January 3, 2008 - Steve Hailey was a small business owner in Orange County, CA. He and his wife had purchased a health insurance plan through Blue Shield of California to protect their entire family. But six month after purchasing their policy, Blue Shield rescinded it... right after Mr. Hailey got into a debilitating automobile accident. The company claimed that the Hailey's had not been honest on their original application. But the court saw it differently. The ruling is important because unexpected medical bills are one of the two leading causes of personal bankruptcy.

When purchasing health insurance, the Hailey family had a choice. They could get it through Cindy Hailey's employer or they could purchase a separate policy through an independent company. They chose the separate policy and the company that would be providing it was Blue Shield.

Cindy had the responsibility of filling out Blue Shield's application for the entire family, and this is where the problems began. She though that the information that was being requested was solely for her. Therefore, she didn't provide any medical information on her husband. Even so, Blue Shield issued a policy covering them both.

About two months after issuing the policy, Blue Shield began to suspect that its data on Steve Hailey was inaccurate or incomplete. But the company didn't do anything about it. Instead they continued to collect premiums from the Hailey's.

Then came Steve's accident. That's when the fireworks between the Hailey's and Blue Shield really began. Blue Shield authorized and paid for more than $100,000 in medical bills for Steve Hailey. It also authorized an additional $450,000 in treatments but never made payment. Instead, Blue Shield cancelled the Hailey's policy for omissions on the original insurance application, and issued a letter demanding the repayment of monies the company had already shelled out.

The Hailey's sued but the lower court through the case out. Such has been the common practice of courts in California and around the country.

The Hailey's appealed to the 4^th District Court of Appeal in Santa Ana, where they were rewarded with a unanimous and sweeping decision by the court on Christmas Eve. The three judge panel ruled that insurance companies operating in California have a duty to check the accuracy of insurance applications at the time people apply for insurance. The panel also found that insurance companies could not continue to collect premiums after suspecting a problem without taking on liability of their own.

Perhaps the most important part of the ruling is that insurance companies in California can no longer cancel insurance policies after an insured person files a major medical claim.

The court sent the case back to the lower court for trial. The issue in the trial will be whether or not Cindy Hailey intended to hide or obscure facts from Blue Shield related to her husband's health. If not, then Blue Shield will have to pay for Steve Hailey's insurance claims.

The ruling by the 4^th District Court of Appeals could have very far reaching effects in California. It has been the practice of lower courts in the state to side with insurance companies when policies are cancelled. If the Appeals Court ruling stands - it is likely to be appealed to the State Supreme Court in Sacramento - it will mean that anyone who can reasonably show that their insurance was cancelled as a result of filing a claim will eventually get their day in court. And it has the potential to reopen hundreds of cases that have already been thrown out of lower courts but which were not appealed.

by Jim Malmberg

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