Bonnie Dubeck v. California Physicians’ Service

(Health Insurer Waives the Right to Rescind Personal Health Policy Due to a Two Year Delay in Electing to Rescind Policy)

In DuBeck v. California Physicians Service, ____ Cal.App.4th ____ (March 5, 2015), the California Second District Court of Appeal reversed the trial court’s entry of summary judgment in favor of California Physicians’ Service, doing business as Blue Shield of California (“Blue Shield”), regarding its rescission of a medical insurance policy issued to Ms. DuBeck. The parties’ dispute arose out of Ms. DuBeck’s tender of medical bills incurred in connection with the treatment of breast cancer after she had purchased the Blue Shield policy.

In October 2004, Ms. DuBeck physically injured her left breast running into a cabinet. She developed a lump in the area where the injury occurred. On February 11, 2005, she visited the Revlon UCLA Breast Center (“Breast Center”). Subsequently, Ms. DuBeck was diagnosed with breast cancer after going through several tests and consulting with a breast surgeon.

Ms. DuBeck submitted a signed application to Blue Shield on February 16, 2005, five days after visiting the Breast Center. On the application, Ms. DuBeck advised that she last visited a doctor in September 2004 for an annual checkup and that he found nothing, and that her “present status” was “great.” Subsequently, Blue Shield issued a policy dated April 1, 2005. The policy contained cancellation and termination provisions which stated as follows:

“This Agreement may be canceled by by the Member at any time before or after issuance of this Agreement, or fraud or deception in enrollment” and Blue Shield “may terminate this Agreement for cause immediately upon written notice for the following: … Material information that is false or misrepresented information provided on the enrollment application or given to the Plan … .”

On September 8, 2006, approximately 17 months after issuing the policy, Blue Shield sent a letter to Ms. DuBeck cancelling her policy. The letter stated that Blue Shield had “reviewed medical information received after Ms. DuBeck submitted her application and determined that she did not provide complete and accurate information on her application for individual health coverage.” The letter referred to Ms. DuBeck’s answers to questions regarding when she had visited a doctor and in connection with the status of her health. Rather than rescind the policy, Blue Shield advised that it was canceling coverage, effective September 8, 2006. Blue Shield advised Ms. DuBeck that any claim for covered services incurred before this date will be covered and Blue Shield would not seek refund of any claims payments made on her behalf. The letter also specifically stated that Blue Shield was not waiving any rights it may have under the policy.

Subsequently, in September 2008, Ms. DuBeck initiated a lawsuit against Blue Shield. The operative second amended complaint, filed in September 2010, alleged that commencing in April and May 2005, Blue Shield began receiving claims for medical services being provided to DuBeck which Blue Shield rejected as falling under the pre-existing condition exclusion of the policy. Further, the complaint alleged that by no later than August, 2005, when DuBeck began to be monitored by Blue Shield’s medical management department, Blue Shield knew or should have known that DuBeck had been seen for the breast condition on February 11, 2005. However, Blue Shield waited until August 27, 2006, before commencing a formal investigation resulting in its cancelation of coverage on September 8, 2006.

In 2011, Blue Shield moved for summary judgment seeking a judicial ruling of its absolute right to rescind the policy based on material misrepresentations in the application and contending that such rescission would provide a complete defense to all of the causes of action alleged by Ms. DuBeck. Subsequently, the trial court entered summary judgment in favor of Blue Shield.

In reversing the trial court’s decision, the Court of Appeal held that Blue Shield waived its right to rescind DuBeck’s policy. The Court of Appeal reasoned as follows:

We conclude that Blue Shield's conduct was wholly inconsistent with the assertion of its known right to rescind. It is undisputed that by September 8, 2006, Blue Shield was aware of the pertinent information and, consistent with its corporate policy, elected to cancel, rather than rescind, appellant's policy. It communicated this election directly to appellant, along with assurances that the cancellation was “prospective,” leaving her entitled to all benefits of the policy from April 2005 to September 2006. Had Blue Shield asserted a right to rescind in 2006, appellant would not have incurred the effort and expense of attempting to enforce rights Blue Shield itself assured her she had, viz., the right to have “been relinquished.’” (Pacific Business Connections, Inc. v. St. Paul Surplus Lines Ins. Co., supra, 150 Cal.App.4th at p. 525.)

 Moreover, although Blue Shield's actions in September 2006 and the 27 months thereafter were sufficient to defeat any right to rescind, its earlier actions lend additional support to our conclusion that it had lost its right to rescind as a matter of law. Blue Shield's receipt of the claim for appellant's April 6, 2005 breast cancer surgery, for which it suspended payment due to its suspicion that the condition pre-dated appellant's enrollment, should have triggered an earlier investigation and resolution of appellant's right to remain insured. “[A]ctual knowledge of a breach of a policy provision is not essential to establish a waiver of a policy provision. It is sufficient if the insurer has information which if pursued with reasonable diligence would lead to the discovery of the breach.” (Dalzell v. Northwestern Mutual Ins. Co. (1963) 218 Cal.App.2d 96, 102 [32 Cal. Rptr. 125].) This principle was recognized in Barrera v. State Farm Mut. Automobile Ins. Co. (1969) 71 Cal.2d 659 [79 Cal. Rptr. 106, 456 P.2d 674], where the insured under an auto policy misrepresented his driving record and the insurer failed to conduct a simple check of Department of Motor Vehicles records that would have revealed the misrepresentation until the insured was involved in a collision, two years after the issuance of the policy. In rejecting the insurer's contention that the misrepresentation in the application precluded liability to those injured in the collision, the Supreme Court observed: “‘The rule is well established that the means of knowledge is equivalent to knowledge, and that a party who has the opportunity of knowing the facts constituting the fraud of which he complains cannot be supine and inactive, and afterwards allege a want of knowledge that arose by reason of his own laches or negligence.’” (71 Cal.2d at p. 669, fn. 7, quoting Shain v. Sresovich (1894) 104 Cal. 402, 405 [38 P. 51].)