The verdict, after years of reports in local newspapers and the legal press – including the Daily Journal – about the evil insurers who engaged in “post loss underwriting” and deprived honest and ill people of their “right” to insurance. The pleas of the those wronged were taken up by the mavens of the plaintiffs bar, the state Department of Insurance, Legislators and other bleeding hearts who refused to accept the fact that an insurance policy is a contract where both parties owe the utmost good faith to the other. In this case the Haileys, filed suit claiming their health insurance was improperly rescinded and the insurer did them wrong sufficient to require their insurance to be reinstated and for the insurer to pay excessive exemplary damages.

By admitting that the insurer was correct when it rescinded their policy because they had willfully lied on the application for insurance is a pyrrhic victory for Blue Shield and all Blue Shield policy holders whose premiums will rise because of the need to pay for the medical bills of frauds and hundreds of thousands of dollars to their lawyers to defend this spurious action and the others brought because of improper news stories claiming that the insurer acted wrongfully.

In Blue Shield's case, Insurance Commissioner Steve Poizner in 2007 accused its Life & Health Insurance Co. unit of 1,262 "serious violations" over a four-year period that, he said, "completely undermine the public's trust in our healthcare system and are potentially devastating to patients." Poizner proposed $12.6 million in fines but ultimately declined to impose any.

In the end, regulators dropped their investigations in favor of settlements they said would expedite restitution for victims. The California Department of Managed Health Care collected more than $13 million in fines, including $1 million from Blue Shield. And the insurers agreed to offer new coverage to canceled members and to pay back medical expenses.

The Hailey case was the first to reach a jury trial regarding health insurance rescissions, an practice authorized by California statutes to bring people who enter into contracts under false pretenses can be placed back into the status quo – the insured gets the premium back and the insurance contract is void from its inception. 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.

It was also 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" themselves because of a special statute related only to health insurance policies. Despite a nearly 6-year legal battle claiming that they made only honest mistakes, the Haileys told the court they were at fault and that Blue Shield acted "in good faith" and was right to rescind their policy. That shocking admission came in a signed directed verdict read and released Thursday by Orange County
Superior Court Judge Peter Polos.

According to the Daily Journal report:

 The abrupt end to the trial was not the result of any financial settlement, lawyers  for Blue Shield told the Daily Journal on May 28, 2009. "Our impression would be that [the Haileys] became aware of the difficulties that they would have if they had to take the stand and testify under oath," said Greg Pimstone,a partner at Mannatt Phelps & Phillips who represented Blue Shield. Revelations before trial that the Haileys had not mentioned a prior felony conviction for writing a bogus check during a deposition seemed to portend credibility problems for the couple.

In a statement, Blue Shield executives said the verdict vindicated the company and its proper use of rescission to weed out dishonest insurance policyholders. The Haileys’ lawyer  Michael G. Nutter of Santa Ana did not return calls from the Daily Journal for   comment. The statement concluded:

Today's verdict is a complete vindication for Blue Shield of California. It means we acted properly every step of the way. It means that our underwriting procedures were fair and complete, our application was clear, and we acted in good faith. There was no post-claims underwriting. The evidence of deceit by the Haileys was overwhelming. This decision proves that Blue Shield of California had every right to rescind the Haileys' coverage.
 
 After five years of litigation, the Haileys finally admitted what Blue Shield  maintained all along. The Haileys admitted that they willfully misrepresented material information on their Blue Shield application for health coverage. The  Haileys admitted that they did so in order to obtain health coverage that they knew they could not obtain had they been truthful. The Haileys admitted that they understood the Blue Shield application and that the application was clear and  unambiguous.

 Fraud investigators 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 who have established that at the time an insured applied for a policy of insurance he or she 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. The California statute, relied upon by the Haileys to bring their action.

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.[Citation.]' (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d  581, 586 [281 P.2d 39]. [Citation.].)" (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. In Mitchell the California Court of Appeal affirmed and enforced California’s Marine Rule. By affirming the rescission of an insurance policy because of the misrepresentation or concealment of material fact by Mr. Mitchell citing to Imperial Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169.

The Imperial Court stated:

 The "fact that the insurer has demanded answers to specific questions in an application for insurance is in itself usually sufficient to establish materiality as a matter of law." … The court also stated when there is undisputed evidence that false information was given in an application for insurance and the insurer issued a policy in reliance upon this information, the materiality of a misrepresentation or concealment may be established as a matter of law. … The court went on to say that materiality was established by “the nature of the insurance coverage which  defendant sought, the quality and quantity of the information which was not disclosed,” in addition to the fact that the insurer “specifically requested the information on its application and therefore relied upon it in issuing the policy.”

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 applied what the plaintiff’s bar has coined as “post loss underwriting.” The case, although it refused to allow a party to rescind, and although 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 wheel chair, 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 were criminally fraudulent. California Penal Code § 550 provides, in part, as follows:
 
  (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.

(6) Knowingly assist, abet, solicit, or conspire with
 
  (A) any person who knowingly presents any false or fraudulent claim for the payment of a loss, including payment of a loss under a contract of insurance;
  (B) any person who knowingly presents multiple claims for the same loss or injury, including presentation of multiple claims to more than one insurer, with an intent to defraud;
  (C) any person who knowingly causes or participates in a vehicular collision, or any othervehicular accident, for the purpose of presenting any false or fraudulent claim; and
  (D) any person who knowingly prepares, makes, or subscribes any writing, with the intent to present or use it, or to allow it to be presented in support on any claim.
 
 (7) Knowingly make or cause to be made any false or fraudulent claim for payment of a health care benefit.
 
The admission of a false claim in court is strong, if not clear and convincing evidence, that the Haileys were guilty of felony insurance fraud and could face criminal prosecution. Other plaintiffs whose policies were legitimately rescinded and are pursuing claims against the insurer should consider the down-side and the exposure they face to five years in jail.