## Facts

- Cindy Hailey applied in 2000 for an individual health plan covering herself, her husband Steve, and their son through a telephone application process conducted by a plan representative.
- The application omitted disclosure of Steve’s significant preexisting conditions, including obesity, hypertension, and gastroesophageal reflux.
- The plan issued coverage effective December 2000.
- In February 2001, Steve was hospitalized for gastrointestinal problems, prompting the plan to investigate the application.
- In March 2001, Steve was hospitalized again after an automobile accident; the plan continued its review.
- In June 2001, the plan rescinded coverage retroactive to inception, asserted willful misrepresentation, treated the contract as void from the start, and sought reimbursement of claims paid.
- The Haileys alleged the plan engaged in postclaims underwriting by issuing coverage without adequate upfront review and later rescinding after significant claims.

## Issues

1. Whether Health & Safety Code § 1389.3 permits rescission of an individual health plan after claims based solely on material misrepresentation, or instead requires proof of willful misrepresentation or reasonable pre-issuance efforts to ensure an accurate and complete application.
2. Whether triable issues of fact existed as to (a) willfulness of the omissions and (b) the plan’s reasonable efforts during underwriting, precluding summary judgment and supporting rescission as a matter of law.
3. Whether allegations of retroactive rescission tied to postclaims underwriting and aggressive reimbursement efforts could support an intentional infliction of emotional distress claim, requiring leave to amend.

## Decision

- The Court of Appeal reversed summary judgment for the plan on the Haileys’ breach of contract and bad-faith claims.
- The court reversed the judgment for the plan on its cross-complaint for rescission and restitution.
- The court reversed the order sustaining the demurrer to the intentional infliction of emotional distress claim without leave to amend.
- The matter was remanded for further proceedings.

## Legal Principles

- Under Health & Safety Code § 1389.3, a health care service plan may not rescind an individual plan after claims based merely on later-discovered material misrepresentations or omissions.
- Rescission after claims is permitted only if the plan proves either (a) the misrepresentation or omission was willful or (b) before issuing coverage, the plan made reasonable efforts to ensure the application was accurate and complete.
- Where evidence permits differing inferences on willfulness or on the adequacy of the plan’s pre-issuance verification, those disputes are for the trier of fact and defeat summary judgment.
- Contract-based denial of benefits generally is insufficient for intentional infliction of emotional distress, but alleged postclaims underwriting coupled with retroactive rescission and reimbursement demands may constitute extreme and outrageous conduct if proven.

## Conclusion

The court held that § 1389.3 restricts post-claim rescission of individual health plan coverage and required a trial on disputed facts concerning willfulness and the plan’s pre-issuance efforts; it also permitted the insureds to pursue an emotional distress theory based on alleged postclaims underwriting and retroactive rescission practices.


Hailey v. Cal. Physicians' Serv., 69 Cal. Rptr. 3d 789 (Cal. Ct. App. 2007)