Insurer Waived Right to Rescind for Willful Misrepresentation

A woman underwent a fine needle aspiration of a lump in her breast. Five days after the procedure, the woman submitted a signed application for medical insurance. The section of the application seeking medical information asked whether the applicant had “received any professional advice or treatment ... from a licensed health practitioner” or “had any symptoms” pertaining to “breast problems, breast implants, adhesion, abnormal bleeding, amenorrhea, endometriosis, fibroid tumors”; “[b]een an inpatient or outpatient in a hospital, surgical center, ... or other medical facility”; had any “[a]bnormal laboratory results”; or had any “[d]iagnoses, symptoms and/or health problems not mentioned elsewhere on this application, or that have not been evaluated by a physician, or have any complications or residuals remaining following any treatment, or been advised to have a physician exam, further testing, treatment or surgery which has not yet been performed by a physician, dentist, or other health care provider?” The woman checked “No” in answer to all these questions. On another page, the applicant was asked to “provide details regarding the last physician visit you ... had, regardless of the date....” The woman responded that her last such visit had been two years before for an annual checkup, that the doctor found nothing, and that her “present status” was “great.” Page seven of the application form asked for the applicant's signature and stated: “I alone am responsible for the accuracy and completeness of the information provided on this application. I understand that neither I, nor any family members, will be eligible for coverage if any information is false or incomplete. I also understand that if coverage is issued, it may be canceled or rescinded upon such a finding.”


The insurer issued the policy. The policy contained cancellation and termination provisions stating: “This Agreement may be canceled by [the insurer] for false representations to, or concealment of material facts from, [the insurer] in any health statement, application, or any written instruction furnished to [the insurer] by the Member at any time before or after issuance of this Agreement, or fraud or deception in enrollment” and the insurer “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....”


Under the policy, pre-existing conditions were covered only after the insured had been “continuously covered for six (6) consecutive months, including [the] waiting period,” which began “on the date [the insurer] receive[d] your application.” The policy defined “pre-existing condition” as “ ‘an illness, injury, or condition ... which existed during the six (6) months prior to the Effective Date with [the insurer] if, during that time, any medical advice, diagnosis, care or treatment was recommended or received from [a] licensed health practitioner.’ ”


The lump proved to be cancerous, and in the months that followed, the woman underwent surgery and other medical procedures. In the course of her treatment for breast cancer, her doctors discovered she was also suffering from leukemia.


The woman had the health insurance for seventeen months. During that time, the insurer paid medical claims unrelated to the woman’s breast cancer, which had been deemed a pre-existing condition. After seventeen months, the insurer sent the woman a letter cancelling her health insurance. As grounds for cancelling the policy, the insurer claimed that the woman had made material misrepresentations in her application and concealed that she had undergone a fine needle aspiration for a lump in her breast several days before submitting her application for health insurance. The cancellation letter expressly stated that the insurer was electing to cancel coverage prospectively, rather than rescind the policy, and that any claims for covered services incurred prior to the cancellation would be covered.


The woman sued the insurer for breach of contract, violation of the covenant of good faith and fair dealing, and intentional infliction of emotional distress. The complaint alleged that the insurer had failed to pay covered claims while the policy was in force. Specifically, the complaint contended that by delaying and canceling the policy, the insurer was able to collect and retain $19,600 in premiums, $5,450 more than it had paid to medical providers on the woman's behalf. The insurer asserted as an affirmative defense that the policy was subject to rescission, because the woman had willfully misrepresented or concealed material facts in her application, rendering the policy void ab initio. The woman argued that the insurer had waived its right to rescind by waiting well over a year after learning of circumstances supporting rescission, and thereafter electing to cancel, rather than rescind, her policy. Additionally, the woman argued that if the insurer had promptly rescinded the policy when it discovered she had undergone the fine needle aspiration, she could have applied for and obtained government-provided medical insurance coverage based on her low income. The Los Angeles County Superior Court granted summary judgment in favor of the insurer on this defense.


The California Second District Court of Appeal, Division Four, reversed. The court held that the insurer waived its right to rescind the woman’s health insurance policy as a matter of law.


The insurer waived its right to rescind the woman’s health insurance policy as a matter of law. The court held that the test for whether a party waived a right to rescind a contract required (1) an existing right to rescind; (2) a knowledge of the right to rescind; and (3) an actual intention to relinquish the right to rescind, or conduct so inconsistent with the intent to enforce the right to rescind as to induce a reasonable belief that it has been relinquished. The court found that the insurer had an existing right to rescind because it had obtained all the information needed to conclude that the woman had misrepresented and/or omitted important information which, in its view, justified a decision to reject her application. The court found that the insurer had knowledge of its right to rescind as evidenced by the cancellation letter which expressly stated that the insurer was electing to cancel coverage prospectively, rather than rescind the policy. The court found the insurer engaged in conduct so inconsistent with the intent to enforce the right to rescind as to induce a reasonable belief that it had been relinquished. Specifically, the insurer waited over two years to assert a right to rescind, while assuring the woman of her right to coverage during the period the policy was in effect and retaining her premiums for such coverage. The court noted that had the insurer rescinded the policy, it would have been required to return to the woman the premiums she had paid—which at the time exceeded the payments the insurer had expended for her medical care. Instead, it elected to cancel the policy, retaining the profit. The insurer did not assert a right to rescind until the woman filed suit challenging the decision to cancel and the coverage decisions made during the policy period. When it finally asserted the right to rescind, the insurer offered no evidence of new information obtained post-cancellation; no explanation for the reversal of its earlier election to cancel, rather than rescind; and no justification for the disavowal of its earlier confirmation of coverage or for the retraction of its assurance that covered services incurred during the pendency of woman's policy would be paid for. The court reasoned that had the insurer asserted a right to rescind at the time it cancelled her policy, the woman would not have incurred the effort and expense of attempting to enforce rights the insurer itself assured her she had, meaning the right to have any claims for covered services incurred, before the policy was cancelled, covered. In addition, the court noted that the insurer's receipt of the claim for woman's breast cancer surgery, less than a week after her policy issued, for which it suspended payment due to its suspicion that the condition pre-dated the woman's enrollment, should have triggered an earlier investigation and resolution of the woman's right to remain insured. By ignoring information that would have resolved the truthfulness of the representations in the woman's application at an early stage and determining at that time whether to continue as her insurer, the insurer allowed the woman to incur substantial medical expenses and dissuaded her from investigating the availability of government assistance. The court concluded that the insurer's lack of diligence in the early months of the policy and the apparent prejudice to the woman provided a second and independent basis for rejecting its claimed right to rescind.


The California Second District Court of Appeal, Division Four, reversed the trial court’s grant of the insurer’s motion for summary judgment.


See: DuBeck v. California Physicians' Service, 2015 WL 970699, 15 Cal. Daily Op. Serv. 2287, 2015 Daily Journal D.A.R. 2629 (Cal.App. 2 Dist., March 5, 2015) (not designated for publication).


See also Medical Law Perspectives November 2014 Report: More Than Skin Deep: Skin Cancer Misdiagnosis and Other Liability Issues


See also Medical Law Perspectives October 2012 Report: Mistakes in Diagnosing Cancer: Liability Concerns for Misdiagnosis, Failure to Diagnose, and Delayed Diagnosis


See also Medical Law Perspectives Blog, November 25, 2014: Skin Cancer Incidence Rises; Surgeon General Issues Call to Action


See also Medical Law Perspectives Blog, November 24, 2014: CDC Study Shows Skyrocketing Skin Cancer Costs; What Lawyers Can Learn By Examination and Persuasive Presentation of Statistics


See also Medical Law Perspectives Blog, October 24, 2014: Medical Expert Testimony Not Necessary to Establish Standard of Care for Failure to Communicate Cancer Diagnosis