Court Confirms that Medication Side Effects Can Support a Disability Insurance Claim

Posted in: De Novo Review, Disability Insurance, Disability Insurance News, ERISA, Insurance Blog June 29, 2015

When a person suffers from a disability caused by an injury or sickness, the resulting restrictions and limitations, be they physical or mental, can have a devastating impact on that person’s ability to return to work. What is often overlooked, is that the side effects of the medication prescribed to treat a medical condition can themselves also impede a person’s ability to perform in the work place, thus resulting in a long-term disability. Recently, Central District of California Federal Court Judge Percy Anderson, in Hertan v. Unum Life Insurance Company of America, 2015 WL 363244 (C.D. Cal. June 9, 2015), ruled that a long-term disability insurer had to consider how the side effects of an insured’s medication impacted her cognitive abilities, and therefore, her ability to perform her job.

In 2010, Plaintiff Gaye Hertan was diagnosed with a large brain tumor. At the time of her disability, Hertan was the partner in a law firm. Hertan underwent brain surgery to remove the tumor, and during the surgery plates and screws were inserted into her head. A couple of months after the surgery, Hertan returned to work on a part-time basis. While her doctors cleared her return to work, they also stated that she could work no more than 50-70% of the time. Following the surgery, Hertan experienced pain along the incision and under her scalp, for which her physicians prescribed endocet (Percocet). When the pain persisted, she was eventually also prescribed the pain medications of meloxicam, Lyrica and OxyContin.

Unable to return to work on a fulltime basis, Hertan filed a claim for long-term disability insurance benefits under the ERISA-governed long-term disability insurance policy provided by her employer. Hertan reported to Unum Life Insurance Company of America (“Unum”), the Plan’s claim administrator, that the medication made her tired, a little dizzy and made it hard to focus. Unum initially approved Hertan’s LTD claim. However, despite confirming that Hertan was still taking Percocet, and in fact was required to increase her dosage, which also increased the side effects, Unum eventually denied Hertan’s claim for further LTD benefits. On appeal, Hertan and her physicians again confirmed that Hertan’s pain was disabling, and also that the side effects of the pain medication included drowsiness, dizziness, reduced concentration and overall inability to think clearly. These side effects, obviously, negatively impacted Hertan’s ability to return to fulltime work as an attorney. Despite these reports, Unum again denied her disability claim.

Judge Anderson reviewed Unum’s claim decision under the de novo standard of review. In reviewing Hertan’s medical records and Unum’s claim decision, Judge Anderson determined that Hertan’s medical records, which included numerous references to her pain, pain medication and resulting side effects, supported her ongoing claim for LTD benefits, explaining that:

Throughout her claim, Hertan consistently explained that she could only work part-time because her pain would get worse throughout the day until it reached a point where she would need to take her narcotic pain medication. Once taking the medication, she was unable to work as an attorney because the medication made her tired, dizzy, and unable to focus. (AR 196, 248.) Dr. Jordan repeatedly confirmed that the pain medication impaired Plaintiff’s cognitive functioning to the extent that it prevented her from returning to full-time work as an attorney. (AR 1017.)

Judge Anderson criticized Unum for focusing on the physical requirements of an attorney, a sedentary occupation, rather than “address[ing] the cognitive demands of Hertan’s occupation as an attorney.” Finally Judge Anderson rejected Unum’s contention that the side effects of the Percocet might be minimized as she “may have become habituated to the Percocet,” noting that such a conclusion was not supported by the record. After reviewing the record, Hertan was awarded past-due LTD benefits and placed back on claim.

The lesson of Hertan v. Unum Life Insurance Company of America is that, when assessing whether a claimant meets an ERISA Plan’s definition of disability, the claim administrator must evaluate, not only how the underlying disability impacts a claimant’s ability to perform his or her job duties, but also whether the prescribed medication has side effects that might impede a claimant from returning to the work force. What is surprising is that although this decision is correct and logical, not many long-term disability insurance cases under ERISA have focused on the side effects of medication as being disabling, and that an insurer’s decision to discount them is inappropriate.

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Recent Juror Attitudes Should Frighten Insurance Companies

Posted in: Bad Faith, Disability Insurance, Insurance Blog, Life Insurance, Long Term Care Insurance, Punitive Damages June 23, 2015

Recent verdicts from across the nation in disability, life and health insurance policy cases must be alarming for big corporate insurance companies.  The trend is for jurors to award individual plaintiffs astronomical punitive damage verdicts, showing their general disdain for insurance companies and tendency to empathize with policyholders, particularly where a person’s health is at issue.

That trend in juror attitudes is supported by jury consultant research.  For example, Mark S. Sobus, Ph.D., J.D. of EDGE Litigation Consulting, LLC, found insurers are at a great disadvantage when trying to persuade jurors to side with them because jurors tend to have a negative attitude toward insurance companies.  Dr. Sobus in his research asked jurors, “In a dispute between a policyholder and his/her insurance company, are you someone who without knowing any facts would automatically side with the policyholder or the insurance company?”  Dr. Sobus found no one ever said they would side with the insurance company, but around thirty percent of jurors admitted that they would automatically side with the policyholder.  That thirty percent of jurors can almost never be persuaded to change their minds.

Dr. Sobus also found:

  • While most jurors believe policyholders make fraudulent claims to insurance companies and that such conduct is wrong, this rarely leads to jurors adopting such a position when they decide a case, even where the insurer presents strong evidence the policyholder made misrepresentations to the insurer.
  • Jurors hold insurance companies to an incredibly high standard of constructive knowledge. Jurors very often forgive misconduct by the insured when they conclude (as they most often do) that the insurance company could have and should have independently learned about “missing” information left out by the insured on his application for insurance.
  • An example of this happened in a life insurance dispute in which the insured was murdered. The murder happened during the policy’s two-year contestability period, which allowed the insurance company to rescind the $5 million policy if it found material misrepresentations in the application.  The insured omitted that he was bankrupt on his application.  He misrepresented his assets.  And he failed to disclose he had been turned down by other insurance companies.  In this case and similar cases, according to Dr. Sobus, jurors consistently found in favor of the beneficiary.  The jurors concluded that the company did not adequately investigate the insured prior to issuing the policy.  The common refrain from jurors was the company wanted the premiums and didn’t care about the insured’s material financial history until he died and the insurance company’s assets were on the line.  Only then did the company properly investigate the underwriting risk, when it should have done so before it sold the policy.

Jury consultant conclusions that jurors are predisposed to side with individual insureds over their insurance companies are borne out by recent jury verdicts against insurance companies.  In Latham v. Time Ins. Co., No. 2006-cv-1040 (Boulder Colo. Dist. Ct. Jan. 2010), after just six hours of deliberating, a jury awarded a thirty-nine year old teacher and her two children almost $50 million in damages, mostly punitive damages.  Her health insurer, the defendant, had rescinded her insurance policy after she submitted a claim for $185,000 in medical bills for the broken bones, internal injuries and brain damage she and her children suffered in an automobile accident caused by a drug dealer fleeing from police.  The insurer decided not to pay the claim and rescind the policy because it discovered the insured had failed to disclose certain medical information on her application for the insurance.

The insured’s omission did not matter to the jury, which emphasized the lack of humanity and concern by the insurance company for the insured mother of two.  Indeed, the insured admitted she failed to disclose the medical information on her insurance application.  But, according to the local news report, jurors contacted after the verdict stated that the defendant insurance company failed to show that plaintiff deliberately misrepresented her health on her application for insurance or that the company had conducted a reasonable investigation before revoking her coverage.  Another juror stated:

Most of [the insurance company’s] witnesses seemed dishonest, defensive and just showed a basic lack of humanity.  It was kind of frightening.  I was blown away by just how much they acted like robots.

The jury foreman even stated that he had been in favor of awarding as much as $150 million to the insured, “as a way of punishing the company and sending it a message.”

The message of this case to insurance companies is obvious.  Do not discount the role emotions play on jurors involving a dispute between an insurance company and individual insured over her medical condition.  Jurors will tend to side with the insured based purely on their emotions.  Jurors will give the insured considerable grace and big damage awards whenever the evidence will remotely allow it.

Another example is Hull v. Ability Ins. Co., No. 1:10-cv-116 (D. Mont. April 6, 2012).  In that case, an insurance company stopped paying an elderly woman’s benefits, after two years of paying them, under her long-term care insurance policy.  The company claimed her dementia did not qualify her for the benefits under the policy’s terms.  The insured presented evidence the insurer had not obtained information from her treating physician and had not obtained her medical records before denying her claim.  She also presented evidence that the insurer’s claims manual recommended claims representatives avoid relying on information from the insured’s treating physicians.  The jury awarded the elderly woman $250,000 in benefits for the insurance company breaching its insurance contract and $32 million in punitive damages (later reduced on appeal to $10 million).

No doubt, as these and other cases illustrate, there is a trend developing among jurors to punish recalcitrant insurers with large punitive damage awards, particularly in cases involving an individual insured’s claim for disability, life or health benefits.  The lesson to “big business” insurance companies is unmistakable, don’t discount the human element juries use to decide cases.  That element puts corporate insurance companies at a distinct disadvantage from day one of a jury trial involving an individual and his or her health problems.

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Disability Insurers Can’t Seem to Get it Right – Another Tale of Insurance Claimant Woe

Posted in: Disability Insurance, Insurance Blog June 18, 2015

Did your disability insurer follow the law when it denied your insurance claim? Don’t count on it. If you have long- term disability insurance through your employer, you may need a lawyer with expertise in the Employee Retirement Income Security Act of 1974 (“ERISA”) to evaluate that. We routinely see disability insurers violate ERISA laws, either intentionally or negligently.

The case of Puccio v. Standard Ins. Co., 2015 U.S. Dist. LEXIS 21412 (N.D. Cal. Feb. 20, 2015) is a recent example. In Puccio, Judge James Donato issued a favorable opinion for policyholders that reiterated three longstanding legal principles disability insurers cannot seem to get right: (1) a “purely paper review” of the insured’s medical records by the insurer’s consulting physician, without personally examining the insured, is generally not sufficient to deny the insured’s disability claim; (2) although an insurer is not bound by a decision from the Social Security Administration (“SSA”) to award disability benefits, it must evaluate the decision and provide legitimate reasons for a contrary conclusion; and (3) an insurer cannot reject an insured’s claim without explaining in detail what specific additional information would be sufficient for it to award disability benefits.

Defendant Standard Insurance Company (“Standard”) violated every single one of these well-established principles when evaluating Plaintiff Annina Puccio’s long-term disability claim. In January 2009, Ms. Puccio submitted a claim to Standard under her group disability insurance policy asserting disability for a mental disorder. That commenced a six year process of numerous claims and appeals involving different mental and physical conditions. Each time Standard initially denied Ms. Puccio’s claim, she appealed. Standard would then reverse its claim decision and award Ms. Puccio disability benefits. This pattern proceeded for years until Standard finally upheld its claim denial in the final administrative appeal.

In the first two claims, Standard reversed its denials and decided to extend disability benefits for a mental disorder, then later for fibromyalgia and osteoarthritis (both musculoskeletal conditions). The policy had a twenty-four month limit for mental and musculoskeletal disorders. Standard thus rightfully limited Ms. Puccio’s benefits to two years based on those disabling conditions.

When Standard denied the insured’s final appeal, a different medical condition was at issue, Addison’s disease, a potentially crippling endocrine disorder. That disease was not subject to the policy’s two-year limit unlike Ms. Puccio’s earlier claims. Standard nonetheless upheld its denial. It concluded based on reviewing Ms. Puccio’s medical records her Addison’s disease symptoms were well controlled and not disabling. It concluded only her musculoskeletal conditions prevented her from working in her sedentary job. It therefore denied her claim for benefits based on Addison’s disease. It stopped paying any further disability benefits because the policy’s two-year limit on mental and musculoskeletal disabling disorders had expired.

Standard retained no less than nine different doctors during the six-year claim process to review Ms. Puccio’s medical records. None of them personally examined her. Each time they concluded Ms. Puccio was either disabled or not disabled based purely on a “paper review” of her medical records. None of them spoke to her treating physicians. Although Standard was well aware that the SSA concluded Ms. Puccio was disabled and had awarded her disability benefits, it failed to review or even ask for their records. While it reduced Ms. Puccio’s disability benefits based on the amount of the SSA award, as it was entitled to do under the policy, it apparently was not interested in understanding why the SSA found her disabled.

Ms. Puccio filed a lawsuit against Standard under ERISA for her long-term disability benefits beyond the two-year limit. She alleged her Addison’s disease symptoms prevented her from performing her job duties. Standard filed a motion for summary judgment and argued its decision to pay benefits for two years based on Ms. Puccio’s mental and musculoskeletal disorders, but to deny further benefits based on her other physical conditions like Addison’s disease, was proper. It contended her Addison’s disease symptoms did not disable her within the meaning of the policy because they did not prevent her from performing her sedentary job duties.

Judge Donato of the Northern District of California soundly rejected Standard’s argument and denied its motion. As discussed above, Judge Donato found it extremely important that Standard had concluded there was no disability based on a “pure paper review” of the insured’s medical records without ever having a doctor personally examine her. He also criticized Standard for not obtaining, evaluating and distinguishing the SSA’s finding of disability. Finally, he reasoned Standard should have told the insured precisely what additional information she needed to submit to change its denial decision and allow her that opportunity on appeal, but it did not.

Judge Donato discussed these legal principles in his opinion as follows:

Standard should have conducted an in-person medical evaluation to assess the disability impact of Puccio’s Addison’s disease . . . Standard limited itself purely to a paper review of her medical records at the cost of ascertaining all the facts from an in-person exam. That alone raises questions about the thoroughness and accuracy of the benefits determination.

* * * *

Evidence of a Social Security Award of disability benefits is of sufficient significance that failure to address it offers support that the plan administrator’s denial was arbitrary, an abuse of discretion. While Standard was not bound by the SSA’s determination, complete disregard for a contrary conclusion without so much as an explanation raises questions about whether an adverse benefits determination was the product of a principled an deliberative reasoning process. . . .

Taken together, these factors alone support a finding that Standard abused its discretion, but there is more. Standard also failed to request the specific evidence that it and its reviewing physicians concluded was necessary to evaluate Puccio’s claim.

* * * *

The Ninth Circuit has emphasized that ERISA regulations call for a meaningful dialogue between a claims administrator and plan beneficiary. A beneficiary is entitled to a description of any additional material or information that was necessary for her to perfect the claim, and to do so in a manner calculated to be understood by the claimant. Standard never informed Puccio that it needed information specifically stating that her Addison’s disease or gastrointestinal issues would prevent her from performing sedentary level work, separate and apart from the other conditions. . . . If Standard required specific information to evaluate Puccio’s claim, Standard needed to ask for it. [Citations omitted].

Based on that reasoning, Judge Donato held Standard abused its discretion when it denied Ms. Puccio’s long-term disability benefits beyond the mental health and musculoskeletal coverage. He remanded the case back to the plan administrator, Standard, to reconsider whether Ms. Puccio is entitled to additional disability benefits. He found Standard must obtain and evaluate the evidence it should have in the first place in reaching its decision, i.e., opinions from Standard’s “paper review” doctors after personally examining the insured, the SSA record, and the insured’s medical records that specifically address how Addison’s disease impacts her ability to work.

Do disability claims administrators diligently follow the law and act in the best interests of the plan’s participants as they are obligated to do as an insured’s fiduciary? You would not be surprised that the answer is that they do not. Often, as Standard did here, a disability claims administrator has a conflict of interest because it acts as both the decider of your claim and the entity ultimately responsible to pay it. Saddled with that conflict, Standard, like other similarly situated insurers, had a financial incentive to deny Ms. Puccio’s claim and ignore well-established legal principles about how a disability claims administrator must act when investigating the claim. Now ask yourself this question: did your claims administrator do so in handling your long-term disability insurance claim?

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For ERISA Disability Insurance Appeals, A Claimant Who is a Day Late May Not Be a Dollar Short

Posted in: Case Updates, Disability Insurance, Disability Insurance News, ERISA, Insurance Blog, Insurance Questions and Concepts, Policy Interpretation June 10, 2015

Under most long-term disability insurance plans governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), a claimant must appeal the denial of any claim for benefits within 180 days of the denial letter. Unless the appeal is made within that strict 180-day period, the claimant may forfeit the right to any short-term disability benefits or long-term disability benefits available under the plan. At least, that was the law until a recent ruling by the United States Court of Appeals for the Ninth Circuit cracked open the window for a timely appeal.

In LeGras v. Aetna Life Insurance Company, __ F.3d __, 2015 WL 3406182, 2015 DJDAR 5798, (9th Cir. May 28, 2015), the Ninth Circuit ruled that when the 180-day deadline falls on a weekend or holiday, the claimant has until the next business day to appeal a denial decision.

After injuring himself while working for Federal Express Corporation, LeGras filed a claim for long-term disability insurance benefits under the employee welfare benefit plan administered by Aetna. After initially approving LeGras’ disability claim, on April 18, 2011, Aetna denied his claim for ongoing benefits, and informed him that he could “file a request to appeal this decision within 180 days of receipt of this notice.” That 180-day period ended on October 15, 2011, a Saturday. However, because LeGras mailed his appeal letter on the following Monday, Aetna denied the appeal as untimely.

LeGras sued Aetna for long-term disability benefits, but the district court judge granted Aetna’s motion for judgment on the pleadings, on the grounds that LeGras failed exhaust his administrative remedies because he mailed his appeal letter after the end of 180-day period. LeGras appealed the district court’s ruling.

In considering the appeal, the Ninth Circuit noted that:

LeGras faces the possibility of losing his long-term disability benefits because of a two-day difference in the computation of the time period to pursue an administrative appeal. Although the stricter time-computation method may be convenient for AETNA’s purposes, it would be contrary to the purposes of ERISA to adopt a method that is decidedly protective of plan administrators, not plan participants.

The Ninth Circuit noted that, in enacting ERISA, Congress empowered the courts to develop federal common law governing employee welfare benefits plans. The Court then noted that federal common law has developed to protect and further the interests of plan participants, such as LeGras.

Next, the Ninth Circuit explained that “[t]here is nothing novel about the principle” of extending a deadline to the next business day, when that deadline falls on a weekend or holiday. The Ninth Circuit also noted that not only have numerous courts, including the United States Supreme Court, enforced this concept, but this rule is codified in Rule 6 of the Federal Rule of Civil Procedure.

In light of this precedent, and to further the interests of claimants such as LeGras, the Ninth Circuit explained that:

Therefore, we hold that, where the deadline for an internal administrative appeal under an ERISA-governed insurance contract falls on a Saturday, Sunday, or legal holiday, the period continues to run until the next day that is not a Saturday, Sunday, or legal holiday.

With this ruling, ERISA claimants will no longer be denied the opportunity to appeal their claim for benefits when the deadline falls on a weekend or holiday, simply because they mailed their appeal on the next business day. This case highlights the importance of having competent and experienced ERISA counsel assisting claimants who are working on appeals. There are indeed many traps for the unwary.

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“Slimy Conduct That Gives Insurance Companies a Bad Name:” Some Quotes from Judge Alex Kozinski

Posted in: Insurance Blog, Policy Interpretation, Property & Casualty Insurance, Uncategorized June 03, 2015

We do not normally focus on dissents in our blogging but we made an exception here with a published Per Curiam opinion from the Ninth Circuit Court of Appeals, Guam Industrial Services, Inc. v. Zurich American Insurance Co., 2015 DJDAR 5948 (9th Cir. June 1, 2015).  This insurance coverage case arose out of the sinking of a dry dock, loaded with barrels of oil, during a typhoon on Guam. The issues pertain to whether either of two insurance policies covered costs of damage to the dock and the associated cleanup which was accomplished before any of the oil leaked out of the containers into the Pacific Ocean. Guam Industrial Services, Inc. (“Guam Industrial”) owned the dry dock.  At the time of the sinking, one of its insurance policies, an Ocean Marine Policy, covered liability for property damage caused by pollutants, issued by Zurich American Insurance Company (“Zurich”). After the dock sank, Guam Industrial filed a claim under each policy. Zurich denied the claim, and Guam Industrial brought suit. The district court granted summary judgment for the insurers, finding that the first policy was voidable because Guam Industrial had failed to maintain the warranty on the dock, and that the coverage under the second policy was never triggered because no pollutants were released. Guam Industrial appealed the decision and the Ninth Circuit affirmed.

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Robert J. McKennon Named Corporate LiveWire’s Global Awards 2015 Insurance & Risk Management Lawyer of The Year for Orange County, California

Posted in: Disability Insurance, Disability Insurance News, Insurance Blog May 12, 2015

McKennon Law Group PC is proud and honored to announce that Robert J. McKennon, founding shareholder of McKennon Law Group PC, has been named as Corporate LiveWire’s Global Awards 2015 Orange County, California Insurance & Risk Management Lawyer of the Year. The annual Global Awards Lawyer of the Year recognition honors the achievements of those individuals that have consistently shown best practice and demonstrated general excellence in every endeavor on a global and national level. Mr. McKennon specializes in all types of insurance litigation but especially focuses his efforts in long-term disability insurance, life insurance, long-term care insurance, health insurance and insurance bad faith litigation.

The Corporate LiveWire Global Awards 2014 Lawyer of the Year winner’s guide is available here.

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Insurers Do No Have Discretionary Authority, Absent Clear Language in Official Plan Documents

Posted in: Abuse of Discretion, Administrative Record, Case Updates, De Novo Review, Disability Insurance, Disability Insurance News, ERISA, Insurance Blog, Insurance Questions and Concepts, Policy Interpretation, Standard of Review April 30, 2015

In actions brought under the Employee Retirement Income Security Act of 1974 (“ERISA”), two roads diverge in federal court—and the court’s choice regarding the applicable standard of review can make all the difference in the scope of permissible evidence.  If the court applies the abuse of discretion standard of review, the court more typically (but not always) only considers evidence received by the insurer in time for its decision and limits its review to the “administrative record” to determine whether the insurer’s denial was an abuse of discretion.  Alternatively, the court may review a case “de novo,” and may consider documents not previously provided to the insurer to determine whether the insured is entitled to benefits. 

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Ninth Circuit Affirms MLG’s Six-Figure Judgment in a Disability Suit Filed Against Sun Life

Posted in: Abuse of Discretion, Administrative Record, Case Updates, Conflict of Interest, Disability Insurance, Disability Insurance News, ERISA, Insurance Blog April 29, 2015

On April 22, 2015, the United States Court of Appeals for the Ninth Circuit issued a decision affirming the district court’s decision to award McKennon Law Group PC’s client, an attorney (“insured”), his past-due ERISA plan benefits, as well as attorneys’ fees, costs and interest against Sun Life & Health Insurance Company in connection with his short-term and long-term disability insurance claim. 

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Robert J. McKennon and Joseph McMillen Publish Article in Los Angeles Daily Journal: “When Insurers Rescind, They Must Act Fast”

Posted in: Disability Insurance, Disability Insurance News, Insurance Blog, News April 02, 2015

The April 1, 2015 edition of the Los Angeles Daily Journal features an article written by Robert McKennon and Joseph McMillen of the McKennon Law Group entitled:  “When Insurers Rescind, They Must Act Fast.”  In the article, Mr. McKennon and Mr. McMillen discuss the California Court of Appeal’s decision in DuBeck v. California Physicians’ Service, 2015 DJDAR 2629 (Cal. App. 2d Dist. Mar. 5, 2015), which held that Blue Shield of California (“Blue Shield”), waived its right to rescind her health insurance policy and, therefore, her claim was covered.  While Ms. DuBeck had allegedly willfully misrepresented material facts about her medical condition on her application, the appellate court found that even if she had done so, Blue Shield waived its right to rescind.

The article is posted below with the permission of the Los Angeles Daily Journal.

When insurers rescind, they must act fast
By Robert J. McKennon and Joe McMillen

Did you disclose your material medical history on your health insurance application?
What about your application for disability or life insurance? Be careful that you do or
you may find yourself without insurance when you need it most like Bonnie DuBeck
did when she learned she had breast cancer that her insurer would not cover because she allegedly misrepresented her medical condition.

Fortunately for DuBeck, the California Court of Appeal in DuBeck v. California
Physicians’ Service, 2015 DJDAR 2629 (Cal. App. 2d Dist. Mar. 5, 2015), held her
insurer, California Physicians’ Service, doing business as Blue Shield of California,
waived its right to rescind her health insurance policy and, therefore, her claim was
covered. While DuBeck had allegedly willfully misrepresented material facts about her
medical condition on her application, the appellate court found that even if she had
done so, Blue Shield waived its right to rescind. Looking at the facts, one wonders how the trial court did not easily reach the same conclusion.

On Feb. 16, 2005, DuBeck submitted a signed application for health insurance to
Blue Shield. Five days earlier, she had visited the Revlon UCLA Breast Center where a nurse performed a “fine needle aspiration” on a lump in her left breast that had
developed after she ran into a cabinet. On the nurse’s advice, DuBeck scheduled a
mammogram and consultation with a breast surgeon for Feb. 17, the day after she
submitted the insurance application.

DuBeck was asked on the application whether she ever had treatment or symptoms
related to potential breast problems or had been advised to have a physician conduct
an exam or further testing which had not yet been performed. DuBeck answered “no”
to each question, omitting material information about her recent and upcoming breast
procedures. On April 1, 2005, Blue Shield issued a health insurance policy to DuBeck
without knowing about her breast exam, procedures and potential health problems.
The lump turned out to be malignant. In the months that followed, DuBeck had breast
surgery and other related medical procedures. In April and May 2005, DuBeck started
submitting claims to Blue Shield under the policy for the medical services. Blue Shield
did not pay for the claims, but suspended processing them. It explained the services
might not be covered under the policy’s preexisting condition exclusion and that it
needed to investigate further.

Blue Shield continued to collect DuBeck’s premiums, $19,600, for the next seventeen
months. It paid for her other claims unrelated to her breast cancer. It did not rescind
the policy during that period.

Seventeen months after Blue Shield issued the policy, on Sept. 8, 2006, it sent
DuBeck a letter explaining it had determined she had not provided complete and
accurate information on her insurance application. Namely, she failed to disclose the
fine needle aspiration procedure, a mammogram and a breast surgeon exam. With full
knowledge that DuBeck had undergone breast cancer surgery and had submitted a
claim to Blue Shield to cover the costs of these procedures, Blue Shield decided to
terminate the policy prospectively rather than rescind it. The letter stated, “Blue shield
has determined that, rather than rescind the coverage completely, your coverage was
terminated prospectively and ended effective today, September 8, 2006.” Blue Shield
also promised to cover and pay for any covered services prior to the termination date.

On the same date Blue Shield sent DuBeck the letter, it sent her a “Certificate of
Creditable Coverage” confirming that her coverage began April 1, 2005, and ended
September 8, 2006. The certificate stated that it was “evidence of your coverage under this plan.”

Two years later, because it had still refused to pay for her breast cancer surgery and
related services, DuBeck sued Blue Shield for breach of the insurance contract and bad faith, among other claims. Blue Shield asserted an affirmative defense that the policy was subject to rescission because DuBeck had willfully misrepresented material facts in her application, rendering the policy void ab initio. It moved for summary judgment on that defense, which the trial court granted.

DuBeck appealed and argued Blue Shield waived any right to rescind the policy. The
Court of Appeal agreed, reversed the trial court, and found waiver as a matter of law.

The court noted rescission extinguishes a contract, rendering it void ab initio, as if it
never existed. Rescission is, of course retroactive, rendering a contract or insurance
policy unenforceable from the outset. Cancellation, however, is prospective. To rescind under California law, the insurer must return to the insured all the premiums paid, unlike cancellation.

It is established California law that an insurer has the right to rescind a policy when
the insured misrepresented or concealed material information in seeking to obtain
insurance. Nieto v. Blue Shield of California Life & Health Ins. Co., 181 Cal. App. 4th
60, 75 (2010). However, that right, like any other, can be waived: “An insurance
company will be deemed to waive any ground which would otherwise entitle it to
rescind a policy … when, despite knowledge of the facts giving it the option, it impliedly recognizes the continuing effect of the policy.” Pierson v. John Hancock Mut. Life Ins. Co., 262 Cal. App. 2d 86, 91 (1968); see also Silva v. National American Life Ins. Co., 58 Cal. App. 3d 609, 61516 (1976).

In general, to constitute a waiver, there must be an existing right, a knowledge of its
existence, an actual intention to relinquish it, or conduct so inconsistent with the intent
to enforce the right as to induce a reasonable belief that it has been relinquished.
Pacific Business Connections, Inc. v. St. Paul Surplus Lines Ins. Co., 150 Cal. App. 4th 517, 525 (2007), quoting Klotz v. Old Line Life Ins. Co. of America, 955 F. Supp. 1183, 1186 (N.D. Cal. 1996).

Under this authority, the Court of Appeal held that Blue Shield waived its right to
rescind the policy as a matter of law, finding the insurer’s conduct was “so inconsistent with the intent to enforce the right [to rescind] as to induce a reasonable belief that it has been relinquished.” The court reasoned Blue Shield told its insured it was terminating the policy prospectively rather than rescinding it, that all her claims prior to the cancellation date would be covered, and retained her premiums.

Additionally, the court explained that in 2009, the Legislature enacted Health and
Safety Code Section 1389.21, which prohibits an insurer governed by the KnoxKeene
Health Care Service Plan Act from rescinding or canceling a health care service plan
contract for any reason more than 24 months following its issuance. Although the
effective date of the statute was January 2010, the court stated: “we find support for
our decision in the Legislature’s judgment that two years is ample time for an insurer to uncover any misrepresentations made in an application and determine whether to
rescind or continue coverage.”

The court determined that Blue Shield first asserted its right to rescind DuBeck’s
policy (during litigation) over three and a half years after issuing it, and more than two
years after admittedly learning the truth about appellant’s medical condition. The court
concluded these facts established Blue Shield had engaged in conduct so plainly
inconsistent with an intent to enforce the right to rescind the policy that it had waived
that right. That Blue Shield first attempted to rescind the policy in litigation after it
represented that it would cancel the policy, but not rescind it, made this outcome

This case teaches that insurers must promptly rescind the policy and return all
premiums upon learning of material misrepresentations in the application. They
cannot engage in conduct inconsistent with a right to rescind that would lead an
insured to reasonably believe the policy is still in effect. California courts will not
hesitate to find waiver as a matter of law in that scenario.


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California Court of Appeal Emphasizes Just How Broad the Duty to Defend Is, which Includes Suits Alleging Even Rape

Posted in: Case Updates, Disability Insurance, Disability Insurance News, Duty to Defend, Excess Insurance, Homeowners Insurance, Insurance Blog April 01, 2015

A liability insurer’s duty to defend its insured against lawsuits is extremely broad, much broader than its duty to indemnify its insured for a judgment entered against it.  That has been the law in California for decades.  But just how broad is the duty to defend?  Does it extend to civil lawsuits alleging the insured raped and sexually assaulted the plaintiff?  Does it extend to lawsuits alleging intentional acts by the insured?  You bet it does if the policy contains the right language.

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