Health Insurance Rescission Case Upheld by California Appellate Court

On Wednesday, December 28, 2011, the First District Court of Appeal affirmed the trial court's granting of summary judgment in Hagan v. California Physicians' Service dba Blue Shield of California, et al, Case No. A130809 (unpublished), a health insurance rescission matter.

The matter was handled by Barger & Wolen Senior Partners John M. LeBlanc and Sandra Weishart, Senior Associates Ophir Johna and Vivian Orlando, and Greg Pimstone of Manatt, Phelps and Phillips

Background

In 2005, the Hagan family applied for health coverage with Blue Shield of California Life & Health Insurance Company. Beginning in 2001, Lori Hagan -- in her mid-thirties -- began to experience heavy menstrual cramping and bleeding. Over the next four years, she saw at least four physicians who diagnosed her with an enlarged uterus, fibroid tumors, menorrhagia and dysmenorrhea. She underwent exploratory laparoscopic surgery under general anesthesia, which confirmed the fibroid tumors and also revealed uterine adhesions and endometrial tissue. Ms. Hagan also underwent hormone therapy to treat the bleeding and severe pain. She was advised on multiple occasions that she needed to consider a hysterectomy or uterine ablation as treatment options.  

In applying for insurance coverage, however, the Hagans failed to disclose any of this information, despite application questions that asked the applicants to disclose any treatment, advice or symptoms concerning the female reproductive system, such as abnormal bleeding or fibroids, questions that inquired about any visits to the hospital, outpatient center, surgeries, and questions that requested disclosure of any other symptoms, conditions or recommended treatment not mentioned elsewhere on the application. 

In response to the application question that asked the applicants to disclose their last physician visit, Ms. Hagan failed to disclose that she had seen her physician just three weeks earlier, where he had again diagnosed her with painful symptoms related to her fibroids and where they again discussed hysterectomy as an option. 

Blue Shield Life rescinded the policy after it discovered these misrepresentations and omissions.

Though not required, Blue Shield Life paid all of the medical expenses incurred by the Hagans through the date of the rescission. The Hagans obtained replacement coverage within a few days, and Ms. Hagan was not deprived of any medical treatment as a result of the rescission.

Unfortunately, Ms. Hagan later passed away from uterine cancer. John Hagan sued Blue Shield Life alleging breach of contract, breach of the covenant of good faith and fair dealing and punitive damages. 

The Court's Decision

In upholding the trial court's decision granting summary judgment, the Court of Appeal first reviewed general principles governing an insurer's right to rescind. It rejected Hagan's argument that the language of Blue Shield Life's policy required it to prove that the Hagans' misrepresentations were intentional. 

The Court then reviewed the undisputed evidence in detail, in light of the specific questions on the application, as well as the excuses proffered by Hagan for why Ms. Hagan failed to disclose her long medical history, and concluded that the trial court properly granted summary judgment in Blue Shield Life's favor, in that there were clear misrepresentations and omissions of material facts on the application. 

The Court also found that Blue Shield Life did not engage in postclaims underwriting as defined in California Insurance Code section 10384

The Court held that the case was governed by the legal standards concerning underwriting and rescission set forth in Nieto v. Blue Shield of California Life & Health Insurance Company, 181 Cal. App. 4th 60 (2010) (click here for list of prior posts on Nieto). 

According to the Court, Blue Shield Life can only be guilty of postclaims underwriting if the "written information submitted on or with" the Hagans' application gave rise to "reasonable questions" that Blue Shield Life failed to resolve prior to issuing the policy. 

Against the background of California law that entitles Blue Shield Life to rely on the accuracy of the information the Hagans provided on their application (i.e., Blue Shield Life was not required to assume any of the Hagans' statements were false), Blue Shield Life properly completed its medical underwriting, and therefore did not violate Insurance Code section 10384.

Liability Insurer Does Not Waive Right to Raise Misrepresentations in Application for Failing to Follow Internal Underwriting Guidelines

While this blog is dedicated to Life, Health and Disability Insurance, including ERISA matters, a recent Court of Appeal liability insurance decision concerning waiver, estoppel and Health & Safety Code § 1389.3 Colony Insurance Co. v. Crusader Insurance Co.should apply with equal force to life, health and disability insurers.

Colony Insurance Company sought a declaration that Crusader Insurance Company improperly refused to defend a tenant lawsuit and share the costs incurred in defending the tenant litigation. Among the many issues argued was Colony’s contention that Crusader engaged in post-claims underwriting in violation of Health & Safety Code § 1389.3, relying on Hailey v. California Physicians’ Service, a case tried and won by Barger & Wolen partner John LeBlanc, as discussed here.

Mr. LeBlanc has taken the time to analyze the issue in Colony.

In Colony, both Colony and Crusader insured an apartment building in Los Angeles that became the subject of a tenant lawsuit. The apartment building was insured by Crusader from December 2003 to December 2004, after which Colony insured the building. Colony sought a declaration that Crusader improperly refused to defend the tenant lawsuit and share the costs incurred in defending the tenant litigation.

An application for coverage on the apartment building was submitted to Crusader in November 2003. In the application, the insured indicated that the building had been inspected by a governmental department in 1999 and 2000, but failed to disclose inspections occurring in 2002. The insured also failed disclose that in 2002 a governmental department found deficiencies and code violations. At the time it issued the policy, Crusader was unaware of the insured’s omissions, but denied coverage for the tenant lawsuit once it learned of the material misrepresentations and concealments in the application.

Colony sued Crusader, seeking a declaration that the misrepresentations and concealments in the application were not material and for payment from Crusader for a portion of the defense costs in the tenant litigation. At trial, the insured admitted that the 2002 citations should have been included in the application, and the evidence demonstrated that if the 2002 citations had been revealed, Crusader would not have insured the building. However, the evidence also demonstrated that Crusader failed to comply with its internal underwriting guidelines in issuing the policy. The trial court entered judgment in Crusader’s favor.

On appeal, Colony relied on principles of equitable estoppel and waiver to argue that Crusader was precluded from denying coverage for the underlying litigation because it failed to follow its internal underwriting guidelines. The Court of Appeal rejected these arguments on the grounds that Colony forfeited the arguments by failing to timely raise them in the trial court, but also found the contentions lacked merit.

First, the Court of Appeal found that there was no estoppel. The Court stated that Crusader’s internal guidelines, standing alone, did not create any rights enforceable by Colony. In so holding, it noted that the insurance agreement reinforced this conclusion: “By acceptance of this policy, the insured agrees ... that this policy embodies all agreements existing between the insured and the company or any of its agents relating to this insurance.” Further, there was no evidence that the insured detrimentally relied on the guidelines when applying for the policy. Thus, Crusader was not estopped from denying coverage for failing to comply with its own guidelines.

Similarly, the Court of Appeal held that Crusader had not waived its right to deny coverage based on the misrepresentations due to a failure to comply with its internal underwriting guidelines. In so doing, the Court cited to Insurance Code § 336, which provides:

The right to information of material facts may be waived, either (a) by the terms of insurance or (b) by neglect to make inquiries as to such facts, where they are distinctly implied in other facts of which information is communicated.”

The Court also noted that Colony failed to provide any explanation as to how Crusader’s internal guidelines could rewrite the provisions in the Insurance Code expressly permitting an insurer to rely on an insured’s representations in the application when issuing a policy.

Finally, Colony attempted to rely on Hailey v. California Physicians’ Service, 158 Cal. App. 4th 452 (2007), to contend that Crusader engaged in post-claims underwriting in violation of Health & Safety Code § 1389.3.

The Court of Appeal dismissed this argument, indicating that Colony’s

reliance on Hailey is misplaced because Hailey applied a specific statute applicable to health services plans. This case does not involve a health services plan and the prohibition on post-claims underwriting in section 1389.3 is inapplicable.”

Colony also attempted to rely on Barrera v. State Farm Mutual Automobile Insurance Co., 71 Cal. 2d 659 (1969), to support its argument that Crusader engaged in post-claims underwriting. The Court rejected this argument, relying in part on Nieto v. Blue Shield of California Life & Health Insurance Co., 181 Cal. App. 4th 60 (2010), because Barrera involved an automobile liability insurer and the public policy of protecting injured third parties, neither of which was a concern in the present case.

Thus, judgment in Crusader’s favor was affirmed.

Blue Shield Wins Summary Judgment in Rescission Case

by John M. LeBlanc and Ophir Johna

On September 20, 2010, the Lake County Superior Court granted summary judgment in favor of Barger & Wolen client Blue Shield of California Life & Health Insurance Company in the health insurance rescission action titled John M. Hagan v. California Physicians’ Service, et al. 

Blue Shield Life was represented by Barger & Wolen partners John M. LeBlanc and Sandra I. Weishart and senior associate Ophir Johna, and by Gregory N. Pimstone from Manatt, Phelps & Phillips, LLP.

In 2006, Blue Shield Life rescinded a health insurance policy issued to the Hagan family after discovering that they misrepresented and omitted Ms. Hagan’s ongoing, serious medical problems and treatment in their insurance application. Had it known about Ms. Hagan’s true medical history, Blue Shield Life would not have issued the policy. 

The Hagans asserted several claims against Blue Shield Life, including breach of contract and bad faith. They contended that the rescission was improper and that it amounted to illegal “post-claims underwriting.”

On Monday, the court rejected all of the Hagans’ arguments, granting summary judgment as to the entire action and thereby confirming that Blue Shield Life was legally justified in rescinding the Hagans’ policy. 

In granting summary judgment, the court agreed with the Court of Appeal’s decision in Nieto v. Blue Shield of California Life & Health Insurance Company, that the underwriting standard delineated by the appellate court in Hailey v. California Physicians' Service, a case also handled by Mr. LeBlanc and Barger & Wolen, was inapplicable to health insurers such as Blue Shield Life. 

Applying the correct legal standard, the court found that Blue Shield Life completed all legally required underwriting prior to issuing the Hagans’ policy, and that it was not required to obtain the Hagans’ medical records because their insurance application gave no indication of any potential underwriting issues.

The court further found no triable issues of fact as to whether the Hagans misrepresented and failed to disclose material medical history information requested by the application. (In fact, although not required to support the rescission, the court noted the existence of strong evidence that the Hagans’ misrepresentations and omissions were willful.) Accordingly, the court held that the rescission was proper as a matter of law and dismissed all of the Hagans’ claims.

Blue Shield Life’s parent company, California Physicians’ Service, which was named as a defendant in the suit although it did not issue the Hagans’ insurance policy, also obtained judgment in its favor.

Court Refuses Requests to Depublish Decision Affirming Rescission of Health Insurance Policy

On April 28, 2010, the California Supreme Court declined to review the Second District Court of Appeal’s decision in Nieto v. Blue Shield of California Life & Health Insurance Company, 181 Cal. App. 4th 60 (2010) (previously discussed here). The Supreme Court also declined to depublish the Nieto decision, despite numerous requests from consumer groups and a specific request from the Los Angeles City Attorney’s office. 

The Supreme Court’s decision confirms the Nieto court’s holding that the underwriting standards addressed by the Second District in Hailey v. California Physicians’ Service, 158 Cal. App. 4th 452 (2007), have no application to health insurers in California. It also confirms the holding in Nieto that advising applicants in the application, and in the policy, that an insurance policy is issued in reliance on the application statements will satisfy the requirements of the California Insurance Code attachment statutes to “endorse” the application on the policy. 

Finally, the Nieto decision is also being widely reviewed for its holding concerning when successive motions for summary judgment can be filed.

Further discussions on the Hailey and Nieto decisions can be found here:

Court Finds Triable Issue of Fact as to Rescission of Health Insurance, but Upholds Dismissal of Bad Faith and Punitive Damage Claims

Following the Hailey and Nieto decisions, issues exist whether a Health Care Service Plan completed sufficient medical underwriting prior to rescission

In Nazaretyan v. California Physicians’ Service, the California Court of Appeal reversed the trial court’s grant of summary judgment in favor of California Physicians’ Service dba Blue Shield of California (“Blue Shield”), a health care service plan, following its rescission of Gevork Nazaretyan and Narine Ghazaryan’s (the “Plaintiffs”) health care coverage. In a fact-driven decision, the Court of Appeal held that Blue Shield failed to establish, as matter of law, that its investigation prior to issuing Plaintiffs’ coverage was sufficient to demonstrate that it completed medical underwriting, as required under Health & Safety Code § 1389.3, to rescind for non-willful, material misrepresentations in the application for coverage.

The Court of Appeal also concluded that, as a matter of law, it could not hold that the Plaintiffs, who are husband and wife, willfully misrepresented material information in their application to Blue Shield. However, the Court of Appeal affirmed summary adjudication in Blue Shield’s favor on the Plaintiffs’ bad faith and punitive damage claims.

In August 2004, the Plaintiffs applied for health care coverage with Blue Shield with the assistance of their long-time insurance broker Ahman Yusop. On September 10, 2004, Blue Shield sent Yusop a form requesting information that was missing from the initial application. On September 21, 2004, the missing-information form was returned to Blue Shield with the questions answered, and on October 12, 2004, the Plaintiffs resubmitted their application to Blue Shield. Based on the information in the applications, Blue Shield approved coverage at its most favorable rate on November 1, 2004.

On May 17, 2005, Ghazaryan gave birth prematurely to twin girls, which were conceived as a result of in vitro fertilization (“IVF”). On or about November 11, 2005, the Plaintiffs’ case was referred to Blue Shield’s eligibility review unit (“ERU”), which was responsible for investigating potential material misrepresentations or nondisclosure of medical history by Blue Shield subscribers. In the course of its investigation, the ERU obtained medical records revealing that Ghazaryan had begun IVF treatments in 2004 and also had undergone a “D & C procedure” for spontaneous abortions in October 2002 and October 2004. The records also showed that on October 12, 2004, Ghazaryan was seen for an infertility evaluation and was scheduled for the various steps of the IVF procedure. During discovery, Blue Shield also learned that in 2002, the Plaintiffs had undergone fertility treatment including IVF, and that their second round of IVF treatment began on August 17, 2004, before they first applied to Blue Shield.

There were several places on the application to Blue Shield where the Plaintiffs should have disclosed their previous and ongoing infertility treatments, but they failed to do so. Had the Plaintiffs disclosed that they were being treated for infertility, Blue Shield would not have issued coverage to them. On March 24, 2006, Blue Shield sent the Plaintiffs a letter advising them that their coverage had been rescinded, effective November 1, 2004. The Plaintiffs filed suit against Blue Shield in July 2006, and on October 29, 2005, the trial court entered judgment in favor of Blue Shield following its motion for summary judgment. The Plaintiffs appealed.

The Court of Appeal first acknowledged the leading decisions of Hailey v. California Physicians’ Service, 158 Cal. App. 4th 452 (2007), and Nieto v. Blue Shield of California Life & Health Ins. Co., 181 Cal. App. 4th 60 (2010), which also dealt with rescission of a member’s coverage by a health care service plan. (See summary of Nieto here.)

The Court noted that, as discussed in Hailey, a health care service plan is entitled to rescind a plan contract on the basis of material misrepresentations in the application if either of the following two conditions is satisfied: (1) The plan completed medical underwriting before issuing the plan contract; or (2) the subscribers willfully made material misrepresentations in their application. According to the Hailey court, to complete medical underwriting the plan must “make reasonable efforts to ensure a potential subscriber’s application is accurate and complete.”

Thus, the Court of Appeal in Nazaretyan first examined whether Blue Shield provided sufficient facts to demonstrate as a matter of law that it had completed medical underwriting. It determined that Blue Shield had not, for purposes of summary judgment, provided sufficient facts in that regard with respect to the Plaintiffs’ coverage.

In reaching this conclusion, the Court of Appeal specifically noted that Blue Shield did not identify what efforts it undertook, beyond making sure that no required fields in the application were left blank and checking its own systems, to otherwise confirm that the Plaintiffs’ application was accurate and complete.

The Court next examined whether the Plaintiffs willfully misrepresented information in their application to Blue Shield. According to the Plaintiffs, their broker filled out the applications, and they merely signed the applications without reading them. Their broker, Yusop, testified that, apart from the signatures, all of the handwriting on the applications was his. The Plaintiffs further asserted that because of both their limited education and English language skills (both were immigrants) and Yusop’s expertise, they trusted and relied on him to ask them for any necessary information and to record the information accurately on the application (as well as to copy certain information from a previous application in his files). Because the Court of Appeal had to accept these facts as true in ascertaining whether summary judgment was appropriate (and specifically noted that it did not hold the Plaintiffs’ version of the facts as true), it found that as a matter of law it could not conclude that the Plaintiffs willfully misrepresented information in their application.

In addition, the Court of Appeal rejected Blue Shield’s argument that the rescission did not constitute unlawful postclaims underwriting because it was not “due to” any underwriting failure on the part of Blue Shield, as required by Health & Safety Code § 1389.3. Blue Shield contended that the Plaintiffs introduced no evidence that “had any further inquiry of some sort been made [by Blue Shield,] it would have revealed the concealed information.” The Court of Appeal rejected this argument, concluding that Blue Shield failed to carry its initial burden on the argument for purposes of summary judgment; thus, the burden never shifted to the Plaintiffs to introduce evidence of their own.

Finally, the Court of Appeal affirmed the grant of summary adjudication on the Plaintiffs’ bad faith and punitive damage claims against Blue Shield. In so doing, the Court specifically distinguished Hailey, where the appellate court reversed summary adjudication on bad faith and punitive damages, noting that unlike Hailey, there was no evidence of any delay on Blue Shield’s part in investigating and rescinding the agreement.