In an important decision, on December 24 the California Court of Appeal, Fourth Appellate District, in Hailey v. California Physicians' Service (Blue Shield) held that under California Health and Safety Code section 1389.3 a health services plan (Blue Shield) could not rescind a contract of health coverage for material misrepresentation or omission by the applicant unless the plan can demonstrate (1) that the alleged misrepresentation or omission was willful, or (2) the health services plan had made reasonable efforts to ensure that the applicant's application was accurate and complete as part of the pre-contract underwriting process before the health plan granted coverage.  Section 1389.3 was enacted by the California Legislature in 1993, in part to prevent "postclaims underwriting," which is described as a process whereby an underwriter waits until a claim is made before investigating whether a misrepresentation or omission previously made in the application for coverage would allow the underwriter to rescind the policy.

Perhaps equally important for certain health policyholders, the Court held that the case should proceed to trial for a determination on the facts, and denied the health plan's motion for the Court to determine the issues in its favor before trial.  The Court held that there were factual issues in dispute which should be determined by a jury.  The issues in dispute related to the plan's argument that the applicant's misrepresentations or omissions were willful, and the applicant's argument that the plan acted in bad faith by seeking to rescind the coverage.

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