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March 11, 2008

Calif. Insurance Rulings GCs Should Watch Out For

California appellate courts tackled a diverse array of insurance issues in 2007 that included health care post-claim underwriting, directors and officers (D&O) liability, employee dishonesty and the scope of the attorney-client privilege in the context of insurance. The decisions in these cases will have a direct influence on business processes for companies across many industries, and California general counsel should be aware of how these rulings may affect their companies.

Health care. In suits that could have an impact on health insurance claims brought by employees, two recent court of appeal decisions held that "post-claim underwriting" by insurers was a prohibited practice. In Ticconi v. Blue Shield of California Life & Health Ins. Co., 157 Cal.App.4th 707, the 2nd District Court of Appeal held that post-claim underwriting of disability insurance policies is prohibited by Insurance Code §10384. The court allowed a case to proceed where it was alleged that the unlawful conduct was post-claims underwriting in which the insurer rescinded disability insurance policies based on alleged misrepresentations in the applications. The applications were incorporated by reference in, but neither endorsed on nor attached to, the insureds' policies, in violation of Insurance Code §10113 and §10381.5.

Also, the 4th District, in Hailey v. California Physicians' Service, 158 Cal.App.4th 452, concluded that Health & Safety Code §1389.3 precludes a health services plan from rescinding a health insurance policy for a material misrepresentation or omission unless the plan can demonstrate that the misrepresentation or omission was willful or that the plan had made reasonable efforts to ensure that the subscriber's application was accurate and complete as part of the pre-contract underwriting process. The court found that an insurer cannot engage in post-claim underwriting and, given the likelihood of inadvertent error in the application process, required an accurate risk assessment by the health insurance plan, which requires a reasonable check on the information the insurer uses to evaluate the risk at the time of the application.

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Posted by healthinsurance at March 11, 2008 12:11 PM