Health insurers, long under fire by consumer protection groups for the practice known as rescission, now have the onus of proving fraud before canceling the coverage of subscribers who run up big medical bills.
The consumer protection, made possible by Assembly Bill 2470, went into effect this year to conform with the federal health care law, which as of last fall outlawed rescissions based on innocent or minor consumer mistakes.
The new law is particularly important for the millions of Americans who buy insurance on their own in the individual policy market.
Under the state law, insurers must notify subscribers at least 30 days in advance of a policy cancellation.
Insurers also must tell subscribers of their right to appeal – and if the decision is appealed, the policy must remain in force while state regulators perform a review.
In recent years, rescissions have stirred the ire of consumer health care activists who say insurers have been unfairly and unjustly yanking coverage from customers most in need of medical help.
The new rules make sure "that health plans and insurers not act as 'judge and jury' whenever they want to rescind or cancel by giving enrollees the right to appeal a rescission or cancellation to state regulators," the California Medical Association said in an analysis.
In recent years, insurers paid millions of dollars in fines because of what state regulators deemed as unjustified rescissions.
Anthem Blue Cross, for example, agreed in 2009 to pay a $1 million fine and reinstate health policies to more than 2,300 consumers whose medical insurance coverage was canceled.
Anthem also agreed to reimburse consumers for out-of-pocket expenses totaling $14 million, according to a deal brokered by the state Department of Insurance.
The company, which provides coverage to half of all Californians with individual health insurance policies, was ordered to change how it handles rescissions.
That same year, the Department of Insurance announced that Blue Shield of California was reinstating medical insurance policies to nearly 700 consumers. Earlier, Health Net said it would restore coverage for nearly 1,000 subscribers.
Because of the increased scrutiny, insurers have been less aggressive about rescinding policies.
"It does not mean people won't be rescinded; they have more rights to have justice," said Jamie Court, president of Consumer Watchdog. "We still hear of cases, but it's no longer the big brand-names" companies.
The federal health care law cracked down on rescissions and gave consumers the right to sue insurers, but it provided few other remedies.
That's where the state law stepped in.
"What the state law does is make it a little simpler and easier to avoid a rescission," Court said. "It's no fun to go to court."