Short-term insurance policy, long-term lawsuit

Ticconi v. Blue Shield of California Life & Health Ins. Co., --- Cal.Rptr.3d ----, 2007 WL 2171556 (Cal.App. 2 Dist.)

The trial court denied plaintiff’s motion to certify a proposed class. Ticconi sued Blue Shield under California’s Unfair Competition Law for violating the insurance code “by failing to attach his application to or endorse it on the insurance policy when issued, and later rescinding the policy on the ground plaintiff had made misrepresentations in that application.” (UCL claims can be, and often are, based on the violation of some other law.) The trial court found that Blue Shield’s fraud and unclean hands defenses raised individual issues that predominated over common issues.

The court of appeals reversed on the ground that equitable defenses can’t be used to defeat a UCL claim. Moreover, Blue Shield couldn’t raise a fraud defense based on insureds’ statements in applications when the applications were neither attached to nor endorsed on the policy as issued, in violation of the insurance law. Thus, on remand the trial court needed to consider whether plaintiff would be an adequate and typical class representative.

Facts: Ticconi alleged that he applied for a short-term policy, which was marketed as a temporary tide-over for people such as college students who need insurance while they’re waiting for permanent coverage. He further alleged that he filled out the policy application truthfully, and was issued a one-year policy. His application was neither attached to the policy nor endorsed into it, and he paid his monthly premiums. During the policy period, he incurred health care bills over $100,000, but Blue Shield rescinded his policy when he submitted those bills to it. Blue Shield justified its action on the ground that Ticconi had made material misrepresentations on his application; Ticconi denied this and alleged that a reasonable investigation would have cleared him.

Relevant California insurance law forbids the incorporation of any material into an insurance policy by reference. Policies are deemed to constitute the entire contract between the parties, and every statement by the insured, in the absence of fraud, is a representation and not a warranty; these requirements cannot be waived. As a result, Ticconi alleged that – though he didn’t make any misrepresentations – he wasn’t bound by any statement in his application; California law specifically provides that insureds aren’t bound by application statements unless a copy is attached to or endorsed on the policy when issued. He further alleged that Blue Shield had followed the same practice many times in the past four years, rescinding policies that didn’t have attached/endorsed applications. This, he alleged, was an unfair and unlawful business practice. (Plaintiff’s proposed class covered all California residents whose policies were rescinded based on alleged misrepresentations in their applications, but excluded any policyholders whose policies were covered by ERISA.)

Blue Shield indicated that short-term policies are wholly underwritten through the application questions. During the relevant period, it issued almost 250,000 short-term health insurance policies and rescinded 207 of them for misrepresentation. It argued that there was no community of interest, because the proposed class included people whose hands varied in cleanliness. Moreover, not every class member was injured by recission.

The court of appeals began by noting that California law flatly prohibits “postclaim” underwriting of health insurance, quoting a commentator who explained that insurers may rationally choose not to investigate every application, especially for low-limit policies, but may simply wait to see if there are any claims and then check the insured’s application for inaccuracy. The law bans insurers from rescinding a policy due to the insurer’s failure to “resolve all reasonable questions arising from written information submitted on or with an application before issuing the policy or certificate.” (It’s for this reason, I imagine, that short-term Blue Shield policies only issue if the applicant answers “no” to every question.)

The insured isn’t bound by statements on an application unless the application is attached to or endorsed on the policy; in other words, the insurer can’t rely on a misrepresentation defense based on statements in an application that wasn’t attached/endorsed. Moreover, failure to attach/endorse and later “engaging in postclaims underwriting by holding the insureds to statements in those unattached and unendorsed applications” is clearly unlawful and supports a UCL claim. The court also thought that Ticconi’s allegations, if true, would demonstrate an unfair business practice as well as an unlawful one. The factual and legal issues going to liability applied to all class members, and would predominate, thus supporting class certification.

The court of appeals then cited numerous precedents establishing that the unclean hands defense is unavailable in a UCL action based on violation of a separate statute, such as the insurance code. Courts will not aid defendants in acts declared by the legislature to be against public policy. The California Supreme Court has held that equitable defenses can be considered in formulating UCL remedies, but not in rejecting the cause of action.

Likewise, fraud was unavailable as a defense, for the obvious reason that, if the facts are as Ticconi alleged, the statute precludes Blue Shield from holding its insureds to their statements on their applications – and it specifically bars any waiver of its provisions. Blue Shield complained that this interpretation would leave it without any fraud-based defenses, but the court could use the insureds’ nondisclosure or misrepresentations in its consideration of appropriate equitable remedies. Thus, the diverse individual circumstances of the putative class members – who had all uniformly answered “no” to every question on the application – were “not to be factored in.” Legal and factual issues going only to remedies could not outweigh the common liability issues.

There were still issues of adequacy and typicality, since Blue Shield reinstated Ticconi’s policy and paid his outstanding medical bills. On remand, the trial court would have to determine whether Ticconi was still damaged. Because the UCL allows only equitable remedies, he might still adequately represent the class for those purposes. Moreover, defendants aren’t allowed to pick off prospective class representatives one by one; the record suggested that Ticconi had standing when he sued but was then paid some money. The court of appeals noted that Ticconi had announced his desire to keep going with the case to combat Blue Shield’s public claim that he was a fraudster.