A health insurance policy is a binding contract issued by an insurance company to an individual or group in which the insurance company promises to pay for health care reasonably required by the policyholder to treat the illness or injury of persons covered by the policy.
When you apply for insurance and sign an application, you answer questions and provide information about the medical history of anyone who will be covered under the policy. In doing so, you must reveal any serious medical condition or treatment that might reasonably affect the decision by the insurer to undertake the risk associated with providing the coverage.
Generally, insurers cannot arbitrarily cancel an individual’s coverage under a policy. Federal and state laws prohibit discrimination based upon race, national origin, gender, or age. Some states also prohibit insurers from canceling health care coverage of people with mental dementia (such as Alzheimer’s disease), HIV, or mental illness.
Health care insurance policies can be cancelled if there is a material omission or misrepresentation made by a policyholder in the application for coverage. Even if the policy is issued and premiums are paid, the insurer can still cancel the policy later if they discover that the policyholder did not disclose significant medical history in the application that they would reasonably be expected to disclose.
The results of the cancellation are that the policy is canceled, the insurer does not have to pay for the care that was rendered, and the premiums paid on the policy are returned to the policyholder, minus a reasonable cost associated with the period of time during which the policy was in force.
Generally, state law and the policy itself provide that the insurer has only 2 years from the date of application to cancel a policy. If discovery of the omission or misrepresentation occurs after the passage of the 2 year period of "contestability", the insurer is generally out of luck and cannot cancel the policy. After the period of contestability, an insurer may only be able to contest a claim on the basis of intentional fraud on the part of the policyholder.
Normally, there is no prohibition against policyholders canceling their health insurance coverage or their participation in a health service plan. One major exception to this is in the case of Medicare assignments. If a Medicare recipient has chosen to obtain private insurance or HMO coverage involving an assignment of the Medicare benefits to the insurer, the Medicare recipient must apply to the Health Care Financing Administration (HCFA) before changing insurers or plans. Otherwise, there is no financial penalty for canceling health insurance coverage.
If your insurance company cancels your policy without a justifiable reason for doing so, then you should retain an attorney. Health insurance policies can be extremely detailed and difficult to read. An experienced insurance attorney can explain the policy’s complex legal terms and inform you whether you have a case.