Update: California Health Insurance Initiative Will Be on the Ballot in November 2014

by Larry Golub

On June 28, we reported that a proposed initiative that would bring prior approval of rates for health insurance to California had failed to qualify for the November 2012 California ballot. 

An earlier blog addressed in more detail that the the initiative would have:

  1. given the California Insurance Commissioner the power to approve health insurance rates proposed after November 6, 2012;
  2. required health insurers’ rate applications to be accompanied by a sworn statement by the insurer’s chief executive officer declaring that the contents of the application were accurate and complied in all respects with California law; and
  3. required health insurers to pay refunds with interest if the Commissioner determined that the company’s rates were excessive.

While the initiative failed to qualify for the November 2012 ballot, we observed that the backers of the initiative were seeking to obtain the requisite number of valid signatures to place the initiative on the next general election ballot in November 2014.

According to the Secretary of State, on August 23, 2012, the initiative qualified for the general election to occur on November 4, 2014.

This will ensure plenty of time for both sides to present to the California electorate their arguments in favor of and against the as-of-yet un-numbered proposition.  We will continue to update developments on this ballot initiative.    

Signatures Filed for California Health Insurance Initiative

By Samuel Sorich

Supporters of a proposed California initiative that would give the Insurance Commissioner the power to approve health insurance rates have filed signatures to qualify the measure for a place on the November 6, 2012 ballot.

The initiative needs 504,760 valid signatures to qualify. County clerks now are counting the filed signatures.

Under the initiative, rate approval statutes similar to those enacted by Proposition 103 in 1988 for most property and casualty insurance would be made applicable to health insurance.

The initiative also would affect automobile and homeowners insurance. For health insurance, as well as automobile and homeowners insurance, the initiative would prohibit insurers from using the absence of prior insurance coverage or a person’s credit history as a rating factor or a criterion for determining insurance eligibility.

The initiative is summarized in this blog here.     

California Assembly Passes Bill Requiring Health Insurance Filing and Disclosures

By Samuel Sorich

On May 3, 2012, the California Assembly passed a bill that would require health insurers that are regulated by the Department of Insurance to submit information to the department when the insurer plans to terminate its contract with a provider group or hospital. The bill also would require insurers to provide insureds with additional disclosures. The 80-member Assembly passed Assembly Bill 2152 with a 46-25 vote.

AB 2152, which is sponsored by the Department of Insurance, has three major elements.

  1. The bill would require a health insurer to notify the Department of Insurance at least 75 days before the insurer terminates its contract with a provider group or hospital to provide services at alternative rates of payment. The department would have the authority to review and approve the written notice that the insurer proposes to send to the insureds affected by the termination. 
  2. AB 2152 would require a health insurer to include in its disclosure form a statement clearly describing the basic method of reimbursement made to its contracting providers of health care services, and whether financial bonuses or any other incentives are used. 
  3. AB 2152 would require health insurance policies to include additional notices and disclosures. 

The bill is now waiting to be assigned to a Senate committee. 

Signatures May Be Collected for California Health Insurance Initiative

By Sam Sorich and Larry Golub

On January 4, 2012, the California Secretary of State announced that signatures may be collected for a proposed initiative which would bring prior approval of rates for health insurance to California, and also amend the existing regulation of automobile and homeowners insurance.

Jamie Court, the President of Consumer Watchdog, is the proponent of the measure, termed the Insurance Rate Public Justification and Accountability Act. There were actually two virtually identical versions of the initiative submitted to (and allowed to proceed to collect signatures by) the Secretary of State, file numbers 11-0070 and 11-0072, but it is expected that Consumer Watchdog will pursue signature gathering for only the second version of the initiative.  (In fact, its website only links to the second version of the initiative.)

In order to qualify for the November 6, 2012, ballot, backers of an initiative must file 504,760 valid signatures in support of the measure. The deadline for submitting signatures for the initiative is June 4, 2012.

Among other things, the initiative would give the California Insurance Commissioner the power to approve health insurance rates proposed after November 6, 2012. The rate approval statutes enacted by Proposition 103 in 1988 for most property and casualty insurance would be made applicable to health insurance. A health insurer’s rate application would have to be accompanied by a sworn statement by insurer’s chief executive officer declaring that the contents of the application are accurate and comply in all respects with California law.

The initiative would require a health insurance company to pay refunds with interest if the insurance commissioner determines that the company’s rates are excessive; this requirement would apply to rates in effect on November 6, 2012 and rates in effect after that date.

Large group health insurance policies would be excluded from the scope of the initiative unless any one of four specified conditions exists; two of the conditions relate to the level of the proposed rate increase.

For health insurance, as well as automobile and homeowners insurance, the initiative would prohibit insurers from using the absence of prior insurance coverage or a person’s credit history as a rating factor or a criterion for determining insurance eligibility.

The initiative specifies that it may be amended only (1) by the Legislature if the legislation furthers the initiative’s purposes and is passed by a two-thirds vote in both the Assembly and the Senate or (2) by another voter ballot initiative.

In its summary of the fiscal effects of the initiative if approved by the voters, the Legislative Analyst’s Office estimates that the measure would increase “state administrative costs in the low tens of millions of dollars annually to regulate health insurance rates, funded with revenues collected from filing fees paid by health insurance companies.”

Originally published on Barger & Wolen's Insurance Litigation & Regulatory Law Blog.

Health Care Rate Regulation Bill Stalls In State Senate

Controversial California Assembly Bill 52 (“AB 52”), which, among other things, granted the California Department of Insurance (“CDI”) and the California Department of Managed Health (“DMHC”) the authority to reject or modify any proposed rate or rate change by a health insurer or health care service plan, has stalled out in the California Senate. Under current law, neither the CDI nor the DMHC has the authority to reject or modify proposed rates or rate changes.

While AB 52 had previously cleared the California Assembly in June, on Wednesday August 31, 2011, AB 52’s author – Assemblyman Mike Feuer – halted efforts to try to get AB 52 passed by the Senate this year, indicating that there were insufficient votes to win approval from the Senate before the deadline next week for approving bills. Assemblyman Feuer stated that he would re-visit passage of AB 52 next year when the Senate returns to session.

Collateral Source Rule Inapplicable When Injured Person's Medical Expenses are Discounted by Health Insurer

By Larry M. Golub

In a long-awaited, and nearly unanimous decision, the California Supreme Court has held that an injured plaintiff whose medical expenses are paid through private health insurance may recover as economic damages no more than the amounts paid by the plaintiff’s insurer for those medical services, and that this discounted amount does not fall within the collateral source rule. The decision is Howell v. Hamilton Meats & Provisions, Inc., decided August 18, 2011.

Rebecca Howell was injured in an automobile accident caused by a driver of Hamilton Meats & Provisions, Inc. The total amount billed by her medical providers for her medical care up to the time of trial was $189,978.63, but due to the preexisting contracts those providers had entered into with Howell’s health insurer, the bills were reduced by $130,286.90, such that the amounts paid to (and accepted by) the providers was only $59,691.73. 

At trial, Howell sought to recover the full amount of her medical bills, not the amount that her medical providers had accepted. While allowing Howell to present her the full-billed amounts to the jury, the trial court reduced those amounts in post-trial motion to the $59,691.73 paid to and accepted by the providers.

The Fourth District Court of Appeal reversed the reduction order on the ground that it violated the collateral source rule, and the Supreme Court accepted review of the case to resolve the following issue: 

Is the negotiated rate differential – the difference between the full billed rate for medical care and the actual amount paid as negotiated between a medical provider and an insurer – a collateral source benefit under the collateral source rule, which allows a plaintiff to collect that amount as economic damages, or is the plaintiff limited in economic damages to the amount the medical provider accepts as payment?

After providing a detailed discussion of the history of the collateral source rule, as “unequivocally reaffirmed” by the Court’s in the decision Helfend v. Southern Cal. Rapid Transit Dist., 2 Cal.3d 1, 6 (1970), and how that rule has been addressed over the past 40 years in case law (mostly involving Medi-Cal benefits) or excepted by statute in limited contexts, the Supreme Court explained that none of the prior cases had “discussed the question, central to the arguments in this case, of whether restricting recovery to amounts actually paid by a plaintiff or on his or her behalf contravenes the collateral source rule.” 

The Court then proceeded to resolve the four issues necessary to answer this question:

First, based on certain California Civil Code sections and the provisions of the Restatement of Torts, and as guided by a prior Court of Appeal decision involving Medi-Cal benefits, Hanif v. Housing Authority, 200 Cal. App. 3d 635 (1988), the Court held that

“a plaintiff may recover as economic damages no more than the reasonable value of the medical services received and is not entitled to recover the reasonable value if his or her actual loss was less.” (Emphasis by Court.)  

This is based on the well-established rule that a plaintiff’s expenses, to be recoverable, must not only be incurred but reasonable, and that this rule “applies when a collateral source, such as the plaintiff’s health insurer, has obtained a discount for its payments on the plaintiff’s behalf.”

Second, the basis for the limitation on recovery as to Medi-Cal recipients, adopted in the Hanif case, similarly applies to plaintiffs like Howell who possess private medical insurance. Since, by the purchase of such insurance, Howell’s prospective liability was limited to the amounts her medical insurer had agreed to pay the providers for the medical services they were to render, Howell could not “meaningfully be said ever to have incurred the full charges” or ever been personally liable for the full charges. 

Third, as to the argument that the tortfeasor (Hamilton in this case) would obtain a windfall “merely because the injured person’s health insurer has negotiated a favorable rate of payment with the person’s medical provider,” the Court disagreed. After addressing the “complexities of contemporary pricing and reimbursement patterns for medical providers,” the Court observed that the “negotiated prices” medical providers accept from health insurers “makes at least as much sense, and arguably more, than” the full prices that are billed by such providers where there is no negotiation between buyer and seller. 

“Accordingly, a tortfeasor who pays only the discounted amount as damages does not generally receive a windfall and is not generally underdeterred from engaging in risky conduct.”

Finally, in response to the contention by Howell that the “negotiated rate differential” is a benefit provided to the insured plaintiff under her policy and should be recoverable under the collateral source rule, the Court disagreed with this assertion as well. 

Since Howell did not incur liability for the full bills generated by the medical providers, due to the fact that her providers had agreed with her insurer on a different price schedule, she could not recoup those full bills as damages for economic loss under the collateral source rule. Moreover, the rule does not apply to the negotiated rate differential since it is not primarily a benefit to the plaintiff but the “primary benefit of discounted rates for medical care goes to the payer of those rates – that is, in largest part, to the insurer.”

As noted above, the Court’s decision was not wholly unanimous, as one Justice dissented. That Justice’s position was that, while Howell should not be able to recoup “the gross amount of her potentially inflated medical bills,” neither should they “be capped at the discounted amount her medical providers agreed to accept as payment in full from her insurer.” Instead, the dissent opted for an intermediate position, claiming this is the majority rule across the country: “Howell should be entitled to recover the reasonable value or market value of such services, as determined by expert testimony at trial.”  

With six Justices signing off on the Court’s opinion, however, the collateral source rule will not require defendants (or their liability insurers) in California to pay any amount greater for medical expenses than the discounted amounts paid by the insured person’s health insurer and accepted by her medical providers.

Originally posted on Barger & Wolen's Insurance Litigation & Regulatory Law blog.

Draft Guidance 2470, Concerning Review of Complaints Concerning Health Insurance Policy Rescission or Cancellation, Released by California Department of Insurance

On May 26, 2011, the California Department of Insurance (“CDI”) released a second draft of its Guidance 2470, which is designed to implement various provisions of AB 2470. AB 2470, enacted in 2010, legislated certain aspects of rescission, non-renewal, and cancellation of health insurance policies and health care service plans in California. 

The CDI’s draft Guidance 2470 purports to set forth requirements concerning the CDI’s review of complaints related to the cancellation, rescission, or non-renewal of a health insurance policy. T

he draft Guidance includes, among other items, provisions concerning the notice health insurers are required to provide to policyholders about the CDI’s review process and information concerning the mechanisms for the review process. 

The draft Guidance also purports to enumerate the factual showing required of health insurers in order to demonstrate that a cancellation or rescission is lawful.

Finally, the draft Guidance requires health insurers to continue to provide coverage to the policyholder until such time as the CDI makes a decision on the lawfulness of a cancellation, rescission, or non-renewal following the CDI’s receipt of a valid complaint from the policyholder.

As the public comment period on draft Guidance 2470 closed on June 6, 2011, it is anticipated that the CDI will issue its final version of Guidance 2470 in the near future.

California Department of Managed Health Care Releases Draft Guidance Concerning SB 1163

On April 22, 2011, the California Department of Managed Health Care (“DMHC”) released draft Letter No. 8-K, which is designed to provide health care service plans with guidance concerning SB 1163. This follows the California Department of Insurance’s (“CDI”) release on April 5, 2011, of Guidance 1163:2 concerning SB 1163.

SB 1163, effective January 1, 2011, amended the California Health and Safety Code and the California Insurance Code to provide for review of rate increases by health care service plans and health insurers for purposes of determining whether the rate increase is unreasonable. 

SB 1163 was adopted in response to a provision in the federal Patient Protection and Affordable Care Act (“PPACA”) that requires health care service plans and health insurers’ rate increases to be reviewed by the federal government to determine whether the rate increase is unreasonable, unless a state has established its own rate review process. The key implementing provisions of SB 1163 are located at California Health and Safety Code Sections 1385.01 to 1385.13 and California Insurance Code Sections 10181 to 10181.13

California Health and Safety Code Section 1385.08(a) states that the DMHC, “may issue guidance to health care service plans regarding compliance with this article.” This tracks the language found in California Insurance Code Section 10181.9(a), which states that the CDI, “may issue guidance to health insurers regarding compliance with this article.” 

Both Health and Safety Code Section 1385.08(a) and Insurance Code Section 10181.9(a) exempt the DMHC and the CDI from following the formal procedures employed for the adoption of regulations in California when issuing guidance concerning compliance with Health and Safety Code Sections 1385.01 to 1385.13 and Insurance Code Sections 10181 to 10181.13. 

Guidance 1163:2 issued by the CDI purports to define the factors the CDI will consider in determining whether a rate increase is “unreasonable” in the individual and small group markets, in addition to attempting to implement certain procedural aspects of SB 1163 for these markets. 

A comparison of the DMHC’s draft Letter No. 8-K with the CDI’s Guidance 1163:2 reveals that the DMHC has preliminarily adopted many of the provisions contained in the CDI’s Guidance, without modification, and may consider some of the other factors contained in the CDI's Guidance when making reasonableness determinations for these markets.

Commissioner Jones Responds to Federal Government Announcement of New State Grants for Health Insurance Rate Review

by Marina Karvelas

In a press release issued today, California Insurance Commissioner Jones applauded the U.S. Department of Health and Human Services after it announced the availability of roughly $200 million in new health insurance rate review grants

Specific funding is available to support states in their efforts to stop excessive premium increases from being implemented. However, California would not be eligible for this portion of the grant because California law currently does not empower the Commissioner to reject excessive health insurance premium increases.

As discussed earlier in this blog, Commissioner Jones recently issued Guidance 1163:2 which allows the Commissioner to determine, based upon a list of factors, including a federal medical loss ratio, whether a health insurance premium rate increase is “unreasonable”.

The Commissioner however has no power to reject an "unreasonable" rate increase.  

Commissioner Jones is actively supporting legislation that would give him such power and the new federal grants gives him yet another platform to do so.

While California is eligible for some of the grant funding through this program, we would be eligible for more federal funding if California law provided the Insurance Commissioner with the authority to reject excessive premium increases. This again brings to light the need to change the law and provide the Insurance Commissioner with that authority. I am working with Assembly Member Mike Feuer to pass AB 52, which would give me the authority to reject excessive health insurance premium increases." 

We will follow AB 52 and the Commissioner's efforts to reform health insurance rate regulation.

Concerned About Excessive Rates, California Insurance Commissioner Requests Rate Filings from Medical Malpractice Carriers

On February 17, 2011, California Insurance Commissioner David Jones announced in a press release that the California Department of Insurance had contacted several unnamed medical malpractice insurers to raise concerns about excessive rates and request that these insurers submit rate filings with the CDI to reduce their rates. 

California Insurance Code sections 1861.01 and 1861.05, enacted in 1988 as part of Proposition 103, specifically grants the CDI the authority to regulate the rates of certain property and casualty lines of insurance, including medical malpractice insurance. It requires these insurers to apply to the CDI for prior approval of rates and prohibits the use of excessive rates. 

The CDI noted in its press release that it has employed these provisions in the past to regulate the rates of medical malpractice insurers, including reducing rate increases. 

In contrast, the CDI specifically confirmed that it does not have the authority to reject rates from health insurers that it deems excessive or unreasonable, as health insurance is not subject to California Insurance Code sections 1861.01 and 1861.05.

In his announcement, Commissioner Jones noted that the basis for the CDI’s determination that medical malpractice rates might be excessive is the low loss ratios that these medical malpractice insurers experienced. 

In the CDI’s view, low loss ratios are an indication that premiums might be excessive and in violation of the law. 

The CDI plans to require a rate filing from those medical malpractice insurers it believes have excessive rates and review the rate filings to ensure that the rates comply with the aforementioned provisions of the California Insurance Code as well as all other applicable provisions of the law.

Court Invalidates New Regulations Issued by Department of Insurance Concerning Underwriting and Rescission of Health Insurance Policies

On December 30, 2010, Sacramento County Superior Court Judge Michael Kenny invalidated several recently issued regulations by the California Department of Insurance (“CDI”) in response to a challenge filed by the Association of California Life & Health Insurance Companies (“ACLHIC”). 

ACLHIC was represented by Gregory Pimstone of Manatt, Phelps and Phillips and by Barger & Wolen partner John M. LeBlanc

The regulations were issued by the CDI on August 5, 2010, and attempted to impose a series of underwriting requirements on health insurers and restrict health insurers’ ability to rescind health insurance policies in California. A copy of the Court’s ruling can be found here.

ACLHIC challenged the regulations on several grounds, claiming that the CDI abused its discretion in adopting the regulations.


In particular, ACLHIC argued that the CDI lacked the authority to promulgate the regulations. The Court agreed with the ACLHIC with respect to the key regulations at issue. It held that the CDI lacked authority to issue either 10 California Code of Regulations § 2274.74 or 10 California Code of Regulations § 2274.77. The CDI argued, unsuccessfully, that its authority to issue these sections was found in Insurance Code §§ 790.10 and 12921

Proposed Section 2274.74, entitled “Standard for Avoiding Prohibited Postclaims Underwriting,” would have prohibited a health insurer from rescinding or canceling a policy if it did not comply with certain underwriting requirements set forth in the regulation, including requiring insurers to obtain health history information from a source other than the applicant. 

The regulation also purported to define medical underwriting by seven enumerated activities required of health insurers, without limiting medical underwriting to those seven activities. 

Further, the regulation attempted to establish the six activities that a health insurer had to conduct in order to resolve all questions arising from application materials.

If a health insurer failed with respect to either of these two items (i.e., any failure to complete the seven enumerated medical underwriting activities or the six activities required to resolve application questions), the regulation barred any rescission or cancellation. 

Finally, if a health insurer made any error in applying its own underwriting procedures – no matter how minor – the regulation likewise prohibited any rescission or cancellation.    

The Court concluded that the CDI lacked the authority to promulgate Section 2274.74.  

It determined that Insurance Code§ 790.10 only applied to those activities governed by Article 6.5 of Chapter 1 of Part 2 of Division 1 of the Insurance Code (within which section 790.10 falls) and that postclaims underwriting is governed by a separate article outside the reach of Insurance Code § 790.10. 

It reinforced this conclusion with the fact that the items prohibited by Insurance Code§§ 790.03, which Insurance Code § 790.10 governs, included an exhaustive list of prohibited business practices, none of which included postclaims underwriting and rescission based thereon. 

Finally, the Court concluded that Insurance Code§ 12921 only permitted the CDI to enforce existing laws regulating the insurance industry and that it did not provide authority for the CDI to promulgate new regulations.

The Court also invalided Section 2274.77 for these same reasons, as the CDI again relied on Insurance Code§§ 790.10 and 12921 to support its position that it was empowered to promulgate this regulation. 

Section 2274.77 purported to require an insurer, at the time of issuance and delivery of a policy, to return a complete copy of the application to the insured for review by including it in the same mailing, or other delivery mechanism, as the policy. If the insurer failed to comply with this requirement, it was precluded from using the information in the application as the basis for rescinding or canceling the policy.


California Court of Appeal Upholds Rescission of Health Insurance Policy

Concludes that Health Insurer Does Not Have to Physically Attach the Application to the Policy to Rely on Misrepresentations in Application to Support Rescission

In Nieto v. Blue Shield of California Life & Health Insurance Company, ___ Cal.Rptr.3d. ___, 2010 WL 162027 (2010), the Court of Appeal considered whether Blue Shield Life – an California insurance company subject to the California Insurance Code – could rescind plaintiff Julie Nieto’s (“Nieto”) individual health insurance policy based on misrepresentations concerning her medical history contained in the application she submitted to Blue Shield Life.

The Court of Appeal affirmed the trial court’s grant of summary judgment in Blue Shield Life’s favor, concluding that Blue Shield Life had no statutory duty to physically attach Nieto’s application to the insurance policy, nor to conduct further inquiries beyond the application during the underwriting process to ascertain the truthfulness of Nieto’s representations in the application before it issued the policy.

In reaching this conclusion, the Court discussed its holding in light of the recent decisions in Ticconi v. Blue Shield of California Life & Health Ins. Co., 160 Cal.App.4th 528 (2008) and Hailey v. California Physicians' Service, 158 Cal.App.4th 452 (2007).

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.

House Committee Votes to Strip Health Insurance Industry of Exemption from Federal Antitrust Laws

As reported by the Associated Press today, a House committee has voted to strip the health insurance industry of its exemption from federal antitrust laws as senators announced plans to take the same step.  The House Judiciary Committee voted 20 to 9 to repeal a law that exempted the health insurance industry from federal controls over certain antitrust violations, including price-fixing.

Health & Safety Code Only Required Blue Cross to "Offer" to Provide Infertility Group Coverage

The Court of Appeal recently interpreted the infertility treatment provisions of Health and Safety Code section 1374.55 in Yeager v. Blue Cross of California, __ Cal. Rptr. 3d __, 2009 WL 2033209 (July 15, 2009). Yeager sued Blue Cross, alleging that it violated its duty under section 1374.55 to offer coverage for infertility treatment in the group plan that Blue Cross provided through Yeager’s employer, Westmont College. Blue Cross moved for summary judgment, arguing that it complied with section 1374.55 by offering optional coverage of up to $2,000 a year for half the cost of each group member’s infertility treatment, which Westmont College declined to purchase for cost-related reasons. The trial court granted summary judgment, and Yeager appealed.

The Court of Appeal held that section 1374.55 – which states that “every health care service plan contract . . . shall offer coverage for the treatment of infertility . . . under those terms and conditions as may be agreed upon between the group subscriber and the plan” – merely obligated Blue Cross to offer coverage for infertility treatment, and left the amount and cost of that coverage to agreement between Blue Cross and Westmont College. Thus, the court agreed that Blue Cross complied with the statute.



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.

Federal Bill for Health Care Reform Unveiled

Earlier this week, House Democrats introduced H.R. 3200: America's Affordable Health Choices Act of 2009 that seeks to make affordable health care available to an estimated 97% of Americans.

The key components of the plan are as follows:

• The plan mandates that employers provide health care coverage to employees. Employers that fail to provide health care coverage will have to pay fees or penalties based on the employer’s payroll (e.g., 8% for payrolls of $400,000). The plan does provide some exceptions to such penalties and fees, including small business with payrolls under $250,000.

• The plan also mandates that individuals maintain health care coverage or pay penalties in the form of a new tax based on his or her income. Individuals that meet a “hardship” exception would be exempted from the penalty.

• The plan provides credits for low- and moderate-income individuals and families to help fund the purchase of health care.

• The plan would create government-sponsored insurance to compete with the private sector. Those needing health care could shop for plans in a government-operated “exchange,” in which private carriers could participate if they meet standard benefit requirements designed by the federal government.

• To subsidize the plan, a surtax ranging from 1% to 5.4% would be imposed on the top 1.2% of income earners.

• The plan would introduce new regulations that would prohibit health care plans and insurers from excluding coverage based on pre-existing conditions.

Barger & Wolen LLP will provide continuous updates as the bill progresses through the House and Senate.

California Insurance Commissioner Unveils Proposed Rescission Regulations

California Insurance Commissioner Steve Poizner unveiled his proposed regulations today to, according to an LA Times article dated June 3, 2009, “combat the health insurance industry practice of dropping members with costly illnesses.” According to the article, Poizner's draft regulations would require insurers to write applications for coverage in “plain English and allow applicants a ‘not sure’ answer to questions about their preexisting medical conditions.”  

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.

Denial of Claim for Health Benefits Alone Not Sufficient to Support IIED

Mintz v. Blue Cross of California, __ Cal. App. 4th __, 2009 WL 1019039 (April 16, 2009).

On April 16, 2009, the Second Appellate District in Mintz v. Blue Cross of California, found Blue Cross liable in negligence when acting as claims administrator for CalPERS, when its claims denial caused physical injury to the member. Blue Cross denied the member's treatment on the grounds it was experimental. The member appealed, and though Blue Cross advised the member of his contractual appeal rights, it failed to advise him of his statutory right to Independent Medical Review.

While the court held that the administrator, as representative of the insurer, may not be held liable for interfering with its principal's contract, and the denial of health insurance benefits, without more, is not the kind of extreme outrageous conduct necessary to state a claim for intentional infliction of emotional distress, the court did hold that the administrator owes a duty to the members to exercise due care to protect them from physical injury caused by its negligence in making benefit determinations.  

Judicial Opinion Available Here