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How to prevent rescission of contract

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Black Wolf
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So one complaint I've heard about our health care system, is that fraud is rampant. That rescission of contracts happens very often, and someone paying $1000/month to a health insurance company may get nothing in return if it's too expensive to do so. Thus, the only logical solution, as opposed to prevention of fraud due to tort reform, we implement a public plan that costs $1.5Trillion dollars.

While nobody can argue with such a huge debt and such a huge amount of government control, let's entertain the idea of tort reform.

- What is causing insurance companies to steal money from people through rescission?

- How do we reform torts to allow for insurees to get their coverage when they actually need it?

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I think such occurrences are very rare. The area where people think they happen most frequently is in a million small costs where the contract actually allows the insurance company to decide what is covered. So, if one is told that they won't reimburse for a flouride gargle after you're 18, their authority to do so is somewhere in the contract. If an insurance company is really breaking a contract, one can sue them.

The solution to U.S. healthcare is to remove legal disadvantages to individual payment of medical bills. Insurance should be insurance. What we have today is not insurance but third-party payment, with insurance thrown in. All legal reforms that do not address this fundamental issue are pretty much a waste of time.

Edited by softwareNerd
Re-wrote sentence for clarity
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- What is causing insurance companies to steal money from people through rescission?
An insurance company cannot steal money from people through rescission. Rescission is remedy under contract law whereby the contract is set aside; this is done by the courts, and rescission is a last resort by courts.

Don't confuse the public's contract illiteracy -- where they say "I paid for insurance, I deserve to get everything covered" -- for actual contract violations by the insurance company. Actual contract violation can be very expensive for a company, but you have to be real sure about what's actually covered.

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http://www.huffingtonpost.com/ian-pearl/i-...g_b_326137.html

I don't know, it seems like this guy has had insurance for quite some time. He actually GOT covered times before, but this time, he did not.

The solution to U.S. healthcare is to remove legal disadvantages to individual payment of medical bills. Insurance should be insurance. What we have today is not insurance but third-party payment, with insurance thrown in. All legal reforms that do not address this fundamental issue are pretty much a waste of time.

I'm actually not sure what you mean here.

Edited by Black Wolf
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I don't know, it seems like this guy has had insurance for quite some time. He actually GOT covered times before, but this time, he did not.
What do you conclude from that -- do you think he has a right to force an insurance company to continue to cover his for the rest of his life? That is apparently his position.

I used to have completely free health coverage through the job, but due to economic reality, I now have to pay monthly premiums. Would you say that because I used to have greater benefits, I have a right to those same benefits forever?

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I don't know, it seems like this guy has had insurance for quite some time. He actually GOT covered times before, but this time, he did not.
Commenting about specific cases is nearly impossible, because both sides have their own story and it is often more about figuring out what the facts are, rather than the legal principle to be used.

I'm actually not sure what you mean here.
The idea of insurance is this: a group of people all face the possibility that only a few of them will have to spend a lot of money because some event -- like a house-fire. So, they pay in small amounts into a pool and whoever's house goes up in flames gets money from that pool. However, each person has different risks. Not only are the homes of different values, but one guy might be on the edge of a forest that sees frequent fires, and the other may be in a much safer location. So, one needs to study these factors and decide how much each should pay into the pool. Also, when the event occurs, one has to check up to ensure that the person's claim is legitimate. Since insured events are rare, these overheads are a small percentage, and are easily paid out of the premium. In fact, they are easily paid out of the interest earned while the premium sits in safe investments waiting for an insured event to happen.

Now, imagine that people wanted their insurance to cover all non-rare, routine events. The mesh in my screen door tore and I have to go to Home Depot and buy a new one for $14.99. Suppose I want that covered too. If insurance firms start to cover such routine events, they are not really providing insurance as such (in the sense of protecting against sudden, larges and unexpected expenses). If one owns a house one pretty much ends up spending some money to maintain it. Some years such spending will be small (say $500) and some years it will be more (the roof and driveway both need to be re-done). Suppose that -- on average -- one spends about $2,000 a year maintaining a house. If one wanted to pay money into an "insurance" pool and have it paid out in little bits every time a mesh door was torn, or a plumber had to come in to fix a faucet, the insurance company would need that much more administration for each such event. They would have to charge far more than the average annual expense, in order to cover all costs. As one wants "cover" for smaller things and more routine things, one is going away from the concept of insurance, and simply creating a third-party payment program, which will be much more expensive than average.

Doctors have to keep large staffs of people whose only job is to follow-up with insurance companies. On their end, health insurance have large staffs who are following up small claims.In a private market, the bulk of these claims would not be covered by insurance. Some very risk-averse people might want to pay lots of premium, but the typical person would consider it a waste. For instance, one can get used-car warranties that will reimburse you every time you have some repair; but, their cost usually makes them a poor choice. In a private market, the typical health insurance would cover you for large expenses that are outside the normal range.

Many people in the U.S. clearly understand that this is the crux of our problem: the original tax law that favored company-purchased health policies, and all the other laws that grew around it. When Medical Savings Accounts (MSAs) were introduced, it was with the hope of moving toward a more individual-based system. Again, when they were morphed into Health Savings Accounts (HSAs) it was with the same intent. Those who want to move the country the other way are well aware of this issue as well. They have done all they can to hamper MSAs and HSAs. In order to move toward a better system, the government should allow people to deduct any money they spend on health-care expenses, and should allow the first few thousands a year to be deducted without any presentation of receipts (much like a standard deduction).

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Commenting about specific cases is nearly impossible, because both sides have their own story and it is often more about figuring out what the facts are, rather than the legal principle to be used.

The idea of insurance is this: a group of people all face the possibility that only a few of them will have to spend a lot of money because some event -- like a house-fire. So, they pay in small amounts into a pool and whoever's house goes up in flames gets money from that pool. However, each person has different risks. Not only are the homes of different values, but one guy might be on the edge of a forest that sees frequent fires, and the other may be in a much safer location. So, one needs to study these factors and decide how much each should pay into the pool. Also, when the event occurs, one has to check up to ensure that the person's claim is legitimate. Since insured events are rare, these overheads are a small percentage, and are easily paid out of the premium. In fact, they are easily paid out of the interest earned while the premium sits in safe investments waiting for an insured event to happen.

Now, imagine that people wanted their insurance to cover all non-rare, routine events. The mesh in my screen door tore and I have to go to Home Depot and buy a new one for $14.99. Suppose I want that covered too. If insurance firms start to cover such routine events, they are not really providing insurance as such (in the sense of protecting against sudden, larges and unexpected expenses). If one owns a house one pretty much ends up spending some money to maintain it. Some years such spending will be small (say $500) and some years it will be more (the roof and driveway both need to be re-done). Suppose that -- on average -- one spends about $2,000 a year maintaining a house. If one wanted to pay money into an "insurance" pool and have it paid out in little bits every time a mesh door was torn, or a plumber had to come in to fix a faucet, the insurance company would need that much more administration for each such event. They would have to charge far more than the average annual expense, in order to cover all costs. As one wants "cover" for smaller things and more routine things, one is going away from the concept of insurance, and simply creating a third-party payment program, which will be much more expensive than average.

Doctors have to keep large staffs of people whose only job is to follow-up with insurance companies. On their end, health insurance have large staffs who are following up small claims.In a private market, the bulk of these claims would not be covered by insurance. Some very risk-averse people might want to pay lots of premium, but the typical person would consider it a waste. For instance, one can get used-car warranties that will reimburse you every time you have some repair; but, their cost usually makes them a poor choice. In a private market, the typical health insurance would cover you for large expenses that are outside the normal range.

Many people in the U.S. clearly understand that this is the crux of our problem: the original tax law that favored company-purchased health policies, and all the other laws that grew around it. When Medical Savings Accounts (MSAs) were introduced, it was with the hope of moving toward a more individual-based system. Again, when they were morphed into Health Savings Accounts (HSAs) it was with the same intent. Those who want to move the country the other way are well aware of this issue as well. They have done all they can to hamper MSAs and HSAs. In order to move toward a better system, the government should allow people to deduct any money they spend on health-care expenses, and should allow the first few thousands a year to be deducted without any presentation of receipts (much like a standard deduction).

Great post! I've been wanting to look into this topic some more, and I think this will work for a general framework.

Edited by Alexandros
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No, it seems like he's been paying the insurance company the whole time.
When the terms of the insurance contract change, so that a particular benefit is no longer covered, then the insured no longer has a right to that benefit, even if he has paid for it in the past. As of the moment that a new contract exists, the conditions of the old contract are past history and not relevant to present claims.
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In a private health-insurance market, special contractual conditions would evolve, which address the extension of contracts within certain "boundary terms".

We see this in certain other types of contracts. For instance, term life insurance contracts often come with a clause that allows the insured to renew for a certain max. amount, at a certain rate, regardless of medical exam results. I have a 20 year life-insurance. It has such a renewal option. If the contract is about to end and if I am on my death-bed, I can still take out insurance of up to 40% of the original covered amount at certain pre-agreed terms. Of course, this also means that my premium would have been lower if I did not want such an option, but I do.

A similar option is seen in commercial real-estate transactions, particularly for retail. Imagine that you start a coffee shop on a particular street corner, renting the shop with a 5-year lease. After 5 years, business is booming. The landlord knows that you will be loath to move such a business, so he can try to get more rent from you than a newcomer would pay. Of course you have the threat that you will move, but most businesses also write options into their original lease which allow them to renew on certain terms. The current market is an example where landlords are paying special attention to such terms. The commercial real-estate market is low, and landlords (expecting an upturn in a few years) are uneasy with renewal clauses using current rents as a basis. We just moved buildings and the landlord was willing to do a great deal if we did a 2-year lease (5 years would have been typical) with no renewal option.

There are some markets where long-term contracts and options would be typical if left to the free-market. Consider your utilities. Suppose your utility were private and -- all of a sudden -- it said that you would have to pay three times the existing rate starting next month! Today, you do not have to worry about it, because the government would not let them do that. However, in a free-market, you would have to make sure that you're covered. Knowing how such things evolve, it is likely that a few standard utility-provisioning contracts would evolve, which contain clauses that protect the interests of both parties against various standard surprises.

The same with health insurance. If left to the free-market, contracts would evolve to give people all sorts of long-term protection. Anyone expecting a child would definitely want to buy some type of long-term cover, or something with clauses allowing long-term renewal, for really expensive conditions before the child is born. The reason this does not happen is similar to the utility case: the government has your back for certain situations. The problem is for people who do not fit the profile that the system is design for, or areas where the government did not realize that one party could end a contract in a certain way.

Government regulation drives out private contractual vigilance.

Edited by softwareNerd
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I think such occurrences are very rare. The area where people think they happen most frequently is in a million small costs where the contract actually allows the insurance company to decide what is covered. So, if one is told that they won't reimburse for a flouride gargle after you're 18, their authority to do so is somewhere in the contract. If an insurance company is really breaking a contract, one can sue them.

The solution to U.S. healthcare is to remove legal disadvantages to individual payment of medical bills. Insurance should be insurance. What we have today is not insurance but third-party payment, with insurance thrown in. All legal reforms that do not address this fundamental issue are pretty much a waste of time.

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When the terms of the insurance contract change, so that a particular benefit is no longer covered, then the insured no longer has a right to that benefit, even if he has paid for it in the past. As of the moment that a new contract exists, the conditions of the old contract are past history and not relevant to present claims.

If that is the case though, why would an insurance company ever have to pay for anything? They can just change the terms of the contract in order not to have to.

I do think that if someone is paying for a certain kind of coverage there is some reasonable expectation on their part that the terms will continue as agreed, because you're necessarily paying to defray the risks of potential future, not current events. Perhaps the solution is for health insurance plans to run for a set time where the terms are agreed not to change, and then every time that period ends the terms get reevaluated, sort of like car insurance. Of course if either party breaches the contract, say if a payment is not made on time, then all bets are off.

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While I agree with you in general, and I am definitely for tort reform of some kind, I think there are two instances where it might be beneficial to consult with an attorney: (1)purchasing a home utilizing a new mortgage (2)purchasing a medical policy of some kind. Remember, the BIG print giveth and the LITTLE print taketh away. :pimp:

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If that is the case though, why would an insurance company ever have to pay for anything? They can just change the terms of the contract in order not to have to.
Contracts have a definite term. If you have a contract with an insurance company to the effect that they will pay to repair broken arms, and you break your arm, then they are obligated to pay to repair your arm. Once the contract is renegotiated, that right to coverage goes away.
I do think that if someone is paying for a certain kind of coverage there is some reasonable expectation on their part that the terms will continue as agreed, because you're necessarily paying to defray the risks of potential future, not current events.
That, I think, is not a reasonable expectation. You are only defraying the covered costs within the terms of the contract.
Perhaps the solution is for health insurance plans to run for a set time where the terms are agreed not to change, and then every time that period ends the terms get reevaluated, sort of like car insurance.
They do. I think the problem is that people also accept contracts that can be unilaterally changed. The best-known example of that, I think, is the interest rate clauses of credit card contracts. It is explicitly stated that the credit card company can change interest rates and minimum payment. The same is true with insurance: if a benefit can be unilaterally canceled by the insurance company within the period of the contract, then it will say so in the contract. Then if you are not happy with that possibility -- if you want a guarantee that bone-breaking coverage can't be canceled within the period of the contract, you should either negotiate for better insurance that doesn't have that clause (or any other "at companies discretion" clause), or you should get specific insurance that covers the problem in question.
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Perhaps the solution is for health insurance plans to run for a set time where the terms are agreed not to change, and then every time that period ends the terms get reevaluated, sort of like car insurance.
Yes, the solution would involve terms staying constant over a certain time. In fact, that is how it is today, in practice. However, one needs more than that: one needs a clause that says "I can renew this on the following terms until I die". Today, this is in effect via all sorts of government laws rather than via contracts. For instance, the law has made company provided insurance widespread, then it has added mandates as to what must be covered by such insurance, and finally it has added portability laws that disallow insurance companies from denying cover in many situations. Then, at 65 Medicare takes over, so the biggest costs are off the private insurers. Private contracts would need to cover the various situations where current law "protects" the consumer.

While I agree with you in general, and I am definitely for tort reform of some kind,...
Possibly true, I don't know enough. However, I'm afraid that it will come in the wrong form: e.g. in the form of "caps" that are too low. I would like to see a system where juries cannot simply use their emotions to decide cases, and where science plays more of a role; but, I suspect that is not what our politicians mean when they speak of tort reform. Edited by softwareNerd
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Contracts have a definite term. If you have a contract with an insurance company to the effect that they will pay to repair broken arms, and you break your arm, then they are obligated to pay to repair your arm. Once the contract is renegotiated, that right to coverage goes away.That, I think, is not a reasonable expectation. You are only defraying the covered costs within the terms of the contract.They do. I think the problem is that people also accept contracts that can be unilaterally changed. The best-known example of that, I think, is the interest rate clauses of credit card contracts. It is explicitly stated that the credit card company can change interest rates and minimum payment. The same is true with insurance: if a benefit can be unilaterally canceled by the insurance company within the period of the contract, then it will say so in the contract. Then if you are not happy with that possibility -- if you want a guarantee that bone-breaking coverage can't be canceled within the period of the contract, you should either negotiate for better insurance that doesn't have that clause (or any other "at companies discretion" clause), or you should get specific insurance that covers the problem in question.

I was not aware that health insurance contracts have a definite term. I guess that is why you have to renew benefits with your employer every year. God the employer-based system is a mess. You have no actual dealings with the insurance company itself, only your employer's benefits administrator and who knows whose interests they're actually working for.

I think if people had the choice not to agree to unilateral contracts they wouldn't. Some company with guts could make a lot of money offering people regular contracts. Credit card companies are a good example too. I just had my APR jacked up to 30% for no reason, same as the default rate. Isn't that some kind of perverse incentive for me to default almost? ;) That's OK, they shot themselves in the foot though. That's one less paying customer they'll have and a company in this bad of trouble (it's Citi) can't afford that right now.

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Just a few points I think might be relevant to the discussion that aren't in the vein of "insurance companies are thieving scum" argument commonly seen in the media.

1. The price of cosmetic surgery has consistently decreased year after year. These procedures are generally not covered by insurance or government mandatory health care directives. A cosmetic surgeon generally works for profit and is not required to provide any service unless payment is rendered. It would appear that operating in more of a free market, outside the realm of third-party payers, is acting to drive down the cost of these procedures at the same time that most other procedures are consistently rising in cost. The circumstances surrounding the general reduction in prices of one aspect of medicine seem relevant to reducing prices in the others.

2. Cosmetic surgeons have similar or greater malpractice claims filed as normal doctors, but have significantly lower penalties applied even when they lose. That is according to a cursory internet search, not in depth research, but it sounds plausible. Tort reform is way down on the "to-do" list of politicians. Decreasing costs through tort reform would likely decrease insurance need and cost, and unjust tort law is one of the main reasons often given by professionals abandoning healthcare. Skilled surgeons and high malpractice risk specialties are in the midst of a shortage, cosmetic surgery is doing just fine.

3. The government heavily influences prices ,through medicare and medicaid, to rise.

4. Inflationary policy by the government raises prices systemically, while lowering the value provided to the insurance company via premiums. The shrinking margin will come out somewhere.

5. Government regulations and tax law create an artificially low supply of insurance providers, while rising prices inspire a high demand.

6. A brief search of state insurance regulations yielded a mass of regulation too complex to assimilate in a reasonable timeframe, most of which are apparently designed to prevent any sort of cost saving measure from insurance providers.

7. Every wage earner pays 1.45% of their pay to finance their own insurance company's competition, which can also restrict competition and run at a consistent loss.

8. Our mixed economy offers far too much influence for sale to a corrupt government. Remove the government's corrupting influence and increase penalties for legitimate fraud and breach of contract cases.

9. The corrupt businessman is the one who flourishes under the current system. Many honest businessmen and professionals refuse to participate in an ridiculously unjust system.

Just some things to spark conversation.

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I think such occurrences are very rare. The area where people think they happen most frequently is in a million small costs where the contract actually allows the insurance company to decide what is covered. So, if one is told that they won't reimburse for a flouride gargle after you're 18, their authority to do so is somewhere in the contract. If an insurance company is really breaking a contract, one can sue them.

The solution to U.S. healthcare is to remove legal disadvantages to individual payment of medical bills. Insurance should be insurance. What we have today is not insurance but third-party payment, with insurance thrown in. All legal reforms that do not address this fundamental issue are pretty much a waste of time.

Hmmm.. this is interesting.. has there been a study on this?

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Hmmm.. this is interesting.. has there been a study on this?
Which part are you asking about? About the notion of having insurance be insurance? and letting individuals decide most of their medical expenses? Assuming that's what you're asking about...

I don't know about studies; I'm a layman in the area. I've seen reports where people talk about how much % of health-care goes to running the administrative side of things. One also hears doctors speak of the huge overhead. I have seen the time that I and my colleagues spend on following up health-claims with the myriad entities involved. I've also worked in software that is used for claims-analysis. In addition, I have first-hand experience living in a country where medicine does not use either a government nor an insurance model. Doctors there hardly have much office help; it was all so simple.

However, this administrative overhead does not explain the whole story. The more important part is that the spending on health-care will drop because people will not really want to pay for much of the healthcare they get, if they had to make the decision themselves (rather than being forced to pay a lump-sum as premium and then having the "insurance" company pay). In fact, this is something that even the proponents of public healthcare acknowledge: i.e. that people will cut their expenses on healthcare. Proponents of universal coverage claim that individual decision-making will encourage people to skip their annual doctor visits (to take a common example). Then, they say, this will lead to high costs in the longer run. (There are a few different ways to answer those objections, but I'll stop here, because I'm not sure this is what you were asking about in the first place.)

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Which part are you asking about? About the notion of having insurance be insurance? and letting individuals decide most of their medical expenses? Assuming that's what you're asking about...

I don't know about studies; I'm a layman in the area. I've seen reports where people talk about how much % of health-care goes to running the administrative side of things. One also hears doctors speak of the huge overhead. I have seen the time that I and my colleagues spend on following up health-claims with the myriad entities involved. I've also worked in software that is used for claims-analysis. In addition, I have first-hand experience living in a country where medicine does not use either a government nor an insurance model. Doctors there hardly have much office help; it was all so simple.

However, this administrative overhead does not explain the whole story. The more important part is that the spending on health-care will drop because people will not really want to pay for much of the healthcare they get, if they had to make the decision themselves (rather than being forced to pay a lump-sum as premium and then having the "insurance" company pay). In fact, this is something that even the proponents of public healthcare acknowledge: i.e. that people will cut their expenses on healthcare. Proponents of universal coverage claim that individual decision-making will encourage people to skip their annual doctor visits (to take a common example). Then, they say, this will lead to high costs in the longer run. (There are a few different ways to answer those objections, but I'll stop here, because I'm not sure this is what you were asking about in the first place.)

I'm referring to how rescission of contracts is usually something the contract allows for. I'm curious about this.

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I'm referring to how rescission of contracts is usually something the contract allows for. I'm curious about this.
Well, it is not really rescission, so one won;t find it there. What you will find is a finite term, so that there is no guarantee of renewal at a price that you like. You will also find many sections that allow the insurance company to decide what they will cover when it comes to details. It will also have clauses allowing them to decide what dollar amount is reasonable and "customary" for any particular health-related procedure.
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Well, it is not really rescission, so one won;t find it there. What you will find is a finite term, so that there is no guarantee of renewal at a price that you like. You will also find many sections that allow the insurance company to decide what they will cover when it comes to details. It will also have clauses allowing them to decide what dollar amount is reasonable and "customary" for any particular health-related procedure.

Would it be unreasonable to reform torts so that you can't say, "Oh, I'm rescinding this contract because your actual weight is less than 170lb. You are 175lbs."

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Would it be unreasonable to reform torts so that you can't say, "Oh, I'm rescinding this contract because your actual weight is less than 170lb. You are 175lbs."
I don't know what you mean by "rescinding". Unless he has contracted differently with a renter, a landlord should be allowed to say "I'm not going to extend your lease, because you're overweight". If the insurance company similarly did not contract to extend, why would they have less protection than the landlord? However, in both cases, nothing is being rescinded, because there was a contract, but no agreement to extend it.

Of course, contracts may not be really be rescinded unilaterally. That's standard law, no debate about it. However, it has little to do with this case.

As for the particular case pointed out in this thread, there was really no fully-free contract anyway. In fact, that is the essence of the problem: the government, in their wisdom, insist on some terms that are part of all health-insurance "contracts". (I scare-quote "contracts" because: to the extent that the government imposes those conditions, those are not fully free contracts.) So, instead of a willing contract with terms that both parties agreed to, they have certain conditions that the government decided. Apart from being prohibited to agree to terms they like, the parties are also lulled into a sense that the government has looked out for them. So, the individual might think that the government has him covered, with the forced conditions. Of course, the government did not. The insurance company thought of a creative way to get out of the government-imposed rule. They can say what they will about the "spirit" of the condition, but that is not relevant in this case.

Edited by softwareNerd
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I don't know what you mean by "rescinding". Unless he has contracted differently with a renter, a landlord should be allowed to say "I'm not going to extend your lease, because you're overweight". If the insurance company similarly did not contract to extend, why would they have less protection than the landlord? However, in both cases, nothing is being rescinded, because there was a contract, but no agreement to extend it.

My point was that insurance companies shouldn't be allowed to deny coverage based on errors.

Ie: I'm sorry, but you spelled your name wrong, so I'm not going to provide the coverage that we agreed to.

I'm not saying that insurance companies should be forced to extend.

"I'm not giving you coverage because you made a typo" is not something I feel unilateral rescission should apply to this.

Of course, contracts may not be really be rescinded unilaterally. That's standard law, no debate about it. However, it has little to do with this case.

On the federal level or on the state level does the law make reference to this?

http://www.texas-opinions.com/law-rescission.html

As for the particular case pointed out in this thread, there was really no fully-free contract anyway. In fact, that is the essence of the problem: the government, in their wisdom, insist on some terms that are part of all health-insurance "contracts". (I scare-quote "contracts" because: to the extent that the government imposes those conditions, those are not fully free contracts.) So, instead of a willing contract with terms that both parties agreed to, they have certain conditions that the government decided. Apart from being prohibited to agree to terms they like, the parties are also lulled into a sense that the government has looked out for them. So, the individual might think that the government has him covered, with the forced conditions. Of course, the government did not. The insurance company thought of a creative way to get out of the government-imposed rule. They can say what they will about the "spirit" of the condition, but that is not relevant in this case.

I'm gonna try to find where the law makes reference to this, it seems interesting

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