Davis v. Blue Cross of Northern California

• Decision Date: 05 October 1979
• Docket Number: S.F. 23842
• Citation: 25 Cal.3d 418,158 Cal.Rptr. 828
• Court: California Supreme Court
• Parties: , 600 P.2d 1060 Victoria J. DAVIS et al., Plaintiffs and Respondents, v. BLUE CROSS OF NORTHERN CALIFORNIA, Defendant and Appellant. Fred E. WARGO et al., Plaintiffs and Respondents, v. BLUE CROSS OF NORTHERN CALIFORNIA, Defendant and Appellant.

Page 828

158 Cal.Rptr. 828

25 Cal.3d 418, 600 P.2d 1060

Victoria J. DAVIS et al., Plaintiffs and Respondents, v. BLUE CROSS OF NORTHERN CALIFORNIA, Defendant and Appellant.

Fred E. WARGO et al., Plaintiffs and Respondents, v. BLUE CROSS OF NORTHERN CALIFORNIA, Defendant and Appellant.

S.F. 23842.

Supreme Court of California, In Bank.

Oct. 5, 1979.

White, Giambroni & Walters, Kathleen M. Courts, Joseph T. White, Jr., and J. Michael Amis, Oakland, for defendant and appellant.

Musick, Peeler & Garrett and James E. Ludlam, Los Angeles, as amici curiae on behalf of defendant and appellant.

Bruce A. Bailey and Damanes & Bailey, Burlingame, for plaintiffs and respondents.

TOBRINER, Justice.

In these consolidated cases, defendant Blue Cross of Northern California (Blue Cross or insurer) appeals from orders of the San Mateo Superior Court denying its petitions to compel arbitration in two class actions filed against it by a number of individuals insured under Blue Cross hospitalization policies. The trial court denied Blue Cross' request to submit the disputes to a medical arbitration panel on a number of independent grounds, concluding, inter alia, that Blue Cross had breached its duty of good faith and fair dealing to its insureds, and had consequently waived its right to demand arbitration, by failing to apprise its insureds at the time it rejected their claims either of the availability of arbitration or of the procedure by which the insureds could initiate arbitration.

Blue Cross now contends that the trial court erred in refusing to compel arbitration. As we shall explain, however, we have concluded that the trial court correctly found that Blue Cross' failure timely or meaningfully to apprise its insureds of their rights to arbitration constituted a breach of its duty to its insureds, precluding Blue Cross from subsequently compelling such insureds to submit their claims to arbitration. Accordingly, we affirm the trial court orders.

1. The facts and proceedings below.

In July 1976, plaintiffs, individual "subscribers" or insureds under separate but similar hospitalization policies issued by defendant Blue Cross, ¹ filed the underlying class actions against Blue Cross. In essence, plaintiffs contended that Blue Cross had adopted an interpretation of its hospitalization policies that regularly denied its insureds hospitalization benefits to which they were entitled. The complaints briefly described the circumstances under which each of the named plaintiffs, pursuant to his or her physician's advice, had been hospitalized. In each case, Blue Cross, although initially confirming general coverage for hospitalization, thereafter refused to pay for the bulk of the hospital expenses incurred by each insured during his or her hospital confinement.

The complaints sought relief under various causes of action, alleging that Blue Cross' course of conduct subjected the insurer to liability for (1) breach of written contract, (2) breach of implied covenant of fair dealing, (3) false advertising (Civ.Code, § 1770), (4) breach of oral contract, (5) breach of fiduciary relationship and (6) misrepresentation of the terms of an insurance policy (Ins.Code, § 790.03.) Plaintiffs sought to recover damages and to obtain declaratory and any other appropriate relief.

Shortly after the filing of the complaints, Blue Cross petitioned the trial court for orders to compel plaintiffs to submit their underlying disputes to arbitration. (See Code Civ.Proc., § 1281.2.) In its petitions, Blue Cross asserted that under the terms of one clause of the applicable hospitalization policies, plaintiffs were obligated to submit most of the claims raised in their complaints for resolution by a medical arbitration panel rather than by a court. ² Although Blue Cross acknowledged that several of plaintiffs' causes of action namely, the count relating to alleged violation of the false advertising statute and the count alleging a breach of oral contract did not fall under the insurance policy's arbitration clause, the insurer contended that the bulk of the controversy was arbitrable and that the nonarbitrable causes of action should be stayed pending the outcome of arbitration.

Plaintiffs opposed the insurer's request, contending that the petitions to compel arbitration should be denied on a number of separate grounds. First, plaintiffs urged that Blue Cross by its entire course of conduct as to its insureds had waived any right to compel arbitration. In this regard, plaintiffs maintained that the insurer in violation of its quasi-fiduciary obligations to its insureds and contrary to the covenant of good faith and fair dealing implied in its insurance contract had adopted "a deliberate policy of not informing policy beneficiaries of their rights to arbitrate." Plaintiff asserted that by virtue of the obscure placement of the arbitration clause in the insurance policy without a heading designating the provision as an "arbitration clause" ³ and by virtue of the failure of the clause to advise insureds of the procedure by which arbitration could be initiated, ⁴ Blue Cross had reason to know that its insureds would generally not be adequately informed of their arbitration rights.

Plaintiffs alleged that despite the foregoing knowledge, Blue Cross followed the regular practice of rejecting claims submitted by its insureds without notifying them of the availability of an arbitration procedure to which they could resort if they disagreed with the rejection of their claim. Plaintiffs attached copies of the rejection letters which Blue Cross had sent to the named insureds; the letters simply stated that Blue Cross had determined that the hospitalization expenses which the insured had incurred were not covered by the applicable policy and made no mention of any recourse the insured might have under the policy's arbitration clause. ⁵

Plaintiffs additionally contended that Blue Cross had waived its right to compel arbitration by its own failure promptly to initiate the arbitration process after learning that its insureds disagreed with the rejection of some or all of their hospitalization claims. Plaintiffs argued that if Blue Cross desired to invoke the arbitration procedure, it bore the obligation to demand arbitration within a reasonable time after it knew that a dispute had arisen over its determination of an insured's claim. Plaintiffs claimed that Blue Cross had lost its right to compel arbitration because it had taken no such action in this case, and had instead simply waited to demand arbitration until after the present complaints were filed a period of from three to fourteen months after the fruition of its disagreements with its insureds.

In addition to contending that the insurer had waived its right to arbitration on the two grounds noted above, plaintiffs argued that Blue Cross' petitions should be denied pursuant to section 1281.2 of the Code of Civil Procedure because most of the issues raised by the complaints were not subject to arbitration and the determination of such nonarbitrable issues would render unnecessary any arbitration. ⁶ Plaintiffs asserted that the arbitration provision of the insurance policy would, at most, apply only to the cause of action relating to the alleged breach of written contract, and would not resolve the numerous other causes of action relating to the insurer's allegedly wrongful business practices.

Finally, plaintiffs asserted that the petitions to compel arbitration should be denied because of the uncertainty of the arbitration clause. In this regard, plaintiffs maintained that the clause did not define the scope of the matters subject to arbitration and that the provision did not indicate either the method for initiation of arbitration or the procedures for governance of that process. Although the policy provision did indicate that arbitration would be conducted under the auspices of the "local medical association where the hospital services and benefits in dispute were administered," plaintiffs urged the ambiguity of the clause in that it did not indicate which local medical association would conduct the arbitration in the allegedly not infrequent circumstance in which more than one medical association is located in the vicinity.

After reviewing the insurer's petitions and plaintiffs' opposition, and hearing oral argument on the matter, the trial court rendered the two orders at issue here, denying Blue Cross' request to compel arbitration. In the findings of fact and conclusions of law accompanying its orders, the trial court set forth the numerous grounds upon which it had determined that the petitions should be denied, essentially agreeing with plaintiffs' contentions on all issues.

Blue Cross now appeals from the trial court's orders denying arbitration (see Code Civ.Proc., § 1294, subd. (a)), contending that each of the independent bases for the trial court's denial of its petitions is erroneous. As we explain, we have concluded that the trial court properly denied the insurer's petitions on the ground that the insurer breached its duty of good faith and fair dealing to its insureds by failing timely or adequately to apprise them of the availability of the arbitration procedure. In light of this conclusion, we have no occasion to pass on the soundness of the additional bases of the trial court's rulings.

2. The trial court properly concluded that Blue Cross had breached its duty of good faith and fair dealing by failing to advise its insureds of the availability of, and of the procedure for initiating, arbitration; as a consequence, Blue Cross waived any right subsequently to compel its insureds to resort to arbitration.

Three years ago, in Madden v. Kaiser Foundation Hospitals, supra, 17 Cal.3d 699, 706-707, 131 Cal.Rptr. 882, 886, 552 P.2d 1178, 1182, our court reviewed the evolution of legal attitudes toward arbitration in California and explained that in recent decades ...