Medical Insurer Waived Its Right To Rescind Policy By Electing To Cancel And Retaining Premiums

In DuBeck v. California Physicians’ Service, 2015 Cal. App. LEXIS 203 (March 5, 2015), California’s Second Appellate District held that California Physicians’ Service dba Blue Shield of California (“Blue Shield”) waived its right to rescind a health insurance policy by taking actions wholly inconsistent with rescission.

In October 2004, Bonnie DuBeck (“DuBeck”) was involved in an accident and developed a lump in her left breast. On February 11, 2005, DuBeck visited the UCLA Breast Center for tests in the affected area.  Later that month, additional tests revealed the lump was malignant.

On February 16, 2005, DuBeck applied for health insurance with Blue Shield. DuBeck failed to disclose her recent medical issues and treatment. On April 1, 2005, Blue Shield issued a health insurance policy to DuBeck that covered pre-existing conditions only after six months of continuous coverage. DuBeck underwent breast cancer surgery on April 6, 2005, less than a week after the policy was issued, and her medical providers submitted bills for her treatment to Blue Shield. In its June 2005 explanation of benefits, Blue Shield stated the breast cancer “may have existed prior to [DuBeck’s] enrollment” and that processing of the claim was suspended “pending receipt of additional information requested.”

On September 8, 2006, seventeen months into coverage, Blue Shield wrote to DuBeck cancelling the policy based on her earlier misrepresentations. The letter stated: “[A]t this time[,] Blue Shield has determined that, rather than rescind the coverage completely, your coverage was terminated prospectively and ended effective today, September 8, 2006.” It advised Dubeck that “[a]ny claims for covered services incurred before this date will be covered,” and that “at this time Blue Shield will not seek refund of any claims payments made on your behalf.” Blue Shield had not reimbursed DuBeck for her breast cancer surgeries but had made payment for other health care costs.

Two years later, DuBeck filed a complaint against Blue Shield challenging the cancellation of the policy and asserting claims for breach of contract, violation of the covenant of good faith and fair dealing and intentional infliction of emotional distress. DuBeck alleged that Blue Shield had previously denied her claims for medical treatment in April and May 2005 under the pre-existing condition exclusion in the policy. Therefore, Blue Shield knew or should have known that she had received treatment for her malignancy in February 2005. By delaying the cancellation, Blue Shield was able to collect more in premiums than it paid in benefits. In December 2008, Blue Shield answered the complaint and asserted rescission of the policy as a defense. Blue Shield moved for summary judgment on rescission which the trial court granted. The Court of Appeal reversed.

The Court of Appeal held Blue Shield had waived its right to rescind the policy. First, the Court found Blue Shield was aware of all pertinent information which would have allowed it to rescind when it elected to cancel DuBeck’s coverage two years prior in September 2006. However, instead of rescinding the policy, Blue Shield “cancelled” the policy which allowed it to keep the policy premiums.

Second, Blue Shield was aware of Dubeck’s medical condition as early as five days into coverage when she underwent breast surgery. In fact, Blue Shield refused to pay for the surgery because the breast cancer may have existed prior to the policy. The Court concluded that Blue Shield’s delay in investigating the misrepresentation resulted in DuBeck incurring substantial medical expenses and impeded her ability to timely investigate the availability of government assistance for her medical needs. These actions were entirely inconsistent with rescission. Accordingly, Blue Shield waived its right to rescind the policy.

As this decision shows, there is no middle-ground between acknowledging coverage and rescission. Blue Shield may have had several reasons for cancelling rather than rescinding. Blue Shield was able to keep policy premiums and its cancellation allowed DuBeck to keep benefits for treatment received prior to the cancellation. However, Blue Shield’s approach was fatal to its rescission claim.