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February 2010

Nieto v. Blue Shield of California Life and Health Insurance Co. ? Material Misrepresentations and Omissions in an Insurance Application Justifies Rescission

An Insured's Misrepresentations and Omissions on a Health Insurance Application Justified the Insurer's Rescission of the Policy

(2010) ___ Cal.App.4th ___, 10 C.D.O.S. 715

The California Court of Appeal, Second Appellate District, affirmed a trial courts granting of an motion for summary judgment filed on behalf of Blue Shield of California Life and Health Insurance Co. ("Blue Shield"), finding that Blue Shield was entitled to rescission of a policy issued to Plaintiff and Appellant Julie Nieto ("Appellant") because she failed to disclose information about a preexisting medical condition and medical treatment on a health insurance application form she submitted to Blue Shield.

In May of 2005, Appellant and her partner David Moore ("Moore") submitted an application to Blue Cross for insurance coverage.  On their application Appellant and Moore failed to disclose her extensive treatment and medication for a serious back and hip condition.  It was Blue Shield's practice to rely on the information provided in these applications as truthful.

Following notification of Appellant being diagnosed with necrosis of the hip, Blue Shield obtained Appellant's medical and pharmacy records and learned of her extensive treatment history for hip and back pain that predated the issuance of her policy.  Pursuant to this discovery, Blue Shield rescinded Appellant's policy on November 16, 2005.

Appellant filed a complaint against Blue Shield in July 2006, asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory relief and violation of Business and Professions Code section 17200. 

Blue Shield answered and initially moved for summary judgment in September 2007.  The trial court initially granted Blue Cross's motion.  However, the trial court, on its own motion, vacated its order granting summary judgment and directed the parties to submit supplemental briefs addressing new authority.  Following briefing, the trial court reconsidered its prior order and denied the motion without prejudice.

In April 2008, Blue Shield renewed its motion for summary judgment on the ground that it lawfully rescinded the policy because appellant concealed material information when she applied for health insurance.  The trial court ruled that, even given recent authority, an insurer retains the right to rescind an insurance policy due to the insured's fraud. Nonetheless, it denied Blue Shield's motion on the ground that its separate statement failed to establish that the material facts were undisputed with respect to each element of fraud.  Blue Shield rectified the problems with its separate statement and filed the final and operative motion for summary judgment in August 2008. The trial court issued an order granting summary judgment.  Appellant appealed.

The Court of Appeal affirmed the trial court's ruling finding that the undisputed evidence established that the information appellant provided to Blue Shield was false and, contrary to appellant's assertions, Blue Shield had no statutory duty to show that appellant's application had been physically attached to the insurance policy nor to conduct further inquiries during the underwriting process to ascertain the truthfulness of appellant's representations before it issued the policy.

First, the Court of Appeal held that the operative summary judgment motion was properly filed.  The Court of Appeal held that the trial court properly exercised its discretion in determining the operative motion properly addressed a new issue, fraud, which was not raised by the prior motion.  The Court of Appeal also rejected Appellant's argument that the motion addressed an issue not raised in the pleadings, finding that Blue Cross addressed the issue of fraud in its affirmative defenses. 

Second, the Court of Appeal held that the trial court properly granted summary judgment.  The Court of Appeal found that the governing law permits an insurer to rescind a policy when the insured has misrepresented or concealed material information in connection with obtaining insurance.  Here, the Court of Appeal found that the undisputed evidence established that appellant made material misrepresentations and omissions on the application regarding her medical condition and treatment. 

Third, the Court of Appeal found that rescission was not barred by the insurance code sections 10113 and 10381.5.  The Court of Appeal agreed with the trial court's assessment that whether or not Blue Shield in fact attached or endorsed the application does not impact its ability to rescind.  Similarly, the Court of Appeal found that Insurance Code section 10384 did not bar rescission.  Appellant failed to create a triable issue of fact as to whether Blue Shield engaged in post claims underwriting in violation of section 10384, because she offered no evidence indicating that Blue Shield's rescission was "due to" its failure to complete the medical underwriting process and "resolve all reasonable questions arising from written information submitted" in connection with the application prior to issuing the policy.

Finally, the Court of Appeal found no triable issue of fact as to whether Blue Shield was liable for bad faith or punitive damages. The Court of Appeal cited that an insurer's bad judgment or negligence is insufficient to establish bad faith; instead, the insurer must engage in a conscious and deliberate act, which unfairly frustrates the agreed common purposes and disappoints the reasonable expectations of the other party.  Here, the Court of Appeal found the undisputed evidence established that and that Appellant's misconduct entitled Blue Shield to rescind the policy.

For these reasons, the Court of Appeal affirmed the judgment of the trial court granting summary judgment in favor of Blue Cross.
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This opinion is not final.  It may be modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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