Summary: A Nevada mother applied for health insurance coverage on behalf of her four-year-old daughter. About two weeks later, the daughter was seen by a doctor who diagnosed sexual precocity, made a referral to a specialist, and ordered tests and x-rays. A week thereafter, an underwriting interview was conducted and the mother failed to reveal facts which would have resulted in the carrier refusing to write the health insurance coverage, including the diagnosis, referral to a specialist, and ordering tests. The health insurer discovered the misrepresentations, rescinded the policy, and thereafter the parents filed suit. The U. S. District Judge entered summary judgment in favor of the health insurance carrier on all grounds, including the bad faith claim.
David Siefers, et al. v. PacifiCare Life Assurance Company, 729 F.Supp.2d 1229
The mother of a four-year-old child prepared a health insurance application late in April 2007, signed the application, and submitted it. That application made it clear that the failure to truthfully answer the questions could lead to a policy rescission. It further stated that coverage was not in force until the carrier agreed to accept the risk. The mother signed the application and submitted a deposit premium of $84.00.
About two weeks later, she took her four-year-old daughter in to see a doctor for a pre-school physical. That doctor apparently diagnosed sexual precocity, referred the four-year-old girl to a pediatric endocrinologist and ordered lab work and a hand x-ray. A week thereafter an underwriting assistant called and spoke with the mother and asked about the May 4 visit to the doctor. The mother failed to respond truthfully to questions about the further testing, the treatment, and the referral. Instead, the mother said that the child had been seen “only for her allergies” and that the child was “perfectly healthy except for allergies.” Four days later, the insurance company issued the health policy.
A few months later a claim was submitted for the May 4 office visit. When that claim was received, an underwriting supervisor performed a claim review and discovered the multiple major inconsistencies between what the records revealed and what the mother had said about that office visit. At the end of August 2007, the insurance company sent a letter rescinding the health insurance coverage because of the mother’s “failure to disclose [the child’s] past medical history of sexual precocity, ordered endocrinologist referral, labs, and x-ray of the hand for bone age” during the underwriting follow up phone call. The insurance company also returned all premiums.
Ten months later, the parents filed suit in Nevada state court for breach of contract, tortious breach of the duty of good faith and fair dealing, and for statutory unfair claims practices. The insurance company removed the case to federal court and moved for summary judgment on all counts. The federal court judge granted that motion.
The insurance company contended that it was entitled to rescind the policy and could not be liable for breach of contract “because of the numerous misrepresentations [the mother] made in the May 11 underwriting follow up phone call.” PacifiCare’s underwriting supervisor contended that the misrepresentations were material because if it had “known what transpired at the May 4 doctor’s appointment, it would not have insured [the daughter].” It further contended that there was no requirement for it to prove that the mother intended to defraud. Instead, the insurer had to establish only that the mother “knowingly made misrepresentations.”
The District Judge ruled that no questions of material fact remained and that the health insurer was entitled to rescind the insurance policy issued to the child based upon the mother’s misrepresentations made during the follow up underwriting phone call. The court relied upon the affidavit from the underwriting supervisor, which established that the mother’s “misrepresentations were material to [the carrier’s] acceptance of risk and [the carrier] would not have issued the policy to [the child] had [the carrier] been aware that [the doctor] diagnosed… sexual precocity prior to the effective date of coverage. Plaintiffs, on the other hand, provide no evidence to establish that [the mother’s] misrepresentations were not material.”
The carrier sought summary judgment on the bad faith claims because there had been no breach of the duty of good faith and fair dealing. Rather, the carrier “had a reasonable basis for rescinding the policy due to [the mother’s] material misrepresentations.” Plaintiffs responded contending that the carrier “breached its duty of bad faith and fair dealing by lulling plaintiffs into the belief that [the child] was an acceptable insurance risk, causing plaintiffs to cancel their existing coverage, and then subsequently denying [the child’s] claims because of an irrelevant telephone conversation….”
In Nevada, a bad faith claim succeeds when the evidence establishes three elements: (1) an insurer’s denial of a claim; (2) without any reasonable basis; and (3) the insurer’s knowledge of the lack of any reasonable basis to deny coverage or the insurer’s reckless disregard as to the unreasonableness of the denial. (Curiously, the District Judge relied upon Nevada law for establishing the elements of a Nevada bad faith claim while quoting from a 9th Circuit opinion applying California law when describing the bad faith claim summary judgment standard.) According to the 9th Circuit, the key to a bad faith claim “is whether denial of a claim was reasonable” so that a bad faith claim “should be dismissed on summary judgment if the defendant demonstrates that there was a genuine dispute as to coverage.”
In light of the court’s analysis of the propriety of summary judgment regarding the breach of contract claim, the court easily concluded that the carrier had “acted reasonably in deciding to deny [the child] coverage and rescind the policy.” The court further noted that the plaintiffs had not provided any evidence supporting “their contention that [the insurer] lulled plaintiffs into believing [the child] was an acceptable insurance risk.” In fact, it is more reasonable to conclude that the mother made material misrepresentations hoping to lull the insurance carrier into believing that her child was an acceptable insurance risk. The District Judge concluded that no reasonable trier of fact could conclude that “[the insurer] was not entitled to rescind the policy based on [the mother’s] misrepresentations.” Accordingly, the court also granted summary judgment on the breach of the duty of good faith and fair dealing claim.
Not surprisingly, the court also granted summary judgment in favor of the carrier on the statutory claims handling count finding that there was “no evidence that it had violated any [claims] handling standard” set forth in the Nevada unfair claims practices statute. After describing some of the requirements imposed by Nevada’s unfair claims practices statute, the court found no question of material fact remaining which could establish that the insurer had breached any of those statutory duties. Notwithstanding plaintiffs’ allegations, they had “fail[ed] to provide any evidence in the record to support such assertions.”
Although not directly stated, it appears that the court granted summary judgment in favor of PacifiCare because the judge simply could not condone the conduct of a desperate mother seeking to obtain affordable replacement health insurance coverage for her four-year-old daughter who was showing signs of sexual precocity. The record showed that the family had health insurance coverage for the child when the mother applied for coverage with PacifiCare. (Although unstated, it is likely that the premiums for continuing that coverage were substantial or going to be increased.) Even though the application clearly stated that existing coverage should not be canceled until the new coverage was in force, the mother sought coverage from PacifiCare, lied to obtain that coverage, cancelled the earlier policy, and then paid a heavy price when the PacifiCare coverage was rescinded. The District Judge in Siefers was not going to require the innocent insurance carrier to bear the burden of the obvious misrepresentations made by the mother.
