OC Appeals Panel Rules on Cancellation by Health Insurer

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A state appeals panel ruled that insurers cannot rescind health policies unless they can show policyholders willfully lied on their insurance applications or prove that companies investigated applications before issuing coverage.

A unanimous decision by a panel of the 4th District Court of Appeal on Monday returned to a lower court the case involving car accident victim Steve Hailey, who lost coverage after insurer Blue Shield found inaccuracies in his insurance application.

The lower court was to decide whether the Hailey family intended to deceive Blue Shield and whether Blue Shield acted in bad faith by “blindly” accepting their application and taking their premiums until Steve Hailey’s medical bills got too high.

The panel’s ruling also requires Blue Shield to pay Hailey’s appellate costs.

The decision is the latest blow to California insurance companies’ cancellation practices. In recent months, state agencies have fined, cited and sued the state’s major health insurers for canceling coverage for policyholders who accumulate costly claims.

Michael Nutter, a lawyer representing the Haileys said Blue Shield is “going to need to show — which I don’t think they ever can do in this case — that the Haileys willfully misrepresented something.”

But Blue Shield spokesman Tom Epstein said the insurer would prove that “our underwriting was appropriate and that the Haileys misrepresented numerous important facts on their application.”

Blue Shield rescinded Steve Hailey’s policy after authorizing more than $450,000 worth of hospital and other medical care.

The insurer also demanded that he repay more than $104,000 it spent on his behalf.

Blue Shield had contended that Hailey lied on his application about preexisting conditions, failed to disclose a recent emergency room visit and shaved about 45 pounds off his weight.

But Steve Hailey’s wife testified that she filled out the application for the family and mistakenly believed that it was asking for information about only her health.

The panel’s decision follows a lawsuit filed earlier this month by the state against Blue Shield, which it accused of canceling health coverage for sick people to avoid paying their medical bills.

That suit seeks $12.6 million in fines while contending the insurer committed more than 1,200 violations of claims-handling laws and regulations, resulting in more than 200 people losing their coverage after they submitted claims.