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Matthew Hirsch

The Recorder

09-21-2007

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. He said most cases end with dismissals or confidential settlements, adding that the settlements can be substantial, a point disputed by lawyers for insurers.

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 When Blue Shield rescinded his policy, Hailey had to sign up with a new insurer and wait six months for surgery with a torn urethra and other injuries, Nutter said.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.

Gregory Pimstone, an attorney for Blue Shield, says such a requirement would run counter to decades of precedent in civil contract case law.

"If one party has not given the other party material facts that would have affected its decision to enter into a contract, then that contract was entered into by mistake," said Pimstone, a Los Angeles partner at Manatt, Phelps & Phillips.

This summer, another insurer, Blue Cross of California, agreed in a proposed class action settlement to rescind coverage only when it could show a willful misrepresentation. But Glenn Solomon, who represents health care providers in that case, said Blue Cross reserved the right to change that policy if the courts upheld a lesser standard.

"That was one of the things we pointed out that was not good about the settlement," said Solomon, a Los Angeles partner at Hooper, Lundy & Bookman who represents the California Medical Association.

Solomon is pushing for a tougher standard on health coverage rescissions because the doctors' offices and hospitals he represents are less likely to get paid when uninsured patients have to foot their medical bills.

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.