The California Department of Insurance says a health insurer in the state has agreed to offer new policies to 678 consumers whose policies were rescinded from Jan. 1, 2004, to May 31, 2008.

Blue Shield of California Life and Health Insurance Company, a unit of Blue Shield of California, San Francisco, also has agreed to reimburse the consumers for out-of-pocket medical expenses and change underwriting and claims practices, officials say.

“Canceling someone’s insurance can have devastating medical, emotional, and financial impacts,” California Insurance Commissioner Steve Poizner says in a statement about the agreement. “I will continue to take action against those insurers who do not live up to their agreements.”

The consumers affected bought individual, family, or short-term health policies.

The new policies will be issued without medical underwriting or preexisting condition exclusions, officials say.

Any medical expenses that would have been covered under the rescinded policies that are not covered by another source will be reimbursed or paid by Blue Shield of California Life, officials say.

An expedited independent arbitration process has been established to resolve any disputes regarding these expenses, officials say.

Blue Shield of California Life also has agreed to change its application forms, underwriting process, producer training, and oversight of its claims handling.

The company could end up having to pay a $5 million fine if it violates the terms of the agreement in the future, officials say.

The California department has negotiated similar settlements with 2 other health carriers in recent months.

Blue Shield of California Life says it is pleased with the settlement agreement and notes that it will not have to pay a fine to resolve regulators’ concerns.

Blue Shield of California Life now can “enter 2009 with new procedures in place to clarify the responsibilities of insurers and our customers in the future,” Duncan Ross, president of Blue Shield of California Life, says in a statement.