California health insurers have a duty to check the accuracy of applications for coverage before issuing policies -- and should not wait until patients run up big medical bills, a state appeals court ruled Monday.
The court also said insurers could not cancel a medical policy unless they showed that the policyholder willfully misrepresented his health or that the company had investigated the application before it issued coverage.
The unanimous decision by a panel of the 4th District Court of Appeal in Santa Ana is the latest blow to California insurance companies and the way they handle policy cancellations after patients get sick and amass major medical claims.
The insurers’ practices are under scrutiny by the state Legislature, the Department of Insurance, the Department of Managed Health Care and the courts. In recent months, state agencies have fined, cited and sued the state’s major health insurers for the way they have handled cancellations and treated policyholders.
The decision came in a closely watched case involving Steve Hailey, an Orange County small-business owner whose coverage was canceled by Blue Shield of California after he had a disabling car accident. The ruling in favor of Hailey sends the case back to the lower court for trial and requires Blue Shield to pay Hailey’s appellate costs.
At issue for trial, the appeals court said, is whether the Hailey family intended to deceive Blue Shield and whether Blue Shield acted in bad faith by “blindly” accepting their application and taking their premiums until Steve’s medical bills got too high.
Spokesman Tom Epstein said Blue Shield, one of the state’s largest health plans, looked forward to the trial and would prove that “our underwriting was appropriate and that the Haileys misrepresented numerous important facts on their application.”
The company said it was considering an appeal.
Steve Hailey’s wife, Cindy, said the decision “was the best Christmas present we could have possibly gotten.”
The family was “very excited that our case is finally going to be heard,” she said. “There have been so many other people hurt besides us, and hopefully this will just be the best thing for everyone.”
Michael Nutter, a lawyer representing the Haileys, said the ruling would be a boon to his clients’ case.
Blue Shield is “going to need to show -- which I don’t think they ever can do in this case -- that the Haileys willfully misrepresented something,” he said.
The real value to consumers is that the ruling opens the door for hundreds of trials of similar suits on grounds favorable to people whose policies have been rescinded, said William Shernoff, a Claremont lawyer who represents policyholders.
“What this court is saying is these cases are going to juries, and that’s going to scare the hell out of the insurance companies,” Shernoff said. “Just one or two punitive damage awards by juries will clean this up, and the appellate court is now going to let that happen.”
Until now, lower courts have typically dismissed cases in favor of insurers without trials, and insurers have settled confidentially out of court, insurers and policyholder lawyers say.
Bryan Liang, executive director of the Health Law Institute at California Western School of Law in San Diego, said the ruling was consistent with what the state Department of Managed Health Care has said -- that insurers “cannot cancel policies without willful misrepresentation.”
The court “went further and stated quite clearly that the current policies of insurers simply do not serve as a basis for legal rescission,” Liang said.
In the Haileys’ case, Blue Shield rescinded Steve’s policy after authorizing more than $450,000 worth of hospital and other medical care. The insurer also demanded that he repay more than $104,000 it spent on his behalf.
Blue Shield contended that Hailey lied on his application about preexisting conditions, failed to disclose a recent emergency room visit and shaved about 45 pounds off his weight.
But Cindy Hailey testified that she filled out the application for the family, including a teenage son, and mistakenly believed that it was asking for information about only her health.
The lower court sided with Blue Shield, dismissing the case without trial. But the appeals court reversed that decision, sending the case back for trial.
The appeals court, in an opinion written by Justice Richard M. Aronson, said there was reason to believe that Cindy Hailey was confused by Blue’s Shield’s application. The form, the court said, “although understandable upon close examination and reflection, is no model of clarity, and lends credence to Cindy’s explanation of her omission of Steve’s health information.”
The court also said that facts of the case “raise an inference that Blue Shield may have acted in bad faith by delaying its decision to rescind the policy.”
Blue Shield became suspicious that the Haileys might have withheld information in February 2001, two months after it issued the policy, the court noted. But the firm failed to notify the Haileys of the rescission until almost four months later.
If Blue Shield had notified the couple more promptly, the court noted, Cindy Hailey said she could have obtained coverage through her employer before Steve’s accident, avoiding the dispute and problems related to delays in his care.
The court also highlighted the testimony of Blue Shield’s underwriting investigator that the company referred about 1,000 claims a year to her for investigations of possible application omissions and misstatements. Yet, the court wrote, the investigator said she rescinded less than 1% of them.
“These facts raise the specter that Blue Shield does not immediately rescind health care contracts upon learning of potential grounds for rescission, but waits until after the claims submitted under that contract exceed the monthly premiums being collected,” the court wrote.
A health plan, the court went on, “may not adopt a ‘wait and see’ attitude after learning of facts justifying rescission.” The court said companies could not continue to “collect premiums while keeping open its rescission option if the subscriber later experiences a serious accident or illness that generates large medical expenses.”
As a result of the rescission, the Haileys said they were unable to afford physical rehabilitation and other medical care that Steve needed.
An operation he required to repair a torn urethra was delayed until his condition was life-threatening -- and then it was too late, they said. The delay left Steve permanently dependent on a catheter, they said.
The court concluded that, “assuming the truth of the Haileys’ evidence, the tragic situation in which they now find themselves could have been averted had Blue Shield’s agent or underwriter simply asked Cindy if she had included information for her husband and son.”