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LTC Contestability Period Debated At NAIC

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When is fraud really fraud, and should a long term care carrier have recourse after a 2-year period of contestability?[@@]

Those were some of the questions that came up here at the summer meeting of the National Association of Insurance Commissioners, Kansas City, Mo., during a discussion of efforts to update the NAIC’s Long Term Care Insurance Model Act.

The NAIC’s Senior Issues Task Force looked at a draft of a proposed revision to Section 7 of the model, which deals with the incontestability period.

Consumer advocates and some regulators said “post claims underwriting” and the ability to rescind LTC contracts after the contestability period ends are potentially abusive.

Insurers said post-claims underwriting and the ability to rescind older policies protect them from consumers who fail to describe their health accurately when contracts are issued.

Insurers are concerned about the possible 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 current draft reads “After a policy or certificate has been in force for 2 years it is not contestable.”

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

When Wisconsin Insurance Commissioner Jorge Gomez asked whether insurers should be able to contest policies for an indefinite period, Femea said, “Fraud is fraud.”

But Gomez asked for specific examples of the need for an indefinite contestability period.

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

Gomez added that the industry has not yet shown him that insurers need more than 2 years to find fraud in an LTC application.

Kelley Greenlee, an LTC ombudsman for Kansas, said insurers should underwrite applicants thoroughly when the applicants apply for coverage, just as homeowners should install security systems before being burgled.

Femea summarized data from a sampling of 5 ACLI members’ recission reporting forms for 2002, 2003 and 2004.

Several carriers reported no recissions. The carrier with the highest number of recissions, 12, had 483,000 policies in force in 2003, according to Femea’s data.

Femea’s figures do not include information about voluntary recissions, the type of recissions that would result if a carrier alleged fraud and offered to return the policy premium.

Voluntary recissions are not part of the form insurers are required to fill out, but the ACLI will try to get information about voluntary recission if that is what regulators want, said Lynn Boyd, the ACLI’s LTC specialist.

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 came to her after a claim had been denied or premiums had been refunded.

The children of the patient often are outraged about the parent being accused of fraud, Burns said.

In some cases, Burns said, the fraud allegations could result from information outside the LTC applicant’s field of knowledge, such as a remark about a patient’s forgetfulness that a doctor included in a patient’s record without the patient’s knowledge, Burns said.

Or, according to Dalora Schafer, an Oklahoma regulator, the insureds may put trust in an agent who just tells them to sign the contract.

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

Julie Benafield Bowman, Arkansas’s insurance commissioner, sided with the ACLI.

“I’m appalled and certainly not amused at taking out the fraud provision,” Benafield Bowman said. “The magnitude of the situation doesn’t matter. It is a deterrent. Most people know that they are supposed to tell the truth.”