The California Dept. of Managed Health Care collected more than $13 million in fines, including $1 million from Blue Shield. Plaintiffs' lawyers claim that rescission is an “industry practice of revoking policyholders' coverage over technical errors or omissions on the application” rather than by statutory grounds.

Fraud, whether in property, casualty, liability, surety or health insurance, is never a “technical error.” It is an intentional misrepresentation or concealment of material fact issued to deceive, which deceived the insurer to its detriment. It always should be, as it was with the Haileys, an industry practice to rescind and fight claims presented by persons who obtained insurance by fraud.

It also was the case that resulted in a far-reaching appellate decision that sided with policyholders. That decision said insurers could not rescind unless they could prove sick and needy patients like Steve Hailey, who was rescinded after a near-fatal auto accident, had actually “willfully misrepresented” himself because of a special statute related only to health insurance policies.

Insurance professionals should consider this case as one where an insurer refused to give in to bad press and governmental pressure when dealing with a potential fraud. Rescission because of fraud in the inception of insurance policies, like that admitted to by the Haileys, is an important defense to the multi-billion dollar crime of insurance fraud. Insurers with a policy applicant who misrepresented or concealed a material fact should seek legal counsel to determine if the policy may be rescinded under the law of the state in which the policy was issued. Insurance agents and brokers should be careful to obtain truthful responses to questions posed by applications to avoid errors and omissions claims when their insured's policy is rescinded.

Every person concerned with insurance and insurance fraud must remember that California law has long held that:

An insurance company is entitled to determine for itself what risks it will accept, and therefore to know all the facts relative to the applicant's physical condition. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. (Robinson v. Occidental Life Ins. Co. [1955] 131 Cal. App. 2d 581, 586 [281 P.2d 39]) (64 Cal. App. 3d at p. 273)

In LA Sound USA Inc. v. St. Paul Fire & Marine Ins. Co. (156 Cal. App. 4th 1259 [2007]), the court upheld the rescission of a policy of insurance for an innocent misrepresentation and concealment of material facts in an application for insurance and relied upon (Imperial Casualty & Indemnity Co. v. Sogomonian [1988] 198 Cal.App.3d 169).

In the case that allowed the Haileys to go to trial (Hailey v. California Physicians' Service, 158 Cal.App.4th 452, 69 Cal.Rptr.3d 789 [Cal.App. Dist.4 12/24/2007]), the Court of Appeal stated a concern about what the plaintiffs' bar has coined as “post-loss underwriting.” The case, although it refused to allow a party to rescind and couched in phrases of insurance, dealt with a different statutory scheme that governed health care payers (HMOs) and not insurers that required an intentional misrepresentation to allow rescission.

That it does not apply to insurance rescissions of policies other than health insurance is clear since the same court, within 30 days decided (LA Sound, supra).

Blue Shield should be commended for protecting itself and going to trial when it knew it was right even though Mr. Hailey, coming to court in a wheelchair, made a compelling sight to gain the emotional backing of a jury.

The press has ignored the fact that the Haileys have now admitted in open court that their attempts to obtain money and damages from Blue Shield was criminally fraudulent. California Penal Code ? 550 provides, in part, that:

(a) It is unlawful to do any of the following:

(1) Knowingly present or cause to be presented any false or fraudulent claim for the payment of a loss, including payment of a loss under a contract of insurance.

(5) Knowingly prepare, make, or subscribe any writing, with the intent to present or use it, or to allow it to be presented in support of any false or fraudulent claim.

The admission of a false claim in court is an admission of criminal conduct. It is clear and convincing evidence that the Haileys were guilty of felony insurance fraud and should face criminal prosecution.

The lesson: If an insurer believes it has been deceived and has a valid ground for rescission as did Blue Shield, Imperial and St. Paul Fire & Marine, a fraud can be defeated even in California–even when the press and the Dept. of Insurance decry the insurer's efforts to protect itself from fraudulently obtained policies and fraudulent claims.