Dubeck v. California Physicians’ Service (2015) 234 Cal.App.4th 1254.

Despite intentionally misrepresenting material facts in her insurance application, a California court denies an insurer’s attempt to rescind the policy holding that the insurer had an opportunity to investigate prior to making payments on the claim.

Dubeck v. California Physicians’ Service discusses an insurer’s waiver of right to rescind a policy for misrepresentations in the policy application. It establishes that even when the initial application contains misrepresentations and omits material facts, an insurer may be precluded from rescinding the policy and voiding it ab initio after having previously agreed to cover claims that occurred before the policy’s cancellation. While we disagree with the holding, the case is a strong reminder of the need for prompt claim investigation and thorough underwriting review.

The Plaintiff, Bonnie Dubeck, purchased a medical insurance policy from Defendant California Physicians’ Service (Blue Shield). Several days before making this purchase, Dubeck underwent a medical procedure at the Revlon/UCLA Breast Center to ascertain the nature of a lump in her breast. After being given an appointment for a mammogram, ultrasound, and consultation, Dubeck applied for the policy. One section of the policy application asked questions about pre-existing conditions, specifically referring to breast issues. Dubeck checked “no” in answering these questions. Dubeck was also asked to provide the date of her last visit with a physician. She failed to disclose her consultation with the Breast Center, and instead, provided an earlier date where she claimed she was given a clean bill of health. On April 1, 2005, Blue Shield issued Dubeck a medical insurance policy.

The policy contained a cancellation provision for false representations or concealment of material facts. In addition, preexisting conditions were covered only after the insured had been continuously covered for 6 consecutive months, including the waiting period. On September 8, 2006, approximately 17 months after the issuance of the policy, Blue Shield sent Dubeck a letter cancelling the policy. The letter stated that Blue Shield had reviewed medical information it obtained after the submission of the application, and ultimately determined that Dubeck did not provide complete and accurate medical information. The letter specifically referred to the questions dealing with Dubeck’s reproductive system and breasts, and with the questions dealing with her having been an inpatient or outpatient at a hospital or medical facility. Blue Shield also stated that Dubeck’s prior checkup did not result in a clean bill of health. Lastly, Blue Shield stated that it had become aware of Dubeck’s visit to the Revlon/UCLA Breast Center, and that having known about her medical condition, it would not have never issued the medical insurance policy. The letter stated that the coverage was being terminated prospectively, meaning any claims for covered services incurred before the issuance of the letter would be covered, and that Blue Shield would not be seeking a refund. Blue Shield explicitly stated that it was not waiving any right it had under the Health Services Agreement or any terms of the application.

In September of 2008, Dubeck initiated a lawsuit alleging that Blue Shield failed to pay her claims for medical services. Blue Shield had received claims in April and May of 2005, but refused to pay them because they fell under the preexisting condition of exclusion of the policy. Dubeck contended that by cancelling the policy, Blue Shield was able to collect and retain approximately $20,000 in premiums, which was approximately $5,000 more than it ever paid to medical providers on Dubeck’s behalf. Dubeck further argued that the cancellation/termination provisions in the policy were in smaller type than permitted by California regulations. Lastly, Dubeck argued that the waiting period for coverage of preexisting conditions expired 6 months after Blue Shield received her application, and not 6 months after the policy was issued. Blue Shield filed an answer asserting as an affirmative defense that the policy was subject to rescission for willful misrepresentations and concealed material facts, thus rendering the policy void ab initio.

Blue Shield filed a motion for Summary Judgment, which was granted by the Trial Court. In its ruling, the Court found that Dubeck’s application contained material misrepresentations and that the misrepresentations were willful. The Court further found that Blue Shield undertook reasonable efforts to ensure that Dubeck’s application was complete and accurate at the time the policy was issued. The issue of waiver was not addressed.

In her appeal, Dubeck contends that Blue Shield waived its right to rescind by waiting over a year after learning about the misrepresentations. The rescission of contracts is governed by Civil Code sections 1691 and 1693, which state that a party must “promptly upon discovering the facts which entitle him to rescind: (1) give notice of rescission to the party to whom he rescinds; and (2) restore or offer to restore everything of value he has received from the other party under the contract. Delays in seeking rescission may result in forfeiture of the right to rescind where the delay causes prejudice. Heavily scrutinized, when the insurer has full knowledge of the facts, and then recognizes the continued validity of the policy, it may forfeit its right to rescind that policy.

The Court of Appeal held that Blue Shield’s conduct ultimately resulted in a forfeiture of its right to rescind. Blue Shield failed to return Dubeck’s premiums, which at the time exceeded the payments expended for her medical care. Blue Shield did not to offer any new evidence of post-cancellation information, did not to provide any explanation for the reversal of its earlier decision to cancel rather than rescind, and offered no justification for disavowing its earlier confirmation for coverage of medical expenses that were incurred prior to the cancellation of the policy. Blue Shield had the ability to inquire and obtain medical information about Dubeck’s preexisting conditions. The court concluded that it failed to investigate and obtain medical records in a timely fashion. By failing to promptly investigate and obtain the necessary information, Blue Shield allowed Dubeck to incur medical expenses, and ultimately dissuaded her from pursuing alternate forms of coverage that would have been available to her (i.e. government assistance). Blue Shield’s lack of diligence and resulting prejudice to Dubeck, combined with the earlier promise to cover medical expenses incurred prior to the cancellation, are grounds for forfeiture of its right to rescind the policy.