), 9 Cal 2d 103, 69 P.2d 835; Barrera v. State Farm Mutual (1969), 71 Cal 2d 659, 79 Cal. Rptr. 106. (Emphasis added.)
When an insurer learns that it issued a policy based upon misrepresentation or concealment of a material fact, it can declare the policy void from its inception by returning to the putative insured the premium paid so that both parties are in the position they were in before the policy was issued. If an insurer attempts to rescind a policy where it knows there is no misrepresentation or concealment, it can be subject to litigation for the tort of bad faith. Under no circumstances, regardless of the comments made by the insurance commissioner, can the rescission be illegal. To call it such in a regulation is a canard and an indication that the CDOI either has no idea about the law of rescission or is ignoring statutory and case law. The regulations, as the CDOI now tries to enforce them, are acting in such a way as to allow a health insurer to be easily defrauded since it will be “illegal” to rescind even if it is the victim of material misrepresentation or material concealment. Rather, it must immediately prove that the insured intended, at the time they applied for insurance, to defraud the insurer, an obligation much more stringent than the statutory and case law.
The CDOI has accused health insurers of using rescissions to rescind policies issued to individuals who had made innocent mistakes on applications or left out information that was not relevant to their current health status. The statutes with regard to health insurance only allow rescission for intentional misrepresentation–unlike property-casualty policies that by California statute may be rescinded for innocent material misrepresentation or innocent material concealment. It is, by definition, impossible to rescind a health policy for innocent mistakes by current statutes.
In regulations that were set to take effect Aug. 18, 2010, the CDOI’s regulations required insurers to start investigations of possible omissions of material information from health insurance applications within 15 days of learning of the omissions; to complete investigations within 90 days; to send an investigation target a notice about the investigation every 30 days; and to send the target a written notice about the final determination within 7 days of concluding the investigation. The time limits make it almost impossible to comply and obtain sufficient information to prove fraud.
The issue of rescission of health insurance policies was first raised in California in Hailey v. California Physicians’ Service (158 Cal.App.4th 452, 69 Cal.Rptr.3d 789 [Cal.App. Dist.4 12/24/2007]), which could have helped the Hailey family while making health insurance so expensive as to become extinct for the rest of the citizens of California. The rescission regulations that are the subject of the ACLHIC suit follow Hailey, which revealed that in California, the test of rescission is different for health plans:
[S]ection 1389.3 precludes a health services plan from rescinding a contract for a material misrepresentation or omission unless the plan can demonstrate (1) the misrepresentation or omission was willful, or (2) it had made reasonable efforts to ensure the subscriber’s application was accurate and complete as part of the precontract underwriting process.
What the CDOI fails to note is that after the Court of Appeals decided Hailey, the case was tried and the Haileys admitted that they intentionally misrepresented material facts and the trial court dismissed their suit. This decision should have resolved the issue.
There is a statute that requires a willful misrepresentation to rescind a health plan. The Haileys admitted to willful misrepresentation and the rescission of their policy was upheld. They never would have made the admission if the insurer was compelled to complete its investigation in 90 days.
The decision with regard to misrepresentation on a health insurance application is a factual issue that requires willfulness. If the Haileys had told the truth originally, their policy would have been rescinded and the Court of Appeals decision would never have been issued. Rather than what actually happened, summary judgment would have been granted for the insurer.
A thorough investigation of all of the facts stated in an application, as required by the regulations for a health plan or an insurance policy, can take months to complete and will cost the insurers thousands. If every one of the more than 30 million people living in California applies for insurance, they would not pay the $5,000 it would cost, at a minimum, to allow the insurer to complete the investigation required by the regulations.
A proper pre-risk investigation like that contemplated by Hailey would require checking all medical records of all members of the family seeking insurance, all of their finances, their claims history, their litigation history and interviews of the people they know to determine if the prospective insured is honest, reliable, of high moral character and healthy.
The insurer that does not conduct an investigation will pay claims on risks it would not take had it received complete and honest responses to its inquiries and could not predict actuarially the losses it might incur in the future. The insurer that desired to conduct the investigation required by Hailey would sell no policies, and the insurer that does not conduct the investigation will sell policies and be subject to losses caused by applicants who are not truthful.
Rescission is an ancient equitable remedy and should be honored and enforced. People like the Haileys, who obtain insurance by misrepresentation or concealment of material fact, should not be honored with insurance coverage which they were not eligible to buy. Insurance is not a right; it is a contract that requires that both parties exercise utmost good faith in negotiations for the contract.
The new health insurance law has similar requirements.
Insurance agents and brokers selling health insurance policies should be careful to explain to their customers the importance of truthful responses to questions on applications for insurance, whether they are health or property and casualty policies. The law of rescission varies by state, with the right more difficult to obtain in some states than others. If an insurer attempts to rescind a policy and the insured sues the insurer, it is a certainty that the agent or broker who placed the insurance will be named as a defendant. Files should be documented so there is no question that each inquiry on the application was made to the proposed insured in words the proposed insured understood, and the answers were those of the insured and not the agent or broker. The prudent agent or broker will never suggest or change an answer.