Home > Uncategorized > California appellate court reverses summary judgment in rescission case

California appellate court reverses summary judgment in rescission case

The Second District California Court of Appeal has reversed a trial court decision upholding the rescission of an individual health insurance policy on the grounds the insurer as a matter of law failed to comply with California law barring ex post facto underwriting after a policyholder files a costly claim.

Today’s ruling in Nazaretyan et al. v. California Physicians’ Service, B213664 reverses summary judgment granted in favor of Blue Shield of California’s rescission of a policy on the grounds a married couple failed to disclose the wife had undergone fertility treatments before giving premature birth to twins, leading to nearly $1 million in medical bills.

The court agreed with the insureds that Blue Shield’s medical underwriting did not meet the standard set in Hailey v. California Physicians’ Service (2007) 158 Cal.App.4th 452.  Hailey permits rescissions only for material misstatements or omissions on applications for individual coverage provided the plan or insurer completed medical underwriting prior to issuing coverage or can demonstrate an applicant willfully misrepresented or omitted material information about their medical history. 

Blue Shield, which maintains it has no affirmative duty to verify the accuracy of information applicants for coverage provide about their medical histories, unsuccessfully attempted to convince the court Hailey was wrongly decided.  In 2008, the insurer’s petitions to the California Supreme Court to review the ruling were denied.

Blue Shield also unsuccessfully tried to distinguish Hailey from a recent ruling in Nieto v. Blue Shield of California Life & Health Ins. Co. (2010) 181 Cal.App.4th 60.  In that case, the court held Hailey didn’t apply because the rescission at issue in Nieto involved an indemnity policy falling under California’s Insurance Code whereas Hailey, like Nazaretyan involved a managed care service plan regulated by the Knox-Keene Health Care Service Plan Act of 1975, codified in the Health & Safety Code.  (The insured in Nieto has petitioned the California Supreme Court for review.)

The ruling in Nazaretyan comes the same day President Barack Obama signed into law H.R. 4872, the sweeping health care reform legislation that bars rescissions except in cases of fraud starting this year. 

Under one of the prongs of Hailey, California insurers and health plans can already legally rescind coverage if they can prove an applicant committed fraud in order to get coverage.   However, they don’t have to also meet the other test set forth by Hailey: that medical underwriting was completed before coverage was bound.

In 2009, California Gov. Arnold Schwarzenegger vetoed AB 2, legislation that would have permitted rescissions only in cases where both Hailey tests are met: medical underwriting is completed and an applicant intentionally committed the misrepresentation or omission in order to obtain coverage.  Health plans and insurers argued that would require them to meet an impossibly high legal burden of proof to make rescissions stick in court. That argument that found favor in Schwarzenegger.  In the previous legislative session, Schwarzenegger vetoed nearly identical legislation citing concern such a standard would harm a “fragile” individual health insurance market.

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