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Akron Univ. School of Law

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Saturday, September 22, 2007

Health Insurance Lawsuits: Post-Claims Underwriting

Law.com reports on an increasing number of lawsuits against health insurers for post-claims unwriting (canceling policies on discovery of alleged inaccuracies in initial application) and discusses briefly an upcoming California case that could help clarify the law.

William Shernoff says he has been bringing lawsuits over canceled health insurance policies since the 1980s. Lately, however, that part of the Southern California plaintiff lawyer's practice has exploded: Last year, Shernoff filed about 70 lawsuits for people who have gotten stuck with hefty medical bills when an insurance company revoked their coverage by claiming they falsified or omitted important details on their applications. He's on pace to file about the same number this year.  So far, Shernoff says, litigation over the insurance companies' practice -- often referred to as post-claims underwriting -- hasn't led to any significant case law. . . . .

But next week, the Santa Ana, Calif.-based 4th District Court of Appeal will hear arguments in a closely watched case that challenges Blue Shield of California's practice of rescinding coverage based on inaccuracies in an application. If the challenge in Hailey v. California Physicians' Service, G035579, succeeds, plaintiff and defense lawyers say more cases may wind up in trial -- or lead to more lucrative settlements.

According to Michael Nutter, a Santa Ana solo representing the plaintiffs, Steven Hailey suffered a catastrophic car accident shortly after he and his wife enrolled in a health plan. When Blue Shield rescinded his policy, Hailey had to sign up with a new insurer and wait six months for surgery with a torn urethra and other injuries, Nutter said.

In court papers, attorneys for Blue Shield claim that Hailey lied on his application about his weight and concealed information about a recent hospital visit and a host of medical conditions.  More broadly, Blue Shield argues (.pdf) it can rescind coverage when someone's made a misrepresentation material to the company's decision to offer them a health plan.

Central to the case is California Health and Safety Code §1389.3: It suggests health care plans are responsible for resolving all reasonable questions about an application before entering into a contract, and generally prohibits post-claims underwriting. But it also expressly says it does "not limit a plan's remedies upon a showing of willful misrepresentation."

Plaintiff attorneys in the field contend (.pdf) that a showing of willful misrepresentation is required before yanking coverage; defense attorneys say the mention of willful misrepresentation does not amount to a prerequisite.  . . . If the 4th District requires a showing of willful misrepresentation, health insurers will likely find it harder to get cases thrown out early. "Even if the plaintiff's excuse was unbelievable, you might have some judges say, 'Well, let's have a jury deal with that,'" Pimstone said. Shernoff, of Claremont's Shernoff Bidart Darras, would jump at the chance to take other claims before a jury. In an amicus curiae brief filed in the Hailey case, Shernoff claims that Blue Shield has rescinded many members' coverage without investigating whether they intended to deceive the company.  "That means all the past decisions could have been in bad faith," he said, which could provide grounds for punitive damages.

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