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On May 5, 2005, Nieto completed and signed a written application to Blue Shield Life for individual health insurance. In the “Medical History” portion of the application, Nieto answered “no” to almost every question. While the application provided some information about back problems, that information did not relate to Nieto. Contrary to the representations made in the application, Nieto had seen an orthopedist and chiropractor numerous times between January 2002 and May 2005 for back pain. Her treatment in 2005 included two steroid injections as well as oral medications, and in 2004 and 2005 Nieto filled at least ten prescriptions for four different medications, including Soma, Tylenol with codeine, Motrin and Xanax. Further in the application, Nieto also answered that her last doctor’s visit had occurred three years earlier, for the flu, and that the visit had resulted in “no finding” and her present health status was “good.” Nieto did not inform Blue Shield Life in the application about her visits to her orthopedist or chiropractor. Finally, Nieto answered “no” to the question asking if she had “[t]aken or been ordered to take prescription medication(s)” within the past 12 months. Blue Shield Life issued a policy of health insurance to Nieto on July 1, 2005 following its review of her application.

In September 2005, Blue Shield Life opened an investigation file on Nieto after Nieto had received a diagnosis of necrosis of the hip and was scheduled for hip replacement surgery in November 2005. As part of the investigation, Blue Shield Life obtained Nieto’s medical and pharmacy records. At that point, Blue Shield Life learned for the first time that immediately preceding her application Nieto had received extensive treatment for back and hip pain and had been prescribed multiple medications. If Blue Shield Life had been aware of the undisclosed information it either would have declined to issue the policy or, at a minimum, would not have issued the policy until receiving additional information from appellant. Blue Shield Life rescinded her policy on November 16, 2005.

In July 2006, Nieto filed a complaint against Blue Shield Life, asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory relief and violation of Business and Professions Code section 17200. Blue Shield Life cross-complained seeking a declaratory judgment that it rightfully rescinded the insurance contract, thereby precluding Nieto from maintaining her action.

In the trial court, Blue Shield Life moved for summary judgment on the ground that Nieto’s fraudulent completion of her application entitled it to rescind her policy. The trial court determined the undisputed evidence satisfied the elements of fraud or deceit justifying Blue Shield Life’s rescission of the policy. The trial court rejected Nieto’s assertion that Blue Shield Life had engaged in postclaims underwriting in violation of Insurance Code section 10384, finding that before issuing the policy, Blue Shield Life properly completed its underwriting process and resolved all reasonable questions arising from the information provided by Nieto. It further found the evidence showed that Blue Shield Life was not required to do more, as there was nothing in the application to alert Blue Shield Life that Nieto’s responses were false. The trial court reasoned that even if Blue Shield Life had been required to investigate further, there was no evidence to suggest that it would have learned of Nieto’s undisclosed condition and treatment. Finally, the trial court concluded that whether Blue Shield Life attached or endorsed the application to the policy had no bearing on its ability to rescind in view of Nieto’s material misrepresentations and omissions. The Court of Appeal agreed with all of the trial court’s conclusions, discussing each.

First, the Court of Appeal found that the undisputed evidence showed that Nieto committed fraud by making material misrepresentations or omissions concerning her medical history to Blue Shield Life in the application, thereby entitling Blue Shield Life to rescind. Quoting TIG Ins. Co. of Michigan v. Homestore, Inc., 137 Cal.App.4th 749, 755-756 (2006), the Court of Appeal stated that “[g]overning law permits an insurer to rescind a policy when the insured has misrepresented or concealed material information in connection with obtaining insurance.” In reaching its conclusion that Nieto engaged in fraud, the Court of Appeal explicitly discounted her argument that a triable issue of fact existed concerning her “intent” to defraud Blue Shield Life based on her declaration in which she averred that she “did not intend to defraud” Blue Shield Life. In reliance on West Coast Life Ins. Co. v. Ward, 132 Cal.App.4th 181, 186-87 (2005), the Court of Appeal stated “[t]he rule in insurance cases is that a material misrepresentation or concealment in an insurance application, whether intentional or unintentional, entitles the insurer to rescind the insurance policy ab initio.” The Court of Appeal further noted that this rule was codified in Insurance Code sections 331 and 360 so that, “any material misrepresentation or the failure, whether intentional or unintentional, to provide requested information permits rescission of the policy by the injured party.” Thus, it found that evidence showing that Nieto “lacked any intent to defraud failed to create a triable issue of fact.”

Second, the Court of Appeal determined that contrary to Nieto’s assertion, Insurance Code sections 10113 and 10381.5 did not bar the rescission because Blue Shield Life did not physically attach a copy of the application to the policy or “endorse” the application to the policy. Nieto relied on Ticconi, supra, 160 Cal.App.4th 528, 534, where the Court reversed an order denying class certification and construed Insurance Code sections 10113 and 10381.5 to “preclude an insurer from raising the defense of fraud based on statements that an insured made in an application for insurance if the application had not been attached to or endorsed on the policy when issued [citations].” In explaining why the Ticconi decision did not preclude summary judgment, the Court of Appeal noted that while not cited by the Ticconi court, Metzinger v. Manhattan Life Ins. Co., 71 Cal.2d 423, 427 (1969), explained that section 10113 does not apply to a situation where an insurer seeks to rescind a policy because of fraudulent misrepresentations made by the insured. The Court of Appeal specifically noted that consistent with the holding in Metzinger, Blue Shield Life did not seek to incorporate any document into the policy by reference. Rather, it sought to demonstrate that, in accordance with Insurance Code sections 331 and 359, it was entitled to rescind the policy. Further, Insurance Code section 10113 expressly applies “in the absence of fraud.” Thus, the Court of Appeal concluded that Section 10113 could be harmonized with other Insurance Code provisions to permit an insurer to rescind a policy where the insured fraudulently conceals or misrepresents material information in the application. Further, it concluded that Insurance Code section 10381.5 does not require that the application be physically attached in all circumstances, noting that Blue Shield Life’s application and policy both expressly stated that the information provided in the application formed the basis for the policy’s coverage. The Nieto court thus declined to adopt the blanket conclusion in Ticconi that material misrepresentations and omissions in an application which is not physically attached to a policy may not be relied upon by the insurer to rescind the policy.

Finally, the Court of Appeal concluded that Insurance Code section 10384 did not bar Blue Shield Life’s rescission. Nieto argued that this section, and the decision in ailey, supra, 158 Cal.App.4th 452, barred the rescission, asserting that Blue Shield Life failed to complete medical underwriting and engaged in postclaims underwriting. The Court of Appeal distinguished the Hailey decision, as Hailey involved a health care service plan governed by Health and Safety Code, not an insurance policy governed by the Insurance Code. Thus, the Court of Appeal construed Hailey’s conclusion that a health care service provider had to do more than rely on the application to complete medical underwriting as having no bearing on health insurers and health insurance policies, finding Blue Shield Life’s underwriting more than sufficient for purposes of section 10384. The Court of Appeal further noted that even if Blue Shield Life had obtained medical records from the physician disclosed by Nieto on the application, those records would not have revealed her undisclosed back and hip problems.

The court rejected Yeager’s argument that Blue Cross’s offer of $2,000 of coverage was insufficient to comply with the statute because infertility treatment typically costs much more than $2,000. On this point, the court held that Yeager’s position that the statute required “full coverage” found no support in the statute’s language. The court pointed out that the “Legislature knows how to establish a health plan’s coverage and costs when it chooses,” as it has done in other sections, and found that the Legislature clearly indicated its intent to leave the specific terms of infertility coverage for negotiation between the plan and the group subscriber.

Still, the Court of Appeal left “for another day” the question of how generous a benefit offer must be to satisfy the duty imposed by section 1374.55 upon a plan to negotiate the amount and cost of coverage with the group subscriber, finding that Yeager’s motion for summary judgment did not properly frame this issue.

According to Mr. Poizner’s news release, the new regulations will (in his words) do the following:

• Set clear and rigorous standards that insurers must meet before they issue a health insurance policy. Insurers must do their underwriting job before they issue the policy.
• Put insurers on notice that they must prove that they have met ALL of the underwriting standards before they can consider rescission.
• Put an end to lightweight sloppy underwriting if insurers want to keep the right to rescind.
• Put insurers on notice that they must be 100% sure that an individual knew the answer to a health history question and failed to provide it before considering rescinding that person.
• Require insurers to make sure that health insurance applications are accurate and complete.
• Require insurers to ask clear and unambiguous health history questions and avoid confusing applicants.
• Require agents who assist applicants with their questions to attest to the insurer regarding their assistance, at every stage of the application process.
• Encourage insurers to use Personal Health Records instead of potentially confusing health history questionnaires to underwrite applicants.
• Provide fair due process protections for consumers who are being investigated for possible rescission including early notice, opportunity to provide input to the insurers, and the chance to clarify their application. No hidden rescission investigations are allowed under the new rules and this encourages insurers to work with their insureds to resolve questions about the accuracy of their responses.
• Require insurers to share documentation used during rescission investigations with the insured under investigation.  

The notice of the regulations will be officially published by the Office of Administrative Law on Friday, June 5.  According to the news release, implementation of the regulations is expected by the end of 2009, following a public hearing, public comment and regulation finalization period.

The regulations would apply to individual health coverage sold by companies licensed by the Department of Insurance.  A second state regulator, the Department of Managed Health Care, said more than two years ago that it would pursue rescission regulations, but has not done so.  The proposed regulations can be viewed here.

On a related note, the California State Assembly is expected to vote soon on a bill that would set a high bar on rescissions for people who purchase individual insurance of all types, regardless of who regulates it.