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April 2010

Nazaretyan v. California Physicians' Service ? Misrepresentation on Health Insurance Application May Not Be Ground for Rescission where Broker Completed Insureds' Applications Because Insureds Did Not Speak English

Summary Judgment Granting Rescission Reversed where the Broker Completed the Applications but Failed to Review the Applications for Accuracy with the Insureds

(Mar. 23, 2010) 182 Cal.App.4th 1601; 10 C.D.O.S. 3660

The California Court of Appeal, Second Appellate District, reversed a trial court's order granting summary judgment rescinding the insureds' health coverage on the ground that their applications contained material misrepresentations regarding their medical history.  The court ruled rescission was not appropriate where evidence showed that a broker filled out the insureds' applications because they did not speak English; did not show the insureds the completed applications or give them an opportunity to review for accuracy; and did not read all the health-related questions on the applications.

Plaintiffs Gevork Nazaretyan and his wife Narine Ghazaryan ("Plaintiffs") were Armenian immigrants who spoke little English and had limited formal education.  Plaintiffs contacted insurance broker, Ahmad Yusop, who had assisted them in the past regarding health insurance.

As with the insureds' past policies, Yusop filled out the insureds' applications.  Yusop neither showed the applications nor read the health-related questions to insureds.  Yusop only asked the date of Ghazaryan's last menstruation, whether she drank or smoked, and whether there had been a "significant change" in their lives.  The applications asked several questions regarding whether insureds had any previous or ongoing infertility treatment, to which insureds responded "no."

Shortly after submitting the applications, Blue Shield sent a form requesting missing information regarding the type of plan the insureds were seeking and the nature and date of Ghazaryan's last physician visit.  Nazaretyan provided the missing information and resubmitted the applications with updated dates for his last physician's visit and his wife's last menstruation.  Blue Shield approved the insureds' applications.

Six months later, Ghazaryan prematurely gave birth to twins.  Blue Shield's records, dated two days after the birth, noted that the twins were the result of in vitro fertilization ("IVF").  Six months after the twins' birth, Blue Shield began an investigation  regarding potential misrepresentation or nondisclosure of medical history.  Blue Shield discovered Ghazaryan received IVF treatments two years earlier, and had begun a second round of treatment shortly before submitting their applications.  Blue Shield later informed the insureds it was rescinding their policy.

The insureds sued Blue Shield for postclaims underwriting in violation of California Health and Safety Code section 1389.3.  The suit also included claims for bad faith and punitive damages.  Section 1389.3 prohibits "the rescinding, canceling, or limiting of a plan contract due to the plan's failure to complete medical underwriting."  The trial court granted Blue Shield's motion for summary judgment on three grounds:  (1) Blue Shield's pre-issuance investigation constituted "reasonable efforts" as a matter of law; (2) the record presented undisputed facts establishing willful misrepresentation by the insureds; and (3) the misrepresentation at issue was not caused by Blue Shield's underwriting failure.

The Court of Appeal reversed, finding that the record presented disputed issues of material facts as to two of the stated grounds, and failed to present any evidence in support of the third ground.  The court applied the underwriting standards of section 1389.3 because Blue Shield was a health service plan subject to the Knox-Keene Health Care Service Plan Act of 1975 (codified as Health and Safety Code section 1340 et seq.).

Under section 1389.3, the court concluded Blue Shield failed to establish that its pre-issuance investigation constituted "reasonable efforts to ensure a potential subscriber's application is accurate and complete."  (Quoting Hailey v. Cal. Physicians' Service (2007) 158 Cal.App.4th 542.)  The court found that Blue Shield's general underwriting policies (checking policy applications for blank fields, and checking its own "systems" for any prior information or claims history), in practice, were not a reasonable check on the information Blue Shield uses to evaluate risk because if an applicant left no required fields blank and had no history with Blue Shield, then Blue Shield might take no further steps to confirm the application's accuracy and completeness. 

Likewise, merely following up with insureds to obtain the missing information did not meet the Hailey standard where the missing information had nothing to do with insureds' medical history.  Blue Shield did not identify any other efforts it undertook to confirm the application was accurate and complete.

The court also found disputed issues of material fact existed as to whether the insureds willfully misrepresented or omitted material information in their application.  The court noted that the insurance broker filled out the applications and the insureds signed them without reading them.  Apart from the insureds' signatures, all handwriting on the applications were the broker's.  And because of both their limited education and English language skills and the broker's expertise as an insurance broker, the insureds trusted and relied on the broker to ask them for any necessary information and to record the information accurately on the application. 

The court rejected Blue Shield's argument that an insured who fails to read his or her application and, instead, relies on an insurance broker to ask the necessary questions and record the information correctly, is reckless as a matter of law.  The court also held the broker's role in filling out the applications was not irrelevant because Blue Shield did not argue or cite authority in support of the proposition that a broker's alleged recklessness can be imputed to the insureds, even if the insureds' conduct was innocent and reasonable.

The court further found that the record did not establish that the insureds' misrepresentation was willful.  In Blue Shield's subsequent form concerning missing information, Nazaretyan stated his last physician visit was an emergency room visit for an ear infection, though his wife had recently seen a physician at a fertility center about beginning a new round of IVF treatments.  The court reasoned that even if Nazaretyan personally filled out the form, he may have interpreted the question as referring to his last physician visit concerning his own medical treatment, and not his wife's last physician visit concerning her IVF treatment.  The court thus held that the undisputed facts in the record did not establish willful misrepresentation as a matter of law.

The court rejected Blue Shield's argument that the rescission did not constitute unlawful postclaims underwriting because it was not caused by an underwriting failure.  Blue Shield had not shown that the insureds lacked and could not reasonably obtain evidence showing the rescission resulted from an underwriting failure.  "The record was completely silent both as to the efficacy of any steps Blue Shield could have taken but failed to take, and as to whether the insureds could reasonably obtain favorable evidence on the issue."  Because Blue Shield was the moving party, the total absence of evidence on this issue works to insureds' benefit.

As for Plaintiffs' claims for bad faith and punitive damages, the court concluded that summary judgment in favor of Blue Shield was appropriate because there was no evidence of a material delay between Blue Shield's discovery of the misrepresentations in the insureds' application and Blue Shield's notice to the insureds that their health coverage was terminated.

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This opinion is not final.  Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the Supreme Court.  Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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Christopher R. Wagner