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Insurance Bad Faith

DO INSURANCE COMPANIES ENGAGE IN FRAUD?

     Insurance companies have a duty to handle their policyholders’ claims in good faith.  They are required by law to deal fairly and reasonably with their insured, especially in the manner they evaluate claims for payment.  Some companies, however, disregard these legal obligations in order to minimize costs and increase their bottom line.

     We heard the story of Patsy Bates, a breast cancer patient, who was insured with Health Net.  In the middle of chemotherapy, the insurance company dropped her health insurance coverage.  As a result, Ms. Bates was left to pay for these expensive medical treatments.  Ms. Bates fought back and sued Health Net.  In an arbitration that was held, the judge who presided the arbitration ordered Health Net to pay more than $9 Million to her.  The judge ruled that Health Net acted in bad faith and described its conduct as “egregious,” thus, warranting the imposition of punitive damages against the company.

     Last week, the LA City Attorney’s Office filed a lawsuit against Anthem Blue Cross and alleged a pattern of false advertising and fraud.  It was alleged in the complaint that the insurance company sold false promises of coverage and concealed a scheme to renege on policies for those with serious medical conditions.  The civil action demands restitution for patients who were left with medical bills and sought more than $1 Billion in penalties.

     For its part, the Department of Managed Health Care, a state agency sought to reopen policies dropped over the last four years by the state’s five major insurers to submit them for reconsideration to an independent arbiter.  Those determined to be wrongly cancelled would be reinstated.  With reinstatement, the insurers will be responsible for medical bills incurred while patients were without coverage.

     These events highlight the unfair and illegal practice of insurance companies to cancel policies at the time that policy holders are most in need of payments for much needed medical care.  The practice, known as rescission, defrauds the policy holder who after having paid premiums and relied on the existence of insurance coverage, is shocked to learn later that the insurance company rescinds the contract and refuses to pay on a claim.  The situation exposes the vulnerability of the policyholder who faces this situation when he or she urgently needs the insurance payment.  It also reveals the callous disregard of the insurance company to respond to the urgent needs of its own insured.

     Companies though are not without arguments.  They said that rescission is necessary to prevent fraud when consumers lie in their applications for insurance.  In practice, however, the companies focus on harmless mistakes or inaccuracies in the application in order to justify rescission.  When companies rescind based on harmless mistakes, they fraudulently deprive their own insured of the rightful benefits under the insurance contract.

     Unfortunately, this bad faith practice extends to other policies like home owners, life, disability or auto insurance.  In a case I pursued to trial before the Los Angeles Superior Court, I represented a disabled retiree who sued his insurance company which sought to cancel his home owner’s insurance.  The company sought to cancel purportedly on the ground that the home owner lied because he did not disclose his swimming pool in his insurance application.  The facts show that it was obviously a mistake on the part of the home owner who had his broker filled in the application and merely signed it at the end.  What is unfair, however, is that the insurance company knew that there was in fact a swimming pool because the homeowner allowed the insurance inspector to take photographs of his house including the swimming pool.  After our law firm’s investigation, we realized that the insurance company had photographs of the swimming pool right in its own files before any claim was filed.  Despite the photos in their file, the company said it “could not have known” that there was a swimming pool.  Nobody believed the insurance company and a 7 figure verdict was awarded in favor of the home owner.

     Some consumers were surprised to learn that this kind of misconduct could come from major companies.  However, the truth is that this is a reality that affects consumers and their families.  Consumers should therefore be careful in the way they fill in any insurance application.  They should spend the time and effort to check whether information provided is accurate and complete.  It is advisable to confer with a trusted family member or a friend to check or review this application. 

     Always expect that when consumers file a claim, company lawyers will scrutinize the application.  These company representatives will investigate if the insureds provided inaccurate information in their application so that they can later seek to rescind the insurance policies.

     Insurance policies are fraught with technical provisions that may be used to minimize or deny a claim.  When policyholders face the prospects of an insurance claim, it is always wise to consult with an experienced attorney knowledgeable in the field of insurance law.

© Law Offices C. Joe Sayas, Jr.