Insurance Alert: Cancellation and Delay Waive Right to Later Rescind Ab Initio

In DuBeck v. Cal. Physicians’ Service (No. B250129, filed 3/5/15), a California appeals court held that Blue Shield’s initial decision to cancel a healthcare policy for application misrepresentations constituted a waiver of the right to later rescind ab initio, leaving Blue Shield obligated for the insured’s healthcare costs up to the date of cancellation.

The policyholder had a lump in her breast, and sought treatment. She underwent a needle biopsy and was given additional appointments for further testing. The lump was subsequently diagnosed as cancerous, and in the following months she underwent surgery. She was also diagnosed with leukemia.

Five days after the initial needle biopsy, the woman submitted her application for insurance to Blue Shield, answering “no” to questions whether she had “received any professional advice or treatment . . . from a licensed health practitioner” or “had any symptoms” pertaining to “breast problems, breast implants, adhesion, abnormal bleeding, amenorrhea, endometriosis, fibroid tumors”; “[b]een an inpatient or outpatient in a hospital, surgical center, . . . or other medical facility”; had any “[a]bnormal laboratory results”; or had any “[d]iagnoses, symptoms and/or health problems not mentioned elsewhere on this application, or that have not been evaluated by a physician, or have any complications or residuals remaining following any treatment, or been advised to have a physician exam, further testing, treatment or surgery which has not yet been performed by a physician, dentist, or other health care provider?” Further, the insured omitted reporting the visit for the needle biopsy, representing her last physician visit as months before. The application was signed and contained an attestation of its accuracy.

Blue Shield issued the policy and began paying benefits but six months later advised the woman that it was suspending payments pending receipt of additional information based upon the suspicion that she was being treated for a preexisting condition. Blue Shield then did nothing further for 17 months, when it advised the policyholder in a letter that it had reviewed medical information received after the application, and determined that she had not provided complete and accurate information. The letter expressly stated that Blue Shield was not rescinding, but canceling the policy prospectively, effective immediately. Blue Shield also sent her a certificate confirming the effective dates of inception and cancellation. An underwriter later testified that it was Blue Shield’s standard procedure to cancel rather than rescind where the company learned of a misrepresentation more than a year after the application.

Two years later the policyholder sued, alleging that the cancellation was defective because, among other things, Blue Shield knew all of the facts early, but managed to collect and keep more in premium than it ultimately paid in benefits by delaying the cancellation. Blue Shield responded by raising rescission as an affirmative defense, for which it was granted summary judgment.

But the appeals court reversed, holding that Blue Shield had waived the right to rescind as a matter of law:

“We conclude that Blue Shield’s conduct was wholly inconsistent with the assertion of its known right to rescind. It is undisputed that by September 8, 2006, Blue Shield was aware of the pertinent information and, consistent with its corporate policy, elected to cancel, rather than rescind, appellant’s policy. It communicated this election directly to appellant, along with assurances that the cancellation was ‘prospective,’ leaving her entitled to all benefits of the policy from April 2005 to September 2006. Had Blue Shield asserted a right to rescind in 2006, appellant would not have incurred the effort and expense of attempting to enforce rights Blue Shield itself assured her she had, viz., the right to have ‘[a]ny claims for covered services incurred before [September 8, 2006] . . . covered.’ In waiting over two years to assert a right to rescind, while assuring appellant of her right to coverage during the period the policy was in effect and retaining her premiums for such coverage, Blue Shield engaged in conduct ‘so inconsistent with the intent to enforce the right as to induce a reasonable belief that it ha[d] been relinquished.’”

The court pointed out that Blue Shield had suspended payment but then did nothing for 17 months, citing Barrera v. State Farm Mut. Automobile Ins. Co. (1969) 71 Cal.2d 659, for the proposition that constructive knowledge is sufficient to trigger an investigation and the failure to do so can effect a waiver of rescission: “The rule is well established that the means of knowledge is equivalent to knowledge, and that a party who has the opportunity of knowing the facts constituting the fraud of which he complains cannot be supine and inactive, and afterwards allege a want of knowledge that arose by reason of his own laches or negligence.”

“Yet by its own admission Blue Shield neither commenced an investigation nor obtained records confirming the date of appellant’s first breast cancer-related procedure for another year. By ignoring information that would have resolved the truthfulness of the representations in appellant’s application at an early stage and determining at that time whether to continue as her insurer, Blue Shield allowed appellant to incur substantial medical expenses and dissuaded her from investigating the availability of government assistance. Blue Shield’s lack of diligence in the early months of the policy and the apparent prejudice to appellant provide a second and independent basis for rejecting its claimed right to rescind.”

The appeals court also pointed out that Blue Shield had not complied with the rescission requirement of returning the premium. Since summary judgment had been based solely upon the rescission defense, the appeals court did not address the propriety of a prospective cancellation, but remanded the case to the trial court for further proceedings.

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March 6, 2015