|
The California Court of Appeal for the Fourth Appellate District reversed a judgment of in favor of California Physicians' Service (Blue Shield) entered after the trial court sustained a demurrer to a cause of action for intentional infliction of emotional distress, granted summary judgment on causes of action for breach of contract and breach of the covenant of good faith and fair dealing, and awarded reimbursement damages to Blue Shield on its cross-complaint. The Court held Health and Safety Code § 1389.3 precluded a health care service plan from rescinding a contract unless the plan can show the misrepresentation was willful or the plan made reasonable efforts to ensure the application was accurate as part of the pre-contract underwriting process. The Court concluded there were triable issues of material fact as to these issues, and whether Blue Shield acted in good faith, and that the allegations of intentional infliction of emotional distress were adequate to state a claim.
Cindy Hailey applied for coverage for herself and her family under a health care service plan issued by Blue Shield. Believing the application sought information only about her, Hailey did not provide health information about her husband.
Blue Shield is a health care service plan (HMO) licensed and regulated by the Department of Managed Health Care pursuant to Health and Safety Code § 1341 (a), enacted as part of the Knox-Keene Health Care Service Plan Act. Blue Shield evaluates health care service plan applications by assigning a point value to the applicant's past and current health history as disclosed on the application. Based on the responses Hailey provided on her application, Blue Shield extended coverage to Hailey and her family at its best rate beginning December 15, 2000.
Hailey's husband was admitted to the hospital for stomach problems in February, 2001. Blue Shield referred Hailey's contract to its Underwriting Investigation Unit for investigation of possible fraud on February 8, 2001. Blue Shield obtained medical records that revealed Hailey's husband had a history of health issues including obesity and gastro esophageal reflux disease. It also learned his true weight was 285 pounds not 240 pounds as listed on the contract application.
Hailey's husband was permanently disabled in a car accident on March 19, 2001. Blue Shield authorized healthcare providers to provide surgery and other care in an amount in excess of $475,000. Mr. Hailey was hospitalized until May 31, 2001, when he was discharged with instructions for home nursing care and physical therapy.
On June 1, 2001, Blue Shield notified Hailey that it was rescinding coverage retroactively to December 15, 2000 based on her failure to disclose Mr. Hailey's health history and true weight.
The Haileys were unable to afford nursing care and physical therapy. Hailey was able to procure health coverage from her new employer but with restrictions for preexisting conditions unless they became life threatening. Due to delays in obtaining necessary care, Mr. Hailey suffered permanent damage to his bladder and other serious health effects.
The Haileys sued Blue Shield. Blue Shield's demurrer to the cause of action for intentional infliction of emotional distress was sustained by the trial court. Blue Shield filed a cross-complaint seeking a declaration it had legally rescinded the contract and was entitled to reimbursement for amounts paid in excess of premiums collected.
Blue Shield file a motion for summary judgment on the causes of action for breach of contract and breach of the covenant of good faith and fair dealing and on its cross-complaint. The trial court granted Blue Shield's motion and the Haileys appealed.
The Court of Appeal found the purpose of Health and Safety Code § 1389.3 is to prevent health care providers from shifting the financial risk of health care from providers back to service plan subscribers. Section 1389.3 precludes "postclaims underwriting," defined as "rescinding, canceling or limiting of a plan contract due to the plan's failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the plan contract." Section 1389.3 also provides it does not "limit a plan's remedies upon a showing of willful misrepresentation."
Blue Shield argued the undisputed evidence conclusively showed Hailey willfully misrepresented her husband's health history on the application. The Court disagreed based on evidence Hailey understood the application to seek information about her health history alone and she was simply mistaken about her husband's weight. The Court found this evidence was not patently unbelievable because the application's instructions were confusing. As a result, a triable issue of fact existed as to whether there was a willful misrepresentation of Mr. Hailey's health history.
Blue Shield argued it was entitled to rescind even if the misrepresentation was not willful. Blue Shield also argued section 1389.3 did not impose an obligation to investigate the accuracy of an application unless questions arose from the answers given. In addition, Blue Shield contended it conducted "complete medical underwriting" by the value assignment process it used to determine eligibility.
The Court disagreed and held that section 1389.3 imposed a duty on Blue Shield and other health care service plans to make reasonable efforts to ensure responses on applications are accurate and complete before making a determination to issue coverage. A provider does not "complete medical underwriting" when it accepts an applicant's responses without performing any inquiry to determine if the responses were made by mistake or inadvertence.
Noting the circumstances of each case vary, the Court declined to spell out what steps are required to conduct a reasonable investigation. It noted a reasonable investigation might include inquiring of an applicant's primary care physician or prior insurers or questioning the applicant about his or her responses.
The Court suggested a significant disparity between the quality of precontract underwriting and a postclaim investigation may be indicative of postclaims underwriting. If the allegations of the complaint were true, Blue Shield conducted little to no investigation into whether the information Hailey provided was complete and accurate before it issued the contract. The investigation it conducted after receiving the claim for Mr. Hailey's hospitalization for intestinal problems was extensive.
The Court distinguished between the rights of insurers governed by Insurance Code § 331, which allows for rescission for concealment whether intentional or unintentional, and the rights of health care service plans governed by the Health and Safety Code. Blue Shield is a health care service plan, not an insurance company, and is not directly governed by the Insurance Code or the regulations promulgated thereunder.
In addition, the Court opined that even if the Insurance Code were applicable, rescission would not be available citing Barrera v. State Farm Mut. Automobile Ins. Co. (1969) 71 Cal.2d 659. In Barrera the Supreme Court held an automobile insurer cannot postpone the investigation of insurability inevitably and concurrently retain the right to rescind, Citing the public policy favoring the protection of innocent drivers from financially insecure drivers, the Supreme Court in Barrera held an automobile insurer must conduct a reasonable investigation within a reasonable period after issuing the policy. Although noting many differences between automobile insurance and a health care services plan, the Court of Appeal concluded Barrera was consistent with its decision.
Turning to the cause of action for breach of the covenant of good faith and fair dealing, the Court first acknowledged that while health care service plans are not insurance, health care service plans, like insurers, are bound by the covenant of good faith and fair dealing. The Court also noted it is settled law that where there is a genuine dispute as to the existence or amount of coverage, an insurer is not liable for bad faith even though it may be liable for breach of contract. Citing the California Supreme Court's recent decision in Wilson v. 21st Century Ins. Co. (Nov. 29, 2007, S141790) __Cal.4th __, 19, 2007 LEXIS 13314, the Court noted the genuine dispute doctrine does not relieve an insurer from fairly and thoroughly investigating an insured's claim. The genuine dispute doctrine also does not alter the standards on summary judgment.
The Court concluded the evidence raised a triable issue of fact as to whether Blue Shield acted reasonably. There was evidence raising an inference that Blue Shield may have the practice of waiting to rescind contracts until claims exceed the premiums collected. And, in this instance, a jury could conclude it was unreasonable for Blue Shield to have waited to rescind until June when it first became suspicious in February.
Finally, the Court concluded the allegations of the Complaint were sufficient to state a claim for intentional infliction of emotional distress. The Haileys alleged Blue Shield acted in an outrageous manner by deliberately foregoing rescission until after Mr. Hailey had suffered severe injuries and corresponding liability for mounting health care costs. The Court also held the Complaint adequately alleged severe emotional distress by alleging depression, anxiety and physical illness.
This opinion is not final. It may be modified on rehearing or review may be granted by the Supreme Court. These events would render the opinion unavailable for use as legal authority.
Click here for opinion.
| 
