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Is Fraud Still Fraud After 2 Years?

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Industry argues for recourse after 2-year LTC contestability period


When is fraud really fraud and should a long term care carrier have recourse after a two-year period of contestability?

These two questions continue to generate considerable discussion as regulators at the National Association of Insurance Commissioners work to update the Long Term Care Insurance Model Act.

Specifically, post-claims underwriting and the recission of long term care contracts after a contestability period ends are practices that regulators and consumer advocates are challenging as being potentially abusive. Insurers, on the other hand, say they provide them with protection from those who fail to divulge the state of their health accurately at a contract’s issue.

The discussion at the Senior Issues Task Force during the NAIC’s summer meeting here centered on the model’s Section 7 Incontestability period. In particular, insurers are concerned about the elimination of a provision that addresses the right of an insurer to contest a policy or certificate if the insured “knowingly and intentionally misrepresented relevant facts relating to the insured’s health.” The draft now simply reads: “After a policy or certificate has been in force for two years it is not contestable.”

“Up until this draft, we had deterrence language in there,” said Victoria Femea, senior counsel-litigation, with the American Council of Life Insurers, Washington.

Wisconsin Insurance Commissioner Jorge Gomez asked if incontestability should be kept indefinitely to which Femea responded that “fraud is fraud.”

But Gomez asked for specific examples to be brought to the task force.

“I don’t know what magnitude of a problem it is for the industry,” he said. “I have yet to hear of when a company has found fraud in an application.”

Gomez added: “I haven’t seen evidence from the industry that fraud can’t be found within two years after an application.”

Kathy Greenlee, a long term care ombudsman for Kansas, said that thorough underwriting needs to be done upfront at the time of application. She compared it to a security system being installed rather than waiting until one is burgled.

Femea referred to data from a sampling of five ACLI members’ recission reporting forms for 2002 to 2004. The highest number of recissions reported was 12 out of 483,000 policies in force in 2003, while several carriers had no recissions with policies in force ranging from 20,640 to 400,000.

Bonnie Burns, training and policy specialist with California Health Advocates, Scotts Valley, Calif., said that in her 20-year career, she has had about a dozen cases in which a family comes to her after a claim has been denied or premiums refunded.

She says the family is often outraged that the parent is being accused of fraud. The problem could be a casual remark about forgetfulness that is put into a patient’s record by a doctor without the patient’s knowledge, Burns explains.

According to Dalora Schafer, an Oklahoma regulator, it also could be that the insured might put trust in an agent who just tells them to sign the contract.

But ACLI’s Femea responded by saying there is a knowledge of a misstatement in such a case and that if a deterrent is removed, then insurers could be more susceptible to fraud.

Regulators wonder what magnitude of a problem fraud is for the industry