Arizona Injury Lawyer & Attorney : Koplow & Patane Law Firm : Insurance Bad Faith, Personal Injury, Auto Accidents : Phoenix, Scottsdale, Tempe, Arizona

Yet, consumers and lawyers who have challenged insurance cancellations say there are many examples of insurers targeting patients who have been diagnosed with chronic or life-threatening diseases that require costly medical care.

Several consumers have lodged complaints with the Arizona Department of Insurance about these policy cancellations, which are called "rescissions" by the insurance industry.

The practice has been scrutinized from California to Connecticut with some states passing tough measures or pursuing regulatory actions and assessing fines to restrict these retroactive health-policy voids.

In Arizona, two women say in separate lawsuits that Health Net of Arizona dropped their policies after they were diagnosed with cancer and that the insurer demanded that their doctors, labs and other medical providers refund payments.

Health Net settled one of the two suits, and the insurer expects to spend millions on legal costs for similar cases in Arizona and California. A Phoenix man sued Golden Rule Insurance Co. after his policy was dropped and the insurer refused to cover the costs to remove a brain tumor and other medical procedures.

The insurance industry recognizes how such cancellations are seen as controversial and has recommended changes that it says will be fair for consumers and insurers alike.

"We want consumers to have an enhanced peace of mind," said Mohit Ghose, a spokesman for Washington, D.C.-based America's Health Insurance Plans, a national association representing nearly 1,300 companies. "It is very clear to our members that rescissions are not necessarily the way to go. We want to make sure people are covered. You also have to have mechanisms in place to prevent fraud."

Under Arizona law, insurance companies are allowed to rescind an individual's policy without notifying state insurance regulators. Such rescissions can occur even after an insurer approves a consumer's application, authorizes medical treatment and makes payments to doctors, hospitals or other medical providers.

Insurance companies say such policy cancellations are an important way to combat fraud because consumers may fail to disclose pre-existing conditions or misrepresent important facts about their medical histories.

They say the practice of investigating a person's medical history and ferreting out such information is necessary to reduce costs and make premiums less expensive for the estimated 293,000 Arizonans who do not have access to employer or government insurance policies and instead have purchased individual health policies.

"The goal is to try to put a stop to this practice because it is hurting a lot of people," said William M. Shernoff, a Claremont, Calif., attorney who has filed dozens of lawsuits challenging such policy cancellations by insurers. "It is not only a financial burden on the people. When their coverage is pulled, they can't get treatment."

Health Net Scrutiny

Health Net faces perhaps the most scrutiny among large insurers for its policy cancellations.

In February, a California arbitration judge ordered the Woodland Hills, Calif.-based company to pay more than $9 million to a cosmetologist whose policy was eliminated while she received chemotherapy for breast cancer. Health Net claims the woman didn't reveal a heart murmur and inaccurately described her weight on a policy application.

The California arbitration case prompted Health Net to announce that it would no longer rescind policies without a third-party review.

But the company still faces many legal challenges in California, Arizona and elsewhere.

Last month, Health Net said it paid $43.2 million for legal costs and lawsuit settlements stemming, in part, from rescission practices in Arizona and California. The managed-care company also disclosed it wrote down an additional $35.8 million on its corporate books, in part because of costs related to these policy cancellations.

A Health Net spokeswoman declined to say how much the company expects to spend on Arizona cases or settlements.

"We're not breaking out the percentage between the two states," said Amy Sheyer, Health Net's director of communications. "These are legal issues, so we do not have any comment."

Court records show Health Net has been sued twice in Maricopa County over the past three years.

Phoenix resident Linda Iorio sued Health Net in 2006 after the insurer dropped her coverage while she was receiving treatment for breast cancer. The two sides settled the lawsuit in March. Neither Health Net nor the attorney representing Iorio would reveal payment terms.

Health Net had canceled Iorio's policy just as she was receiving treatment, claiming she didn't disclose to the insurer that she felt masses in her breasts before signing the application.

Depositions show Health Net never called Iorio before ending the policy. And Health Net did not call her doctor, either. A Health Net senior rescission analyst came across medical records that the insurer believed warranted the policy decision.

A second lawsuit is pending. Tanya Serrano, 33, was diagnosed with ovarian cancer and underwent an aggressive series of chemotherapy treatments to wipe out the cancer.

Right before she had a hysterectomy scheduled, she received a letter from Health Net informing her that her policy was canceled because she failed to disclose her full medical history.

At the time, Serrano felt weak and listless from her cancer treatments and had dropped significant weight. "I cried when they told me I had cancer. I cried when they told me I needed a hysterectomy. I sobbed when I got the letter from Health Net," Serrano said. "I was counting on them to carry me through the hardest thing I would ever go through. They let me down."

Complaints Received

Arizona insurance regulators are aware of the lawsuits and have received complaints about the practice, but they don't believe any one company has shown a pattern of wrongdoing.

It's unknown how many Arizona insurance policies are rescinded each year. Arizona law does not require insurance companies to report the number of policies dropped, according to Gerrie Marks, the agency's deputy director.

More than one dozen Arizona consumers have lodged rescission complaints with the agency over the past three years. Of the cases that the Arizona Department of Insurance has reviewed over that period, the agency has sided with the insurance company in all but one case.

"We've had a handful of complaints," Marks said. "None of them shows any kind of serious problems or concerns."

Consumer complaints are just one way that the state agency finds out about rescissions.

Insurance companies have reported dozens of fraud cases that led to rescissions. Marks said insurers may report such fraud, for example, if a consumer fails to disclose medical history or omits critical medical information. Health Net reports all its Arizona rescissions to the state as fraud cases.

Marks said Health Net has reported dozens of such fraud cases, but she said she could not immediately say what percentage of those fraud cases were actual rescissions. The agency also has fielded more than 100 consumer complaints about policy cancellations over the past three years. Some of those may have been rescissions, too.

Representatives of Blue Cross Blue Shield of Arizona, which provides insurance to about 1.1 million people, attempt to work with its customers before dropping coverage. The insurer rescinded just four policies last year, a spokesman said.

When Blue Cross Blue Shield discovers a person may not have provided all the necessary medical information, the company allows policyholders to explain the discrepancy.

"We would try to clarify that with the member before the policy is rescinded," said Carlos DellaMaddalena, a Blue Cross Blue Shield spokesman.

Even though Arizona regulators don't believe insurers are dealing in bad faith regarding rescissions, regulators in both California and New Mexico have pursued more aggressive policies to address the practice.

The California agency that regulates managed-care companies has launched an investigation of the rescission practices of the five largest insurers.

The California Department of Managed Health Care this month reached a settlement with Kaiser Permanente to reinstate coverage to 1,000 rescinded policyholders. The agency also expects to soon announce a settlement with Health Net.

The agency has received about 200 formal rescission complaints from consumers. That likely represents a small percentage of insurance consumers whose policies have been dropped, a California Department of Managed Health care spokeswoman said.

Also, New Mexico Gov. Bill Richardson recently signed a bill that limits insurance companies' ability to rescind a policy. Insurers must show a consumer has been "willfully fraudulent" before rescinding a policy. Before the change, insurers could merely point to a mistake or omission on an application before dropping a policy.

The New Mexico law raises the burden of proof for the insurer.

Even with states on each side of Arizona tackling the rescission issue, Marks said, there are no efforts in Arizona to strengthen existing laws or conduct investigations of existing companies.

The relatively small number of consumer complaints "indicates it really isn't an issue in Arizona," Marks said. "It doesn't raise any red flags."

Reminders of Battle

Despite the ordeal and emotional toll she experienced, Serrano said she feels better today.
"I'm fine healthwise," Serrano said. "I am fortunate the cancer was caught early."

Serrano and her husband later adopted twin babies. She moved from Chandler to Portland, Maine, to be closer to family.

Still, the reminders of her battle come every day. Bill collectors consistently send payment-demand letters and call her cellphone to remind her of what she owes.

Serrano and her husband are attempting to buy a home, but their credit is poor because of the piles of medical bills.

She wants to move beyond her anger over the ordeal, but she acknowledges it is hard. She dwells on the fact that companies such as Health Net employ workers whose job is to flag policies such as hers.

"There is a person sitting at a desk making this decision." Serrano said. "What goes through their mind? It is wrong. It makes me sick."

Arizona’s laws, unfortunately, do not permit the third-party claimant much, if any, recourse against an insurance company that is treating the claimant unfairly. Insurance laws prohibit “unfair claims practices,” but specifically prohibit claimants from suing insurance companies for “unfair claims practices.” The law does, however, allow claimants to sue insurance companies for “abuse of process” where the insurance company unfairly forces a claimant to litigate a case. However, to date, there have been minimal filings of these types of cases in Arizona due to the difficult nature of prevailing upon them.

Arizona law does use the term “third-party” bad faith in specific, complicated contexts. Generally speaking, and under certain circumstances an insured who is not being adequately protected by an insurance company and who may have a claim for bad faith against the insurance company may assign his or her bad faith rights to the third-party, who then may pursue the insurance company for its failure to protect the insured. There are many variations of this scenario. A simple example is the following: An insured causes a car accident and injures a the claimant. The claimant files a claim against the insured and the insurance company wrongly contends there is no coverage. The insurance company, therefore, has exposed the insured to personal liability for the claimant’s injuries. Thus, the insured has a claim for bad faith against the insurance company. In Arizona, the insured and the claimant may enter into an agreement where they agree to resolve the insured’s claim for a reasonable sum. As part of the agreement, the claimant agrees not to execute against the insured’s assets and the insured assigns his or her bad faith claim against the insurance company to the claimant. The claimant, having been assigned the insured’s bad faith claim, then pursues the insurance company for bad faith. This is called “third-party bad faith” in Arizona. The benefit to the insured is that he or she escapes personal liability. The benefit to the claimant is that he or she can proceed against an insurance company for the full benefit of the claim.

Normally, the insured selects an arbitrator, the insurance company selects an arbitrator, and then the two arbitrators agree on a third arbitrator. Your case is then presented to these arbitrators in a semi-formal setting. The presentation of evidence is usually abbreviated and takes place in a matter of hours, rather than days, as might be normal in a jury trial of the same matter. Once a majority of arbitrators agree on a finding, they issue it and it is final and not appealable. 

Some insurance companies, however, do not have arbitration clauses. In this scenario, the insured’s only option is to file a lawsuit and try the case to either a court-appointed arbitrator (in Maricopa County less than $50,000) or to a jury.