Bad Faith: Postclaims Underwriting

Posted in Bad Faith on May 16, 2010

Nazaretyan v. California Physicians’ Service, (Second District, March 23, 2010) — Cal.Rptr.3d —, 182 Cal.App.4th 1601, 2010 WL 1038685, 10 Cal. Daily Op. Serv. 3660

A husband and wife who were denied healthcare insurance benefits relating to the premature birth of their twin girls when Blue Shield rescinded their coverage, filed an action against the carrier, asserting causes of action for bad faith, declaratory relief, and violation of Business and Professions Code section 17200. The plaintiffs alleged that the defendant rescinded their coverage after discovering that the woman had undergone in vitro fertilization, and that the plaintiffs had failed to disclose their previous and ongoing infertility treatment in the original application. The plaintiffs further alleged that Blue Shield had engaged in “postclaims underwriting” in violation of Health and Safety Code section 1389.3, which prohibits healthcare service plans from rescinding, canceling, or limiting a plan contract due to the plan’s failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on an application.

Blue Shield moved for summary judgment, asserting that its underwriting process was reasonable as a matter of law. The trial court granted summary judgment but the court of appeal reversed, holding that the facts failed to establish as a matter of law that Blue Shield made reasonable efforts to ensure that the application was accurate and complete, and that a reasonable trier of fact could conclude from the evidence that the plaintiffs did not willfully misinform the carrier in their application:

“”Blue Shield does not identify any efforts it undertook, beyond making sure that no required fields in the application were left blank (and presumably checking its own systems, as described above), to confirm that plaintiffs’ application was accurate and complete. Again, “[g]iven the likelihood of inadvertent error, accurate risk assessment requires a reasonable check on the information the insurer uses to evaluate the risk.” (Hailey, supra, 158 Cal.App.4th at pp. 466-467, 69 Cal.Rptr.3d 789.) Blue Shield offers neither evidence nor argument that its failure to take any additional steps was reasonable as a matter of law.
. . .
Blue Shield approaches the issue of willfulness from an entirely different angle. Blue Shield argues that (1) willful misrepresentations include misrepresentations made with reckless indifference to their truth or falsity, (2) an insurance applicant has a legal duty to review the application before signing it and to correct or report any misrepresentations, and (3) an insurance applicant is consequently presumed to have read the application and to be aware of any misstatements, so (4) given that duty and that presumption, plaintiffs were at least reckless in failing to read their applications.

We are not persuaded. If Blue Shield’s theory were correct, then it would mean that anyone who did what plaintiffs claim to have done – namely, rely on an insurance broker to ask them the necessary questions and record the information correctly – would have willfully made any resulting misrepresentations. Such a result would actually punish applicants who, because of their lack of education, English language skills, and familiarity with insurance forms, reasonably conclude that the best way to avoid making any material misrepresentations or omissions on their applications is (1) to trust an expert (an insurance professional) to guide them through the process, and (2) not to second-guess the expert’s work. We cannot believe the Legislature intended the term “willful misrepresentation” in section 1389.3 to apply to errors or omissions produced by such applicants, who on the contrary are actively, innocently, and reasonably endeavoring to avoid making any material misrepresentations.””