In the last several years, the media, and the California Departments of Managed Health Care and Insurance, as well as a number of prominent plaintiff attorneys have taken a keen interest in health plan and health insurer practices of rescinding individual policies. On December 24, 2007, the California Appellate Court, in Hailey v. California Physicians’ Service1 (dba “Blue Shield of California”) helped unravel the morass of competing, and often conflicting, interests and answered the question as to when it is appropriate for a health plan to rescind an enrollee’s health coverage following the enrollee’s payment of premiums and receipt of health care services.
The Hailey decision focused on when a health care service plan (“health plan”) licensed under the California Knox-Keene Health Care Service Plan Act of 1975 (the “Knox-Keene Act”) can rescind coverage subsequent to issuing an individual policy. Relying on section 1389.32 of the Knox-Keene Act, the Court rejected the position asserted by plaintiff and the California Department of Managed Health Care (“DMHC”) in its amicus brief, and ruled that a health plan may rescind coverage when there is no willful misrepresentation if the plan had taken reasonable efforts to ensure it had all the necessary information to accurately assess the risk of providing coverage before issuing the individual contract. Nevertheless, the Court reversed the trial court’s grant of Summary Judgment and concluded there were disputed facts as to whether Blue Shield met its burden of showing that it had taken the necessary reasonable efforts to assess the risk of insuring the plaintiffs.
Hailey v. California Physicians’ Service (dba “Blue Shield of California”)
In Hailey, plaintiffs Cindy and Steve Hailey brought suit following Blue Shield’s rescission of the Hailey’s coverage. Mrs. Hailey had applied for coverage with Blue Shield for herself, her husband Steve, and her son. Mrs. Hailey believed that she only needed to provide her health information on the application form and not the health history of her husband or son. Blue Shield issued coverage based solely on the information provided in the application form. After coverage commenced, Mr. Hailey was admitted to the hospital, and Blue Shield began an investigation into his health history that revealed a history of undisclosed health issues. Shortly thereafter, Mr. Hailey was permanently injured in a car accident. A few months later, Blue Shield cancelled the Haileys’ coverage retroactively due to their failure to disclose Mr. Hailey’s health history on the application form for coverage.
The Haileys sued alleging several causes of action including breach of contract. The Haileys argued that section 1389.3 prevented Blue Shield from rescinding coverage unless it proved that the Haileys willfully misrepresented Mr. Hailey’s health condition when they applied for coverage. Section 1389.3 provides: “[n]o health care service plan shall engage in the practice of postclaims underwriting. For the purposes of this section, ‘postclaims underwriting’ means the 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. This section shall not limit a plan’s remedies upon a showing of willful misrepresentation.”
Blue Shield filed a cross-complaint seeking a declaration that it legally rescinded its health care contract with the Haileys. The trial court granted Blue Shield’s motion for Summary Judgment, and held that Blue Shield was justified in its rescission of the Hailey’s contract. The Haileys appealed.
The Court of Appeal Decision
In reversing the trial court’s grant of Blue Shield’s motion for Summary Judgment, the Court of Appeals concluded that:
- Section 1389.3 precludes a health plan from “rescinding a contract for a material misrepresentation or omission unless the plan can demonstrate (1) the misrepresentation or omission was willful, or (2) it had made reasonable efforts to ensure the subscriber’s application was accurate and complete as part of the precontract underwriting process;”
- Triable issues of fact exist as to (1) whether the Haileys willfully misrepresented health information on the application form; (2) whether Blue Shield made reasonable efforts to ensure the Hailey’s application was accurate and complete as part of the precontract underwriting process; and (3) whether Blue Shield acted in bad faith; and
- The Haileys successfully alleged a cause of action for intentional infliction of emotional distress.
The Court focused its inquiry on whether a health plan could rescind coverage for a negligent misrepresentation on the application form. The DMHC, in its amicus brief asserted that a health plan may only rescind an individual policy when the health plan can demonstrate willful misrepresentation by the applicant in preparing the application. While the Court did not determine whether negligence alone constituted sufficient grounds for rescission, the Court concluded that if willful misrepresentation was not evident, a health plan could still rescind an individual policy if the health plan could demonstrate that it had taken reasonable efforts to ensure it had all the necessary information to accurately assess the risk of issuing a policy before the policy was actually issued.
The Court recognized the unfairness of an applicant obtaining a policy, paying premiums, and discovering only after receiving health care services and submitting a claim that he or she is not covered, and is then unable to cover the loss. The Court noted that “public policy favors requiring a health care services [sic] plan to demonstrate reasonable care in ensuring the accuracy of a potential subscriber’s application as part of the precontract underwriting process.” The Court then held that if a health plan cannot show willful misrepresentation, the health plan may still rescind the contract if the health plan makes “reasonable efforts to ensure it has all the necessary information to accurately assess the risk before issuing the contract.” But the Court declined to identify what steps would constitute a reasonable investigation and remanded the case back to the trial court for further proceedings.
Implications of the Decision
The Court’s opinion is helpful in shaping how health plans can address the issue of rescission. But the Hailey decision leaves several questions unanswered. These include:
- Must a health plan’s precontract underwriting process always include investigating the specific information provided by an applicant on the plan’s application for health coverage? And how extensive does that investigation have to be?
- If an application is unambiguous and a health plan desires to preserve the right to later rescind a policy, is it possible for the health plan to solely rely on the information provided in the application form?
- What steps must a health plan take to demonstrate reasonable care in ensuring the accuracy of a potential subscriber’s application?
Because the answers to these and other questions remain, litigation concerning the appropriateness of decisions to rescind coverage will likely continue.