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Insurer cannot terminate association's health coverage.

In a case with important implications for people who obtain their health insurance through small membership organizations in California, a state appeals court recently held that a health insurer could not cancel its coverage of the San Francisco Trial Lawyers Association (SFTLA).

Health Net of California, Inc., told SFTLA in 2003 it would not renew its contracts because the association did not qualify as a "guaranteed association." A guaranteed association includes at least 1,000 insureds; about 300 people are insured under SFTLA's plan. Many of those members are sole practitioners who would have difficulty getting coverage otherwise. The association filed suit for breach of contract, and Health Net petitioned to compel arbitration.

A state superior court granted a preliminary injunction to block Health Net from terminating coverage and denied its petition. In December, a three-judge panel of the California Court of Appeal upheld the lower court's injunction but reversed and remanded its denial of the petition. (San Francisco Trial Lawyers Ass'n v. Health Net of Cal., Inc., Nos. A104458, A104459, 2005 WL 3473330 (Cal. Ct. App. Dec. 19, 2005).)

A California law requires insurers to insure guaranteed associations. Health Net cited this law in arguing that it was licensed to renew contracts only with this type of association.

The court of appeals disagreed. "Health Net did not address below, and does not address here, the association's argument that the statutory protection for 'guaranteed associations' does not explicitly prohibit Health Net from issuing contracts to similar kinds of groups," Justice Carol Corrigan wrote for the court.

"Nothing prohibits Health Net from issuing this coverage, and it's absurd for the company to suggest that they have been issuing coverage for the last seven years in violation of their license," said Terrence Coleman, a San Francisco lawyer representing SFTLA.

Corrigan noted in the opinion that the company had never produced its license and that there was "a lack of any conclusive information regarding the scope of Health Net's license." She added that the court's decision "neither resolves the licensing issue, nor does it preclude either party from seeking clarification of the scope of Health Net's license."

SFTLA's contracts with Health Net say it cannot terminate or fail to renew coverage without "good cause," such as the association's failure to pay or fraud, which did not apply in this case. Without this good-cause provision, Health Net could have canceled coverage, Coleman said. California law protects guaranteed associations, but "there's no statutory protection for associations like SFTLA," he noted.

The appeals court held that the superior court had erred in denying Health Net's petition to compel arbitration, saying it should have determined whether the arbitration clauses were enforceable. Corrigan wrote that the lower court concluded that "Health Net raised a legal issue to be decided by the court and not the arbitrator. The court did not resolve the question, however, apparently because it believed the issue would ultimately be decided in the context of SFTLA's action."

Coleman's firm also represents Eva Robertson, who used to be covered under SFTLA's plan, in a case against Health Net. When she learned Health Net was trying to cancel the association's plan, she tried to obtain an individual policy from the company. But typically individual policies are medically underwritten--based on preexisting conditions--and group policies are not.

The individual policy Robertson was offered was three times as expensive, Coleman said. "So she went to a local chamber of commerce and joined their coverage, which she then found out was also written by Health Net, and two months later, Health Net canceled that coverage as well."

Health Net also told the Organization of Women Architects and Design Professionals, based in Berkeley, that it would cancel its coverage. "Health Net essentially took over the California market for these association policies through several mergers," Coleman noted.

Carriers are trying to avoid insuring such groups, Coleman said, because if association members are covered under one policy, state law applies. But if the same number of people is covered under dozens of separate employers' policies, the Employee Retirement Income Security Act (ERISA) applies, preempts state law, and "essentially provides immunity to the insurance company for not fulfilling its promises to provide benefits," he explained.

"Carriers like Health Net that are trying to cancel out these coverages are really pouring gasoline on the fire," he said. "California has nearly 7 million people uninsured, and many people covered under SFTLA, for example, would not be able to obtain alternative coverage."

SFTLA's case highlights nationwide problems with health insurance, Coleman noted.

"It's such a precious commodity, and insurance companies are doing anything they can to avoid including large segments of our population in their insurance risk," he said. "They're more than happy to take on a little slice of healthy members of society, but they don't want to fulfill the essential purpose of insurance--to pool and spread the risk."
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Title Annotation:California
Author:Burtka, Allison Torres
Date:Mar 1, 2006
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