On January 19, 2010, the Second Appellate District of the Court of Appeal for the State of California issued its decision in Nieto v Blue Shield of California Life & Health Ins. Co., 2010 WL 162027. The decision substantially undermines Ticconi v. Blue Shield of California Life & Health Ins. Co., 160 Cal. App. 4th 528 (2008) ("Ticconi") and Hailey v. California Physicians' Service, 158 Cal. App. 4th 452 (2007) ("Hailey"), two recent appellate decisions that had significantly impeded a health insurer's ability to rescind an insured's health insurance policy for fraud, and were influential in turning the judicial tide against rescissions generally.
In particular, the Nieto decision expressly declines to follow the dicta of Ticconi about "attaching" the application to the policy, and uses a much narrower interpretation of "postclaims underwriting" than in Hailey. By emphasizing the need to protect insurers against fraud and by citing with approval a long history of case law upholding rescissions, Nieto serves to rebalance the legal scales that had tipped in favor of condoning fraud and deceit by applicants seeking health insurance by allowing them to retain their policies even where they should not have obtained their policies in the first place.
Ticconi. Ticconi primarily concerned Cal. Ins. Code Section 10381.5, which provides that an applicant for health insurance is not "bound by" statements in the application unless a copy of the application is "endorsed on or attached to the policy as a part thereof when issued as a part thereof." The Ticconi court interpreted Section 10381.5 as prohibiting any rescission unless a copy of the application was "endorsed or attached," and suggested that physical attachment is required in all cases.
The Nieto court declines to follow Ticconi. Relying on the legislative history and emphasizing the need to harmonize the "attach or endorse" statute to coexist with the many statutes supporting rescission for fraud, the Nieto court expressly disagrees with Ticconi's suggestion that the application must be physically attached to the policy in order to permit the insurer to rescind. The court found that Blue Shield's practice of cross-referencing the application and the policy to each other is a sufficient "endorsement" to satisfy the statute. The court also found, in the alternative, that the applicant's oral misrepresentations to the Blue Shield sales agent were sufficient to support the rescission, even if Blue Shield could not rely on the misrepresentations in the application to support the rescission.
Hailey. Hailey interpreted the concept of "postclaims underwriting," which is prohibited under California Health & Safety Code Section 1389.3 and Ins. Code 10384. The statutes define postclaims underwriting to mean rescinding a policy "due to the insurer's failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the policy." The Hailey court gave an expansive reading to the phrase "complete medical underwriting." The court suggested that in order to avoid postclaims underwriting, the insurer's initial underwriting must investigate every aspect of information available to it in order to verify the accuracy of the applicant's statements on the application. In so doing, the court departed from a long line of precedent holding that an insurer could rely on the statements made on the application and need not assume that the applicant is untruthful. The Hailey court concluded that this longstanding law was undercut by the enactment of California statutes prohibiting postclaims underwriting where health care coverage is concerned.
Nieto holds that, regardless of whatever heightened underwriting requirements Hailey might have imposed on health care service plans under the Cal. Knox-Keene Act in the Health & Safety Code, health insurers governed by the Insurance Code are entitled to rely on the applicant's statements as being truthful. The court notes that both the insured and the insurer are subject to an obligation of good faith, and emphasizes that Ins. Code Section 331 expressly permits rescission based on concealment by the applicant. The court further holds that, even if the Hailey interpretation of medical underwriting did apply to an insurer, Blue Shield's underwriting process met that standard in this case.
Significantly, Nieto rejects the plaintiff's argument that Blue Shield was required as part of "complete medical underwriting" to obtain the medical records of any physician who was disclosed on the application, even if there were no "reasonable question" raised by the disclosure. Here, the applicant disclosed a physician visit three years earlier "for the flu" but omitted any mention of the extensive and recent visits to other providers for orthopedic problems. In the alternative, Nieto also concludes that, even if Blue Shield failed to "complete medical underwriting" by not obtaining the three-year-old records, the rescission nevertheless was not "due to" such failure because there was no evidence that obtaining the three-year-old records would have uncovered anything about the recent orthopedic experience.
The plaintiffs are likely to seek review of Nieto in the California Supreme Court. Disagreement among the appellate courts is one of the factors the Supreme Court considers in deciding to grant review. The Nieto decision is by the Second Division of the Second District Court of Appeal. Ticconi is by the Third Division of the same District. Hailey is by the Fourth District. The case presents an opportunity for the Supreme Court to clarify what steps are required of health insurers if they are to protect themselves against applicant fraud. Of course, if the country moves to a system of universal health care and guaranteed issue, the underwriting requirements and ability to rescind for fraud will become less important.
From the insurers' and health plans' perspective, Nieto is a case of good facts making good law. The factual basis for the rescission in Nieto was strong, and the court clearly did not want to allow the plaintiffs to reap a benefit from their fraud. If the Supreme Court does not grant review, the Nieto decision provides defense practitioners with a strong opinion in favor of bringing the law in this area back into balance and offers much to argue in defense of a well-reasoned rescission.