Hailey v. California Physicians' Service

• Decision Date: 24 December 2007
• Docket Number: No. G035579.,G035579.
• Citation: 69 Cal.Rptr.3d 789,158 Cal.App.4th 452
• Parties: Cindy HAILEY et al., Plaintiffs and Appellants, v. CALIFORNIA PHYSICIANS' SERVICE, Defendant and Respondent.
• Court: California Court of Appeals Court of Appeals

69 Cal.Rptr.3d 789

158 Cal.App.4th 452

Cindy HAILEY et al., Plaintiffs and Appellants, v. CALIFORNIA PHYSICIANS' SERVICE, Defendant and Respondent.

No. G035579.

Court of Appeal, Fourth District, Division 3.

December 24, 2007.

Jeffrey L. Garland, San Diego, and Michael G. Nutter, for Plaintiffs and Appellants.

Amy L. Dobbersteen, Patricia T. Sturdevant and Lotte Colbert, for California Department of Managed Health Care, as amicus curiae on behalf of Plaintiffs and Appellants.

Arkin & Glovsky and Sharon J. Arkin, Pasadena, for United Policyholders, as amicus curiae on behalf of Plaintiffs and Appellants.

Hooper, Lundy & Bookman, Daron L. Tooch, Glenn E. Solomon and Suzanne S. Chou, Los Angeles, for California Medical Association, as amicus curiae on behalf of Plaintiffs and Appellants.

Shernoff Bidart & Darras, William M. Shernoff and Joel A. Cohen, Claremont, as amici curiae on behalf of Plaintiffs and Appellants.

Gary Cohen and Andrea Rosen, West Sacramento, for California Department of Insurance, as amicus curiae on behalf of Plaintiffs and Appellants.

Barger & Wolen, John M. LeBlanc, Los Angeles, Andrew S. Williams; Mayer, Brown, Rowe & Maw, Andrew L. Frey and Donald M. Falk, Palo Alto, for Defendant and Respondent.

Manatt, Phelps & Phillips, Gregory N. Pimstone and Joanna S. McCallum, Los Angeles, for California Life and Health Insurance Companies, as amicus curiae on behalf of Defendant and Respondent.

Epstein Becker & Green, William A. Helvestine, Damian D. Capozzola and Rhea G. Mariano, Los Angeles, for California Association of Health Plans, as amicus curiae on behalf of Defendant and Respondent.

OPINION

ARONSON, J.

Plaintiffs Cindy and Steve Hailey challenge a judgment entered after the trial court (1) sustained demurrers to their cause of action for intentional infliction of emotional distress without leave to amend, (2) granted summary judgment in favor of defendants California Physicians' Service, doing business as Blue Shield of California (Blue Shield) on the Haileys' claims for breach of contract and breach of the covenant of good faith and fair dealing, and (3) awarded $104,194.12 in damages to Blue Shield on its cross-complaint for rescission of the health services contract it had previously agreed to provide the Haileys.

The Haileys contend, inter alia, Health and Safety Code section 1389.3 ¹ precludes Blue Shield from rescinding unless it can prove the Haileys willfully misrepresented the condition of Steve's² health at the time they applied for coverage. Because evidence of whether the Haileys' misrepresentations were willful presents a triable issue of fact, they contend the trial court erred in granting summary judgment. They also contend Blue Shield's rescission of their health services plan constituted extreme and outrageous behavior sufficient to state a cause of action for intentional infliction of emotional distress.

We conclude section 1389.3 precludes a health services plan from rescinding a contract for a material misrepresentation or omission unless the plan can demonstrate (1) the misrepresentation or omission was willful, or (2) it had made reasonable efforts to ensure the subscriber's application was accurate and complete as part of the precontract underwriting process. Because both of these issues turn on disputed facts, the trial court's summary judgment ruling cannot stand. We also conclude a triable issue of facts exists whether Blue Shield engaged in bad faith, and that the Haileys adequately alleged a cause of action for intentional infliction of emotional distress. We therefore reverse the judgment.

I Factual and Procedural Background

Blue Shield is a health care service plan licensed and regulated by the Department of Managed Health Care. (§ 1341, subd. (a).) To obtain coverage under a Blue Shield individual health contract, applicants must qualify based on their medical and health history. Accordingly, applicants must complete an application requesting specific information regarding their medical history. In signing the application, the applicant attests to the accuracy and completeness of the responses, and acknowledges the plan may revoke coverage if the applicant furnishes false or incomplete information.

Before issuing a contract, Blue Shield evaluates the health care application by assigning a point value to the applicant's past and current medical history and conditions. Some conditions are sufficient by themselves to warrant denial of coverage, while others may prompt a postponement in the process to allow Blue Shield to obtain additional information. Based on the point values, Blue Shield grants coverage, grants coverage at an increased rate, or denies coverage.

When Cindy started a new job in late 2000, she carried health insurance covering her family from a previous employer through COBRA.³ Although she believed she could have obtained health insurance from her new employer, the new insurance did not cover the family's doctor. Learning Blue Shield would cover her family's physician, she contacted Timothy Patrick, a Blue Shield insurance agent, who sent her an application. According to Cindy, she believed she provided all of the information requested on the application. Nonetheless, she mistakenly believed the form sought information relating only to her health, and not that of her husband, Steve, or their son. Although she noted on the application matters concerning her own health, she omitted any health information regarding her husband or son. She also incorrectly listed Steve's weight as 240 pounds instead of his actual weight of 285 pounds.

Cindy sent the completed application to Patrick, who, after receiving it, asked Cindy some questions regarding her health history, but did not go over any of the application's questions and did not inform her the application's health questions also applied to Steve and their son. Although Steve signed the application, he did not read it. Based on the information provided in the application, Blue Shield extended coverage to Cindy and her family at its "premier" or best rate beginning December 15, 2000.

In February 2001, Steve was admitted to the hospital for stomach problems. Based on this claim, on February 8, 2001, Blue Shield's medical management department referred the Haileys' contract to its "Underwriting Investigation Unit" for investigation of possible fraud in their application for coverage. In its probe, Blue Shield obtained Steve's medical records, which revealed a history of undisclosed health issues, including obesity, hypertension, difficulty swallowing, and gastroesophageal reflux disease.

On March 19, 2001, an automobile accident left Steve permanently disabled. He remained hospitalized until May 31, 2001, when he was released and sent home with instructions for additional home nursing care and physical therapy. Before his discharge, Blue Shield authorized healthcare providers to provide surgery, treatment, care, and physical therapy in an amount exceeding $457,000.

On June 1, 2001, Blue Shield sent the Haileys a letter informing them their health insurance coverage had been cancelled retroactively to December 15, 2000, the date Blue Shield issued the policy. Blue Shield based its cancellation on the Haileys' failure to disclose medical information Blue Shield had received from Los Alamitos Medical Center, which disclosed that in October 2000, Steve had been seen "for dysphagia, stricture/stenosis of the esophagus, essential hypertension, and a reported weight of 285 lbs." The letter noted the total amount of claims submitted during the period of February 6, 2001 to May 14, 2001 was $457,163.30. The letter demanded the Haileys pay Blue Shield $60,777.10, the difference between the amount Blue Shield had paid for Steve's medical care, and the premiums the Haileys had paid for their health insurance.

After Blue Shield cancelled the policy, the Haileys could no longer afford nursing care or physical therapy for Steve. In addition, third party medical providers demanded the Haileys pay for medical care previously provided. Although Cindy obtained health insurance coverage for her family from her new employer, it limited physical therapy coverage and did not provide for medically necessary surgery based on preexisting conditions. The new health insurance plan provided surgical benefits to Steve only after his preexisting medical condition became life threatening. Because of the delays in obtaining necessary medical care, Steve suffered permanent damage to his bladder, which no longer functions. The lack of physical therapy has impaired his ability to walk, increased his pain, and resulted in further surgery and medication.

The Haileys sued Blue Shield, alleging in their second amended complaint causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and intentional infliction of emotional distress. Blue Shield demurred to the intentional infliction of emotional distress cause of action, which the trial court sustained without leave to amend. Blue Shield also filed a cross-complaint seeking a declaration it legally rescinded its health care contract with the Haileys and was entitled to recover the money it spent on Steve's medical care before the rescission.

The trial court granted Blue Shield's summary judgment motion on the Haileys' complaint, determining that the Haileys' misrepresentations and omissions justified rescission, and entered judgment for Blue Shield on its cross-complaint in the amount of $104,194.12. The Haileys appealed and later filed a petition for writ of supersedeas to stop Blue Shield from executing on its judgment. We granted a temporary stay of execution pending resolution of this appeal, and invited amici briefs from various organizations.

II Standard of Review

We review a summary judgment motion de novo to determine whether there is a triable issue as to any material fact and whether the moving party is...