Blue Shield of California on Wednesday vigorously denied allegations in a proposed class action accusing the insurer of illegally shutting down policies in order to nudge sicker patients into plans that are costlier or provide fewer benefits.

The lawsuit, filed Tuesday by California-based advocacy group Consumer Watchdog, centers on so-called death spirals that can result when insurance blocks are closed to new customers. In such a scenario, consumers are given the option to transfer to lower-value plans, and patients with pre-existing conditions often can't find coverage.