California insurance regulators are trying to get a health insurer to pay more than $12 million in fines and penalties in connection with allegations that the insurer rescinded policies illegally and violated claim processing rules.

The California Department of Insurance is seeking to collect the money from Blue Shield of California Life & Health Insurance Company, an insurance company unit of Blue Shield of California, San Francisco.

An exam of market conduct for 2004 and 2005 found evidence that California Blue used inadequate evidence to justify rescinding about 600 policies and committed hundreds of other violations of state rules, such as failing to pay claims on a timely basis and failing to provide required information when denying a claim, officials say.

California Blue already has refunded $1 million in claims at the department’s request, officials say.

Earlier this month, a California state appeals court ruled in a case involving California Blue that canceling individual health insurance policies for omissions or mistakes on applications after claims are submitted is prohibited by state law.

California Blue is blasting regulators’ enforcement action and arguing that the California department is changing the rules governing rescissions without going through the appropriate process for drafting regulations.

For years, Blue Shield of California Life “has filed its application forms and insurance policies with the department, which approved them,” Duncan Ross, president of the unit, says in a statement. “Those documents clearly set forth the requirement that people who apply for insurance must submit accurate and complete responses regarding their medical history, as well as the consequences for not doing so. Now, after having approved these applications and policies for many years, the department has determined that the documents do not meet their new standard – and wants to apply that judgment retroactively.

“The department’s interpretation of rescission law is simply wrong,” Ross says. “For many years, the courts – including the California Supreme Court – have clearly stated that an insurer need not demonstrate that an applicant intended to deceive the insurer in order to rescind a contract, as long as the misrepresentation was of such significance that the policy would not have been issued.”

In addition, many of the “claim handling violation” allegations are inaccurate or deal with minor issues, such as whether an insurer must staple an application to a policy or can endorse the application onto the policy, and they do not justify the kinds of fines the California department is seeking, Ross says.

“There is no precedent for imposing fines of this magnitude for what is largely a collection of technical disputes and inadvertent errors,” Ross says.

One problem is that California residents who have health problems and are not members of group plans may have trouble getting health coverage, Ross says.

“That’s why Blue Shield Life’s parent company, Blue Shield of California, has long supported universal coverage and has actively lobbied for a solution the past 5 years,” Ross says. “If coverage for all could be achieved, every Californian would have insurance regardless of health status and rescissions would be eliminated entirely.”