Last week an arbitrator, a retired trial court judge in California, awarded $9 million to Patsy Bates for the wrongful rescission by her health insurer, Health Net, of her insurance policy. The great majority of the award, $8.4 million, was punitive damages.

Bates was in the middle of being treated for breast cancer back in 2004 when Health Net retroactively cancelled her policy. She was left with more than $129,000 in medical bills. She stopped her chemotherapy for several months until, through charity, she was able to get the bills paid.

The arbitrator, Sam Cianchetti, had no kind words for the insurer. "Health Net was primarily concerned with and considered its own financial interests and gave little, if any, consideration and concern for the interests of the insured." The arbitration brought to light company documents showing that bonuses were paid to Health Net employees based on how much they saved the company in rescinding policies. On that score, the arbitrator stated, "It’s difficult to imagine a policy more reprehensible than tying bonuses to encourage the rescission of health insurance that keeps the public well and alive."

The arbitrator also refused to accept Health Net’s argument that the damage Bates went through as a result of the rescission was minimal. "It’s hard to imagine a situation more trying than the one Bates had to endure. She had valid health insurance, thinks she’s making a change when the rug was pulled from underneath and that occurred at a time when she is diagnosed with breast cancer, one of the leading causes of death for women."

In response to the arbitration award, Health Net announced that it was suspending rescission of all insurance policies until it had reviewed its practices. Courtesy of the L.A. Times, you can see a PDF copy of the arbitration award here.

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Don Levit 11/17/2008 01:47 PM
Brian: You do excellent detective work! To actually get the text of the arbitration in this important matter is helpful in understanding the inner workings of an insurer. One item not discussed in the text is why Ms. Bates had the incentive to switch insurers in the first place? Why weren't the original insurer's rates competitive with the new insurer's rates? After all, Ms. Bates was 4 years younger with her original insurer, and she had paid premiums over all that time, without, apparently, incurring much in the way of claims. Don Levit
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Don Levit 11/17/2008 01:47 PM
Brian: You do excellent detective work! To actually get the text of the arbitration in this important matter is helpful in understanding the inner workings of an insurer. One item not discussed in the text is why Ms. Bates had the incentive to switch insurers in the first place? Why weren't the original insurer's rates competitive with the new insurer's rates? After all, Ms. Bates was 4 years younger with her original insurer, and she had paid premiums over all that time, without, apparently, incurring much in the way of claims. Don Levit
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Brian S. King 11/17/2008 01:47 PM
Good question Don. I'm amazed at how variable insurer premiums can be. But it's also true that a good salesman can put lipstick on a pig in a way that few non-insurance folks would recognize. Getting non-sophisticated consumers to switch products in the financial services market based on a sales presentation when a competent, objective examination of the facts would pretty quickly reveal that the newcomer's product is not as good as the existing one happens all the time. Wouldn't you agree?
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Don Levit 11/17/2008 01:47 PM
Brian: Yes, I would agree, if the 2 products were fairly close in benefits and premiums. In this situation, after 4 years, that was probably not the case. Insurers typically block out policies every few years, when a new policy form is issued. It operates similar to a closed-end mutual fund: no new applicants are allowed to enter the block. Thjink what may happen to a church who does not allow new members to enter? The church eventually closes. In insurance, the premiums for the remaining members continues to increase, as the block dwindles. This scheme forces people to switch insurers every 4-5 years, unless one has relatively unlimited funds. Unfortunately for Ms. Bates, she will have a difficult time in another 4 years switching insurers, and most likely, affording coverage. Insurers tend to skew the odds in their favor, particulartly over time. Don Levit P.S. I just remembered, that she may have $9million in punitive damages. Maybe she won't need the insurance after all!
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