Chase v. Blue Cross of California

• Decision Date: 23 February 1996
• Docket Number: No. A068199,A068199
• Citation: 50 Cal.Rptr.2d 178,42 Cal.App.4th 1142
• Court: California Court of Appeals Court of Appeals
• Parties: , 96 Cal. Daily Op. Serv. 1216, 96 Daily Journal D.A.R. 2069 Shelley CHASE et al., Plaintiffs and Respondents, v. BLUE CROSS OF CALIFORNIA et al., Defendants and Appellants.

Page 178

50 Cal.Rptr.2d 178

42 Cal.App.4th 1142, 96 Cal. Daily Op. Serv. 1216,

96 Daily Journal D.A.R. 2069

Shelley CHASE et al., Plaintiffs and Respondents, v. BLUE CROSS OF CALIFORNIA et al., Defendants and Appellants.

No. A068199.

Court of Appeal, First District, Division 3, California.

Feb. 23, 1996.

James H. Fleming, James H. Fleming & Associates, San Francisco, Randal L. Golden, Seyfarth, Shaw, Fairweather & Geraldson, San Francisco, for defendants and appellants.

Eric H. Ivary, Steven J. Brewer, Marguerite E. Meade, Gwilliam, Ivary, Chiosso, Cavalli & Brewer, Oakland, for plaintiffs and respondents.

CORRIGAN, Associate Justice.

The court below refused to order arbitration despite an arbitration agreement in an insurance contract between the parties. Blue Cross of California (Blue Cross) contends the court misapplied governing state case law in denying arbitration. Alternatively, Blue Cross argues state case law is preempted to the extent it conflicts with the Federal Arbitration Act (FAA) ( 9 U.S.C. § 1 et seq.). We agree with Blue Cross's first contention. Consequently, we reverse and remand for reconsideration under the proper state law standard. Additionally, we hold state law on this subject is not preempted by the FAA.

Facts

In 1988, Shelley Chase ¹ contracted with Blue Cross for medical insurance. The coverage was obtained through her employment and included her dependents. Her benefit plan provided for mandatory binding arbitration in the event of a dispute. The arbitration condition was set out in the benefits handbook provided to Chase. ²

In July 1991, Chase's son, Micah, was diagnosed with acute myelocytic leukemia and thereafter received extensive medical care. Between September 9, 1991, and August 30, 1994, Chase received many "explanation of benefits" forms from Blue Cross, along with payment of benefits for Micah's treatment. The arbitration requirement and procedures were printed on the reverse side of these forms. ³ In 10 other instances between October 30, 1993, and January 8, 1994, Blue Cross sent Chase "form reject letters" explaining partial or complete denial of coverage for some aspect of Micah's care. These letters also included a statement of the arbitration condition. The record contains an example of one form reject letter sent to Chase on July 28, 1993, containing the arbitration provision in the main text. ⁴

In March 1993, Micah was awaiting a matching bone marrow donor when his condition deteriorated. His physician determined that Micah could not wait for a matching donor but would have to receive bone marrow from a parent. This procedure, known as a haploidentical bone marrow transplant, was not performed in California but at a cancer center in Texas.

Chase's benefit plan did not include coverage for investigative procedures, which are defined in the handbook as "those that have progressed to limited use on humans, but which are not widely accepted as proven and effective procedures within the organized medical community." On July 17, 1993, Blue Cross sent Chase a letter, denying coverage for the anticipated transplant on the basis that the procedure was investigative. ⁵ This rejection letter did not reiterate the arbitration condition but did outline the available internal review process by which Chase could request reconsideration in writing. The letter also encouraged Chase to "refer to [her] benefit agreement for details about benefits, limitations and exclusions, as well as any waivers that may apply." After receiving the letter, Chase contacted Blue Cross by phone. She was again told she could make a written request for reconsideration, but no mention was made of the formal arbitration procedure. On July 30, Chase sent Blue Cross a letter requesting reconsideration of the denial. Although Micah received the transplant on that same date, he succumbed to the disease a month later.

For several months, Chase heard nothing from Blue Cross, so she contacted the State Department of Insurance. After the Department of Insurance made inquiries of Blue Cross about the claim, Chase received a letter from Blue Cross dated November 9, 1993, again denying coverage on the same basis cited previously. This letter did not mention the arbitration condition. On January 31, 1994, Blue Cross partially denied another claim regarding Micah's care. This claim did not involve the transplant itself. The letter of partial denial did refer to the option for arbitration.

Chase filed a complaint for damages on June 22, 1994. Blue Cross petitioned for an order compelling arbitration, which was denied by the superior court on October 4. The court found that, although the arbitration provision was "clear, plain, conspicuous, and unambiguous," Blue Cross had "intentionally waived and relinquished its right to compel arbitration" because "communications between Blue Cross and Shelley Chase did not mention the arbitration provision."

Discussion

I. Loss of the Right of Arbitration Under State Law

At issue here is the extent of the rule articulated in Davis v. Blue Cross of Northern California (1979) 25 Cal.3d 418, 158 Cal.Rptr 828, 600 P.2d 1060 (Davis) and Sarchett v. Blue Shield of California (1987) 43 Cal.3d 1, 233 Cal.Rptr. 76, 729 P.2d 267 (Sarchett ) that precludes an insurer from invoking an arbitration provision when it has failed to adequately inform the insured of that provision. Chase essentially alleges Blue Cross acted in bad faith or, alternatively, breached the covenant of good faith and fair dealing by failing to properly inform her of the arbitration provision. According to Chase, Davis and Sarchett compel the conclusion that Blue Cross cannot now invoke arbitration.

The trial court agreed with Chase, concluding that Blue Cross "waived and relinquished" its right to compel arbitration because some correspondence regarding the contested claim did not contain a notice of arbitration, even though clear reference to arbitration was made in the benefits handbook and in numerous other written notices relating to the same illness. Consequently, the trial court limited its consideration to isolated facets of the company's extended contact with the insured. We hold that, under Davis and Sarchett, a finding of relinquishment can be reached only after consideration of all relevant circumstances and requires a determination of bad faith conduct by the insurer.

A. Loss of a Contractual Right by an Insurer

It is important to begin by distinguishing the different theories under which an insurer may lose a contractual right. Here, Chase does not allege that Blue Cross "waived" its right to arbitration, in the sense that it intentionally relinquished a known right. Nor does Chase allege that she detrimentally relied upon Blue Cross's actions such that the insurer is estopped from invoking arbitration. Rather, her claim is properly understood to be that Blue Cross's breach of the duty of good faith results in its forfeiture of the right of arbitration.

While courts often speak of the insurer "waiving" its right to compel arbitration in such situations, we understand Davis and Sarchett as cases in which the insurer "forfeited" rather than "waived" the right to arbitration. In the law, "forfeiture" is defined as "A deprivation or destruction of a right in consequence of the nonperformance of some obligation or condition." (Black's Law Dict. (6th ed. 1990) p. 650.) As we explain below, forfeiture of the right to arbitration occurs when the insurer breaches the duty of good faith and fair dealing by engaging in bad faith conduct designed to mislead the insured. ⁶

In Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307, 310, 24 Cal.Rptr.2d 597, 862 P.2d 158, the Supreme Court addressed the question: "May a party that did not demand arbitration within the time specified in an agreement to arbitrate nevertheless compel arbitration on the ground that it did not intend to relinquish the right to arbitrate the dispute when it failed to make a timely demand?" There, the plaintiffs claimed the Court of Appeal erred in finding they had "waived" their right to arbitrate by failing to make a timely demand. (Id. at p. 313, 24 Cal.Rptr.2d 597, 862 P.2d 158.) In upholding the Court of Appeal's decision, Justice Kennard detailed the history of the "waiver" concept in such circumstances: "[T]he courts of this state have held that the failure to make a timely demand for arbitration results in a 'waiver' of the right to compel arbitration. [Citations.] It is true that, as plaintiffs point out, some decisions have defined the term 'waiver' as the voluntary relinquishment of a known right. [Citations.] Contrary to plaintiffs' assertion, however, none of the cases concerning the failure to timely demand arbitration have used the word 'waiver' to mean voluntary relinquishment of a known right. [p] Federal as well as state courts have used the term 'waiver' to refer to a number of different concepts. [Citations.] Generally, 'waiver' denotes the voluntary relinquishment of a known right. But it can also mean the loss of an opportunity or a right as a result of a party's failure to perform an act it is required to perform, regardless of the party's intent to abandon or relinquish the right. [Citations.] The term 'waiver' has also been used as a shorthand statement for the conclusion that a contractual right to arbitration has been lost. [Citation.] [p] The confusion engendered by the multiple meanings of 'waiver' is not new.... [p] We have examined the California decisions stating that a party may 'waive' its right to arbitrate by failing to timely demand arbitration. We conclude that those decisions use the word 'waiver' in the sense of the loss or forfeiture of a right resulting from failure to perform a required act." (Id. at pp. 314-315, 24 Cal.Rptr.2d 597, 862 P.2d 158, italics added.)

More recently, in Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 44 Cal.Rptr.2d 370, 900 P.2d 619 (Wal...