The April 1, 2015 edition of the Los Angeles Daily Journal features an article written by Robert McKennon and Joseph McMillen of the McKennon Law Group entitled: “When Insurers Rescind, They Must Act Fast.” In the article, Mr. McKennon and Mr. McMillen discuss the California Court of Appeal’s decision in DuBeck v. California Physicians’ Service, 2015 DJDAR 2629 (Cal. App. 2d Dist. Mar. 5, 2015), which held that Blue Shield of California (“Blue Shield”), waived its right to rescind her health insurance policy and, therefore, her claim was covered. While Ms. DuBeck had allegedly willfully misrepresented material facts about her medical condition on her application, the appellate court found that even if she had done so, Blue Shield waived its right to rescind.
The article is posted below with the permission of the Los Angeles Daily Journal.
When insurers rescind, they must act fast
By Robert J. McKennon and Joe McMillen
Did you disclose your material medical history on your health insurance application?
What about your application for disability or life insurance? Be careful that you do or
you may find yourself without insurance when you need it most like Bonnie DuBeck
did when she learned she had breast cancer that her insurer would not cover because she allegedly misrepresented her medical condition.
Fortunately for DuBeck, the California Court of Appeal in DuBeck v. California
Physicians’ Service, 2015 DJDAR 2629 (Cal. App. 2d Dist. Mar. 5, 2015), held her
insurer, California Physicians’ Service, doing business as Blue Shield of California,
waived its right to rescind her health insurance policy and, therefore, her claim was
covered. While DuBeck had allegedly willfully misrepresented material facts about her
medical condition on her application, the appellate court found that even if she had
done so, Blue Shield waived its right to rescind. Looking at the facts, one wonders how the trial court did not easily reach the same conclusion.
On Feb. 16, 2005, DuBeck submitted a signed application for health insurance to
Blue Shield. Five days earlier, she had visited the Revlon UCLA Breast Center where a nurse performed a “fine needle aspiration” on a lump in her left breast that had
developed after she ran into a cabinet. On the nurse’s advice, DuBeck scheduled a
mammogram and consultation with a breast surgeon for Feb. 17, the day after she
submitted the insurance application.
DuBeck was asked on the application whether she ever had treatment or symptoms
related to potential breast problems or had been advised to have a physician conduct
an exam or further testing which had not yet been performed. DuBeck answered “no”
to each question, omitting material information about her recent and upcoming breast
procedures. On April 1, 2005, Blue Shield issued a health insurance policy to DuBeck
without knowing about her breast exam, procedures and potential health problems.
The lump turned out to be malignant. In the months that followed, DuBeck had breast
surgery and other related medical procedures. In April and May 2005, DuBeck started
submitting claims to Blue Shield under the policy for the medical services. Blue Shield
did not pay for the claims, but suspended processing them. It explained the services
might not be covered under the policy’s preexisting condition exclusion and that it
needed to investigate further.
Blue Shield continued to collect DuBeck’s premiums, $19,600, for the next seventeen
months. It paid for her other claims unrelated to her breast cancer. It did not rescind
the policy during that period.
Seventeen months after Blue Shield issued the policy, on Sept. 8, 2006, it sent
DuBeck a letter explaining it had determined she had not provided complete and
accurate information on her insurance application. Namely, she failed to disclose the
fine needle aspiration procedure, a mammogram and a breast surgeon exam. With full
knowledge that DuBeck had undergone breast cancer surgery and had submitted a
claim to Blue Shield to cover the costs of these procedures, Blue Shield decided to
terminate the policy prospectively rather than rescind it. The letter stated, “Blue shield
has determined that, rather than rescind the coverage completely, your coverage was
terminated prospectively and ended effective today, September 8, 2006.” Blue Shield
also promised to cover and pay for any covered services prior to the termination date.
On the same date Blue Shield sent DuBeck the letter, it sent her a “Certificate of
Creditable Coverage” confirming that her coverage began April 1, 2005, and ended
September 8, 2006. The certificate stated that it was “evidence of your coverage under this plan.”
Two years later, because it had still refused to pay for her breast cancer surgery and
related services, DuBeck sued Blue Shield for breach of the insurance contract and bad faith, among other claims. Blue Shield asserted an affirmative defense that the policy was subject to rescission because DuBeck had willfully misrepresented material facts in her application, rendering the policy void ab initio. It moved for summary judgment on that defense, which the trial court granted.
DuBeck appealed and argued Blue Shield waived any right to rescind the policy. The
Court of Appeal agreed, reversed the trial court, and found waiver as a matter of law.
The court noted rescission extinguishes a contract, rendering it void ab initio, as if it
never existed. Rescission is, of course retroactive, rendering a contract or insurance
policy unenforceable from the outset. Cancellation, however, is prospective. To rescind under California law, the insurer must return to the insured all the premiums paid, unlike cancellation.
It is established California law that an insurer has the right to rescind a policy when
the insured misrepresented or concealed material information in seeking to obtain
insurance. Nieto v. Blue Shield of California Life & Health Ins. Co., 181 Cal. App. 4th
60, 75 (2010). However, that right, like any other, can be waived: “An insurance
company will be deemed to waive any ground which would otherwise entitle it to
rescind a policy … when, despite knowledge of the facts giving it the option, it impliedly recognizes the continuing effect of the policy.” Pierson v. John Hancock Mut. Life Ins. Co., 262 Cal. App. 2d 86, 91 (1968); see also Silva v. National American Life Ins. Co., 58 Cal. App. 3d 609, 61516 (1976).
In general, to constitute a waiver, there must be an existing right, a knowledge of its
existence, an actual intention to relinquish it, or conduct so inconsistent with the intent
to enforce the right as to induce a reasonable belief that it has been relinquished.
Pacific Business Connections, Inc. v. St. Paul Surplus Lines Ins. Co., 150 Cal. App. 4th 517, 525 (2007), quoting Klotz v. Old Line Life Ins. Co. of America, 955 F. Supp. 1183, 1186 (N.D. Cal. 1996).
Under this authority, the Court of Appeal held that Blue Shield waived its right to
rescind the policy as a matter of law, finding the insurer’s conduct was “so inconsistent with the intent to enforce the right [to rescind] as to induce a reasonable belief that it has been relinquished.” The court reasoned Blue Shield told its insured it was terminating the policy prospectively rather than rescinding it, that all her claims prior to the cancellation date would be covered, and retained her premiums.
Additionally, the court explained that in 2009, the Legislature enacted Health and
Safety Code Section 1389.21, which prohibits an insurer governed by the KnoxKeene
Health Care Service Plan Act from rescinding or canceling a health care service plan
contract for any reason more than 24 months following its issuance. Although the
effective date of the statute was January 2010, the court stated: “we find support for
our decision in the Legislature’s judgment that two years is ample time for an insurer to uncover any misrepresentations made in an application and determine whether to
rescind or continue coverage.”
The court determined that Blue Shield first asserted its right to rescind DuBeck’s
policy (during litigation) over three and a half years after issuing it, and more than two
years after admittedly learning the truth about appellant’s medical condition. The court
concluded these facts established Blue Shield had engaged in conduct so plainly
inconsistent with an intent to enforce the right to rescind the policy that it had waived
that right. That Blue Shield first attempted to rescind the policy in litigation after it
represented that it would cancel the policy, but not rescind it, made this outcome
predictable.
This case teaches that insurers must promptly rescind the policy and return all
premiums upon learning of material misrepresentations in the application. They
cannot engage in conduct inconsistent with a right to rescind that would lead an
insured to reasonably believe the policy is still in effect. California courts will not
hesitate to find waiver as a matter of law in that scenario.
