The Los Angeles city attorney launched a wide-ranging legal action on Thursday against one of California’s biggest health insurance providers, accusing it of illegally selling policies to customers and then denying them coverage when they fell ill.

The action is being launched as health insurers face closer scrutiny from US regulators and legislators. Health insurance has become one of the dominant themes of the presidential election, with Democratic challengers Hillary Clinton and Barack Obama promising to reform what they contend is a broken system.

Rocky Delgadillo, the Los Angeles city attorney, accused Health Net of defrauding customers by setting illegal policy cancellation targets for its sales agents, who rarely possessed any medical training.

Mr Delgadillo said 1,600 Health Net customers had policies cancelled illegally. Damages of $2,500 (€1,700, £1,275) per customer are being sought. But the final damages tally could be much higher if Health Net is also held responsible for illegally advertising its products to thousands more customers.

The company is accused of “unlawful, unfair and fraudulent business acts and practices and deceptive advertising”. In addition, Mr Delgadillo said the company created a “secret unit” responsible for cancelling policies.

More than $35m of claims for medical treatment had been denied, he said, adding that customers were often in a vulnerable position when they discovered they were not covered. “Just imagine . . . you’re in a hospital bed awaiting treatment and you find that Health Net will not provide the coverage you have paid for,” he said.

Health Net said Mr Delgadillo had “drawn conclusions that aren’t supported by the facts”. Health Net paid out $200m in claims on individual policies that serve more than 135,000 consumers, he said. “We have substantive disagreements with the city attorney.”

The legal action comes as Andrew Cuomo, the New York attorney-general, prepares to sue UnitedHealth, the largest US health insurer, over its billing procedures. “We believe there was an industry-wide scheme perpetuated by some of the nation’s largest health insurers to deceive and defraud consumers,’’ he said this week. UnitedHealth denies any wrongdoing.

Mr Delgadillo said the Los Angeles investigation was unrelated to the New York probe. “They are separate investigations. However, my office is in contact with the New York attorney-general and we look forward to co-operating with each other.”