California Department of Insurance will reinstate health insurance for 926 policyholders. Health Net has signed a first-of-its-kind agreement, which will pay $3.6 million in penalties and as much as $14 million in medical reimbursements that it had earlier denied.

The company does not admit wrongdoing. However, Health Net Chief Executive Jay Gellert said his company has settled the case in order "to move forward and make sure these affected individuals can obtain coverage."

According to officials, investigators found evidence that Health Net intentionally confused policyholders with detailed and complicated questions on application forms. When claims were submitted to pay for serious illnesses, the company used purported omission of a symptom or condition as a reason for dropping coverage. The company was also found to have paid bonuses to an employee, based partly on the number of policies she rescinded. As proof, documents were found which stated that the rescissions saved the company $35 million in medical claims.

Federal law prohibits canceling policies of people who get coverage as members of an employee group. One of the most prominent cases involves an independent business owner who was awarded a $9.4-million judgment in February. Patsy Bates, a Gardena hair salon owner, was dropped by Health Net while she was undergoing chemotherapy to treat breast cancer.

Insurance Commissioner Steve Poizner said these practices cause consumers not to trust insurers and added that dropping coverage can have "devastating medical, emotional and financial effects."

In addition to its agreement to pay $3.6 million in fines, Health Net will work with the Insurance Department to improve its practices and reduce rescissions. An additional penalty of as much as $3.6 million could be levied if it is later discovered during a follow-up examination that the insurer did not correct all deficiencies.

The agreement allows Health Net to avoid being targeted for future enforcement relative to potential legal violations which may be uncovered by auditors. Critics argue that the deal might interfere with lawsuits of other consumers who have been dropped by Health Net and curtail the amount of their awards by the court.