Replacement of health insurance

What "replacement" means in health insurance

A replacement happens when a new accident and health policy is sold and, as part of that same transaction, existing coverage is terminated, lapsed, allowed to expire, surrendered, or reduced in benefits. Replacement is not the same as adding coverage. If the old policy stays fully in force and the new policy sits on top of it, that is supplemental coverage. If the old policy goes away — or shrinks — because the new one is being written, the transaction is a replacement and it carries extra duties for the producer.

Replacement is perfectly legal. What is regulated is how it is done and why it is recommended.

Why replacement is a field underwriting problem

When a client moves from an in-force health policy to a brand-new one, the clock on several protections starts over:

• Pre-existing condition provisions and waiting periods restart under the new contract, so a condition already covered by the old policy may sit unpaid for a period under the new one.
• Underwriting happens again at the client's current age and current health, which can mean a higher premium, an exclusion rider, a rating, or a decline.
• Contestability and eligibility provisions are new, so answers on the new application can be reviewed if a claim arises early.
• A timing error can leave a gap with no coverage at all between the termination of the old policy and the effective date of the new one.

Those four risks are the reason a producer must treat replacement as a fact-finding job, not a paperwork job.

The producer's obligations

A licensed life, accident, and health agent acts on behalf of the insurer and is answerable for how the sale is conducted under Texas Insurance Code chapter 4054. Chapter 541 supplies the conduct rules that replacement cases most often violate:

• Misrepresentation of the benefits, terms, conditions, or advantages of any policy — including the policy being replaced.
• Twisting, which is using misrepresentation or an incomplete or misleading comparison to induce a client to lapse, forfeit, surrender, or replace existing coverage.
• False or deceptive advertising and statements, and disparaging another insurer's financial condition or business practices to win the sale.

A comparison that is technically accurate but leaves out the new waiting period, the new underwriting, or the premium increase is still an incomplete comparison.

A defensible replacement procedure

1. Ask and record. Answer every replacement question on the application truthfully and completely, and identify the coverage being replaced.
2. Compare side by side. Benefits, deductibles and cost sharing, exclusions and riders, pre-existing condition treatment, renewability, and total premium.
3. Give the client the comparison in writing and let the client make the decision.
4. Never tell a client to cancel or stop paying the old policy until the new policy has been issued, delivered, and is in force with the client's conditions known.
5. Document the file with the comparison, the client's stated reasons, and any disclosure forms, then keep copies.

When the comparison shows the client is better off staying put, the correct recommendation is to keep the existing policy. Sales conduct that violates chapter 541 exposes the producer to enforcement action, penalties, and restitution, and to license discipline under chapter 4054.