Sam Cianchetti, Judge, (Retired)
IVAMS, Inc.
300 South Park Avenue,
Suite 780
Pomona, California 91766
Phone (909) 629-8305
Fax (909) 629-1607
 

The undersigned was designated by the parties to serve as Arbitrator in this case. A binding arbitration hearing was conducted on November 8, 9, 12, 13, 14, 15 and 16, 2007. In addition to receiving written closing arguments, Arbitrator allowed oral closing arguments which were heard on January II, 2008. All of the proceedings were held at the IVAMS’ offices located in Rancho Cucamonga, California.

Claimant Patsy Bates was represented by Attorneys William M. Shernoff, Evangeline Fisher Grossman and Joel A. Cohen. Respondent Health Net Life Insurance Company was represented by Attorneys William A. Helvestine, Damian D. Capozzola and J. Susan Graham.

Seven witnesses testified at the hearing. The testimony of an additional two witnesses was received via video deposition. Each witness rendered sworn testimony which was subjected to cross- examination. In the order of appearance they were: [*2]

1. Robert Tonez (video deposition)

2. Chester Morris

3. Loree Bianchi (video deposition)

4. Barbara Fowler

5. Mark D. Ludwig

6. Patsy M. Bates

7. Stephen D. Prater

8. Franklin Tom

9. Rahu Nandan, M.D.

In addition to the testimony of the above-named witnesses, Arbitrator has read and considered:

1. Claimant and Respondent arbitration briefs

2. Claimant and Respondent written closing arguments

3. Claimant’s Exhibits 1-44, inclusive

4. Respondent’s Exhibits 501-546, inclusive

5. Court Exhibits 1-28, inclusive, which were received at the hearing

6. Depositions of:

a. Rajeev Arhi, M.D.

b Marcel Bates

c. Patsy Bates

d. Trenise Bates

e. Loree Bianchi

f. Terreli Daniels

g. Barbara Fowler

h. Divinia Garcia

i. Jody Giordano

j. Danilo Jaravata, M.D.

k. Tessie Lagasea [*3]

l. Mark D. Ludwig .

m. William L. Madrid, M.D.

n. Chester Morris

o, Stephen D. Prater

p. Mark J. Schein, M.D.

q. Franklin Torn

r. Robert Torrez

s. Petra Wong, M.D.

t. Tony Wren

The claims of Patsy Bates (hereinafter referred to as “Bates”) arise out of the rescission of an individual health insurance policy she had with Respondent Health Net Life Insurance Company hereinafter referred to as “Health Net”). The policy was approved by Health Net effective August 1, 2003. In September, 2003, Bates was diagnosed with breast cancer. In December, 2003, Health Net sent Bates a letter asking for a clarification of certain responses she had made on Health Net’s enrollrnent application in July, 2003. In January. 2004, Health Net sent Bates a letter notifying her health insurance policy was rescinded. At the time of the arbitration hearing, Bates had unpaid medical bills of at least $129,809.00 (Court Exhibit 28).

Bates set forth two causes of action in this case. The first was breach of contract; the second =se of action stated a breach of the duty of good faith arid fair dealing. Bates has requested damages for her unpaid medical expenses, emotional distress and exemplary damages. As to the latter damages, Bates has contended Health Net violated the provisions of California Civil Code sections 3294(a) in that in rescinding Bates’ policy Health Net was guilty of oppression, fraud or malice.

On August 24, 2007, Arbitrator granted Bates’ motion for summary adjudication regarding ter claim Health Net had breached her contract. The matter was extensively briefed by both parties. ach side was given an opportunity to engage in oral argument. On this date, based on Arbitrator' s inkling that Health Net failed to comply with the mandatory requirements of California Civil Code section 10381.5, Bates’ motion was granted. As a result, the hearing which commenced on [*4] November 8 was limited to the second claim she made regarding Health Net’s failure to satisfy its duty of good faith and fair dealing,

Patsy Bates is 51 years old, a high school graduate with two children arid one grandchild. She has been employed in her own beauty shop as a cosmetologist over 25 years (Reporter’s Transcript (hereinafter RT), Pg 10). She obtained health insurance in 2000 or 2001 with Universal Care She had no problems with this company (RT, Pg 12).

Bates was contacted by Robert Torrez, who called regarding health insurance. When advised she already had insurance, Torrez suggested he might be able to give her a better rate (RT, Pg 12). An appointment was made. Torrez arrived at the shop at a time when she had three clients in the shop, including the one she was working on.

Torrez asked Bates if she had any major illnesses then proceeded to complete the Health Net enrollment application. The application was filled out by Torrez, then signed by Bates (RT, Pg 22).

Bates never reviewed the application. She didn’t feel there was any problem because she was just changing insurance. Torrez was the insurance man and knew she was just “changing over” (RT, Pg 23). When asked about her weight, she told him the weight on her driver’s license was 185 lbs. (RT, Pg 24). She never told Terrez to change the weight, nor was she aware the weight had been changed RT, Pgs 24 and 25).

Bates advised Torrez Dr. Petra Wong was her doctor with Universal. She wanted to remain her patient. Bates didn’t recall giving Health Net an authorization to obtain her medical records but the had no objection if they obtained the records (RT, Pg 26). Torrez was in her shop approximately thirty minutes. She saw him once again when he left the policy with her (RT, Pg 29)

As indicated above, the testimony of Robert Terrez was received via video deposition held in April 26, 2007, approximately four years after his interview with Bates.

Torrez was never a big seller of health insurance. He recalled approximately 20 applications with Health Net over two or three years (Depo: Pg 25, Lines 20-25; Pg 26, Lines l-5.) He preferred el1ing life insurance (Pg 26, Lines 21-22). Torrez stopped selling health insurance because he didn
`46;t want to specialize (Pg 31, Lines 11-16)- Terrez asked an applicant about medications, in general. [*5]

He followed up by asking if the person was in good health. Everybody always says yes (Pg 32, Lines 13-18).

Torrez would generally go through each health question on the application by reading them off (Pg 34, Lines 14-17). He read the question to the applicant or he could have the applicant read them although he felt the applicants didn’t read the question (Pg 34, Lines 20-21). Torrez guessed he had one or two conversations with Bates before meeting with her. He couldn’t recall because of the time difference. He just assumed so because that would normally be the case (Pg 36, Lines 16- 25).

Torrez acknowledged filling out the Health Net enrollment application because he recognized his handwriting (Pg 40, Lines 15-22). Bates signed the application; Torrez saw her sign (Pg 41, Lines 13-18).

Bates was working on a client when Torrez asked her questions. She took breaks to sign stuff (Pg 44, Lines 23-25; Pg 45, Lines 1-4). When personal questions on the application were asked; i.e.; pelvic exams and things like that, Bates would stop working and come over to the front waiting room where Torrez was located (Pg 45, Lines 16-25; Pg 46. Lines 1-7). Torrez couldn’t recall if Bates had time to go through the application (Pg 48, Lines 11-17).

Torrez recalled calling Bates after leaving her shop and advising her she would be rated at 185 lbs.; i.e., Bates would have to pay a higher premium (Pg 51, Lines 17-25; Pg 52, Lines 1-4), Bates told him the weight was different; Torrez made the change and initialed it. He knew it may not look good but that’s what happened (Pg 53, Lines 10-22).

Torrez wanted people to know he had made the change and they would be able to identify him if there were any questions regarding the change (Pg 54, Lines 8-15). Torrez filled out the application (Pg 56, Lines 15-19). Except for his general practice, Torrez did not recall the manner in which questions on the application were asked (Pg 61, Lines 1-6). Torrez didn’t recall any of the specifics regarding his conversation with Bates on the date of the application (Pg 63, Lines 8-11).

Torrez knew Bates had coverage with another health care company. He wrote it down on the application. Bates and he planned on stopping it on August 1 when the Health Net policy would start (Pg 63, Lines 1825; Pg 64, Lines 1-2). Before signing the application, Torrez normally didn’t say [*6] anything. He told applicants where to sign. If the applicant wanted to read the application, they did. If not, applicants didn’t read it. He did not recall if Bates read the application (Pg 65, Lines 3-17). Torrez could not recall if he gave Bates a copy of the application (Pg 72, Lines 24-25; Pg 73, Line 1).

Torrez believed he had asked Bates all of the questions on the application. That was his general business practice and he knew of no reason why he would deviate from that general practice (Pg 88. Lines 1-25).

The testimony of Loree Bianchj (hereinafter Bianchi) was received via a video deposition which took place on September 7, 2007. Bianchi is employed by Health Net of California (hereinafter referred to as HNC) as a senior medical underwriter (Depo: Pg 8, Lines 10-18). Her paycheck, including any benefits, are received from [INC (Pg 14, Lines 25; Pg 15, Lines 106) Bianchi took classes at Cal Western in medical terminology. She was not trained on the California Insurance Code (Pg 17, Lines 1-14). The HNC underwriting manual was reviewed and a senior medical underwriter (Vicky Mata’afa) reviewed applications with her, answered questions and guided Bianchi in making a decision (Pg 30, Lines 19-23).

Bianchi understood that as a senior medical underwriter she was to review applications and any accompanying materials thoroughly, make sure all questions are answered, that sufficient details are provided then make a decision to approve or not based on the application (Pg 31, Lines 17-22). If there was a medical history then an additional questionnaire or medical records would be requested (Pg 31, lines 22-25).

In 2003, Bianchi processed approximately 1,000 to 1,200 applications a month (Pg 43, Lines 13-17). Applications were processed in two to three days (Pg 44, Lines 2-8). The application was supposed to be completed by the applicant (Pg 46, Lines 1-7). If it was determined the application was not filled out by the applicant, it was to be returned with an explanation the application was not completed by the applicant. The applicant was to review the application, make sure all information is accurate update all medical information then sign and date each page of the application (Pg 46, Lines 19-25; Pg 47, Lines 1-3). The underwriter did make an analysis of the handwriting on the application by comparing the broker’s and the applicant’s (Pg 47, Lines 17-21). The signature on [*7] Page 7 of the application is an indication to HNC the applicant completed the application (Pg 49, Lines. 6-9).

Bianchi had never seen Insurance Code Section 10384 (Post claims underwriting prohibited) (Pg 49, Lines 23-25; Pg 50, Lines 7-24). HNC had never trained her concerning this section (Pg 51, Lines 1-9). HNC has guidelines regarding an applicant’s medical history. The underwriter determines if the application has triggered the guidelines so that medical records are requested (Pg 52, Lines 18-25; Pg 53, Lines 1-5).

The Bates’ application received a Code 1 designation meaning it could be approved with no additional information. The application is reviewed twice. It takes two to five minutes to review the application once or twice (Pg 56. Lines 2-24).

Bianchi did notice the weight on the Bates’ application had been changed. However, all questions were answered “no”; she had a check-up a month or two before and said everything is okay; the broker personally saw the application signed. The application was a clean application. There was no need for additional information (Pg 60, Lines 2-26), If the applicant weighs above 198 it is a decline; however, the underwriter always has discretion to rate the application by giving it a plus 50. The whole application is examined (Pg 63, Lines 17-25; Pg 64, Lines 1-10). It was Bianchi' s decision to approve the Bates’ application (Pg 64, Lines 20-25).

Bianchi knew Bates was covered with Universal from approximately 1998 to August 1, 2003. Since she had continuous coverage, a pre-existing exclusion would not be applicable to her (Pg 66, Lines 3-14). In using the term “ever” in the application in relation to post medical history HNC is asking “since birth” (Pg 69, Lines 6-15). By looking at the Bates’ application, Bianchi knew she could obtain Bates’s medical records from Dr. Wong (Pg 70, Lines 2-6; Pg 71, Lines 15-25; Pg 72, Lines l-15). In 2003, per BNC’s guidelines, if all the questions on the application were answered “no”, and if the applicant had not been to a doctor per the application in the past two years and the applicant was 50 years or older, the applicant would be sent a questionnaire asking for a detail of doctor visits, the reason for tests done and the results, including dates for the past two years (Pg 76, Lines 2-13). HNC does not have a protocol requiring the broker or agent to weigh and measure the applicant (Pg 94, Lines 12-15). If there was a question regarding the change in weight or the Bates’ [*8] application, Bianchi could have gone back to Bates and gotten a questionnaire. She looked at the whole thing (applieation) and decided to approve it (Pg 96, Lines 2W-10).

At the time of the Bates’ application, HNC did not have a protocol or custom and practice wherein the person doing the rescission investigation spoke with the initial underwriter before rescinding (Pg 98, Lines 6-13).

Bianchi does receive an annual bonus. One of the components is the claims ratio, i.e., are the right decisions being made on assessing the risk so that claims fall within a predicted amount and HNC can meet its obligations to its members (Pg 103, Lines 16-25; Pg 104, Lines 1-11).

Barbara Fowler and Mark Ludwig (hereinafter referred to as Fowler and Ludwig) were both examined Initially by Claimant’s counsel pursuant to Evidence Code Section 776. Fowler and Ludwig are both employees of HNC (RT, Pg 115). Fowler started with HNC in 1998; her position on the date of the hearing was Senior Risk Selection Analyst. In that position, she is responsible for the investigation and possible rescission of HNC policies (RT, Pgs 9 and 10).

Ludwig was responsible for formulating certain diagnostic codes which are used to trigger a rescission investigation. At the time of the hearing, they numbered three or four hundred, although there could be more (RT, Pg 11).

In addition to her rescission responsibility, Fowler also reviews pharmacy claims (RT, Pg 12), although her rescission activity in 2003 and 2004 was her only responsibility (RT, Pg 13).

Fowler was aware the duty of good faith extended to investigating rescission evenly and fairly; that she should be looking for ways to support the policyholder’s position as well as ways to rescind the contract (RT, Pg 17). Information in an application which was omitted by mistake could be grounds for rescission (RT, Pg 21). The criteria Fowler understands for rescission is the criteria superiors gave her; she hasn’t been given any other criteria that comes from legal cases or statutes in California (RT, Pg 21). The criteria used for rescission as stated in the contract, in the application and in the rescission letter came from Fowler’s superiors (RT, Pg 32).

Fowler did discuss the Bates case with Ludwig for approximately 10 or 15 minutes (RT, Pg 32). Fowler did notice the change in weight on the Bates’ application and the initials near the change (KT, Pg 34). Her concern for the alteration on the application triggered the talk with Ludwig (RT, [*9] Pg 35). If Fowler found out the applicant didn’t fill out the application it could possibly make a difference (RT, Pg 37). There was no discussion with Ludwig regarding contacting the agent to find out about the alteration and whose handwriting was on the application (RT, Pg 38) NC’s policy is they will rely on an application for purposes of rescission which has been totally filled out by the agent (RT, Pg 47).

All of the information used for rescission came from the medical records of Dr.(s) Wang and Nandan. (RT, Pg 75). Fowler did have rescission goals but regardless of the goals they have never affected how she performs her job duties (RT, Pg 89). It was important to her to make sure every decision regarding the rescission of someone’s policy was done thoroughly and accurately (RT, Pg 89). Fowler believed she was aware of the fact that a failure to achieve her personal goal, if she were off by 50%, would impact her bonus at the end of the year' (RT, Pg 91). Fowler’s goals and their achievement are tied to her work on rescission investigations because her job is to investigate medical history and performance (RT, Pg 102). She estimates approximately 1,000 rescissions total for 2003, 2004 and 2005 (RT, Pg 102). All of the rescissions are done by Fowler and Ludwig who are employees of HNC (RT, Pg 115).

When the underwriting file came into Fowler’s possession, she knew Bates had, continuous coverage with Universal since 1988 and would have been past the contestability period with Universal (RT, Pgs 116-117).

Ludwig has expressed satisfaction at the way Fowler was doing her job. She has never been disciplined for anything at WC (RT, Pg 130). Fowler feels she is following company procedure in the way she bas handled rescissions (RT, Pg 131).

Fowler’s bonus is based on a fraction of a fraction. Twenty percent (20%) of her bonus was based on personal goals combined (RT, Pg 132). No portion of her bonus in 2000, 2001 and 2002 related to personal goals (RT, Pg 133). No body has put pressure on her to do more rescissions (RT, Pg 144). In reviewing rescission cases, Fowler gives no consideration to whether or not claims have come in for the member involved. She doesn’t look at claims, only the application, medical history and the underwriting guidelines (RT, Pg 151). The decision to send a clarification letter doesn’t depend on claims in the system, only the medical history (RT, Pg 152). The inquiry is triggered when [*10] a provider submits a bill with a diagnostic code number that falls within the misrepresentation diagnostic code (RT, Pg 159). When reviewing a case for rescission, Fowler looks carefully at the application as well as the entire file; she definitely looks to see if the initial underwriting was done appropriately (RT, Pg 10). If the underwriting wasn’t done appropriately, Fowler would not proceed with rescission; she would close the file (RT, Pgs 160-161) whether the broker has filled out the application causing a disapproa1 is not a hard and fast guideline, if the application is complete, all questions are answered and the applicant has signed and dated the application (RI Pg 167).

The testimony of Barbara Fowler was followed by the testimony of her supervisor, Mark D. Ludwig. Like Fowler, Ludwig is an employee of HNC and is the director of individual underwriting. He indicated that he has no formal medical or legal training (RT 264 and 265). HNC does all of the underwriting services for Health Net Life Insurance Company (RT 266). The criteria used in rescissions was formulated by Ludwig. In so doing, Ludwig worked with the HNC’s law department (RT, Pg 269).

The criteria HNC uses for rescission includes; determining if the underwriting decision would have been different if IINC knew the true facts; did the applicant answer questions truthfully; is it reasonable to conclude the applicant was aware of the omitted medical information; and, was the application, underwritten according to department (ffNC) standards (RT, Pgs 271, 272 and 273). Applicants are expected to know and remember all their medical history going back 20,30 or 40 years (RT, Pg 279). During the course of Ludwig’s experience, applicants have remembered medical history 30 or 40 years old (RT, Pg 286). An unintentional omission can still be a potential ground for rescission (RT, Pg 294).

Ludwig assumes the applicant, by signing the application, has reviewed the application before signing (R,T 295). The home office underwriting manual does not require the application to be filled out by the applicant (RT 297). When Fowler saw Ludwig regarding the Bates’ application, Ludwig did not think about calling Terrez to find out about the alteration or whose handwriting was on the application (RT Pg 309 and 310). Ludwig felt he protected Bates’ rights in the rescission investigation; he felt the way it was handled was very reasonable and did not violate her rights (RT 313). [*11] An oral explanation to the clarification letter sent by HNC s not an acceptable way to respond (RT, Pg 316): As far as Ludwig knows no applicant has ever called in with a detailed oral explanation (RT, Pg 318): When the clarification letter was sent, Ludwig was aware Bates had been diagnosed with breast cancer (RT, Pg 322).

In 2002, one of Fowler’s goals was to achieve a monthly average of 15 IPP (individual and family plan) contract rescissions; Fowler exceeded the goal (RT, Pg 326 and 327); she did 275 rescissions (RT, Pg 328). The estimated savings to HNC over the lifetime of the applicant, was 5.5 million dollars (RT, Pg 329).

In 2003, Fowler’s goal was 300 (RT, Pg 352), Ludwig noted on Fowler’s performance evaluation that 2003 was a banner year for Barbara in several respects (RT, Pg 334). Ludwig noted 6 million in unnecessary health expenses were avoided (RT, Pg 334).

Fowler’s goal in 2004 was stated in cost savings of 65 million rather than stating the number of rescissions (RT, Pg 335). In addition to her goal regarding rescissions, Fowler also had the goal of achieving PHQ processing in three days or less PHQs are provider health questionnaires (RT, Pg 343). The most important part of her job was to review cases to determine if there was adequate evidence of misrepresentation (RT Pg 346).

There are three ways a rescission investigation can be initiated. The largest group are claims from a provider with a diagnostic code; another way is a review of paid pharmacy claims data; and, from calls made by providers for prior authorization (RT, Pg 362). A person gets investigated only if they have a health problem. HNC has no other way of knowing (RT, Pg 366). Only claims with dates of service within ten months of the effective date of the policy are investigated. After this period, FMC no longer examines claims. With pharmacy claims only claims that were incurred within six months of the effective date of the policy are looked at (RT, Pg 367). The policy provider HNC can go back for two years. After two years, HNC is locked into whatever is on the application (RT, Pg 368).

When Ludwig worked on developing the application and initial. underwriting process he worked with HNC’s law department (RT, Pg 392). The rescission letter’s standard language was written by an attorney in the law department (RT, Pg 393). Ludwig has had the opportunity to have [*12] general discussions with the law department regarding the criteria for rescission (RT, Pg 394). The cancelation letter was recommended by someone in the law department. It’s mailed in every case of proposed rescission (RT, Pg 395-396).

}INC keeps track of applicants accepted and those declined. Approximately 70-72% of the applicants will be approved; 18 to 20% will be declined and there is a percentage of applications cancelled or withdrawn (RT, Pg 405-406). Approximately one rescission will result from approximately 15 to 20 investigations (RT, Pg 406).

Ludwig discussed the weight change on the application with Fowler. The broker wasn’t called first before writing the clarification letter to Bates because the applicant would tell us if there was some claim of broker misconduct (RT, Pg 416).

The initials by Torrez actually give strength to the process because he is telling HNC he is the one who made the change. Ludwig didn’t feel it would be improper if the applicant consented to the change (RT, Pg 417-418).

At the hearing arid in closing argument, Claimant has asserted Respondent breached the covenant of good faith and fair dealing implied in law in every contract. Claimant maintained Health Net did not have the right to rescind the Bates’ policy. Claimant has argued that Health Net failed to comply with the provisions of California Insurance Code Section 10381.5. Therefore, it is contended, Health Net is acting in bad faith when the rescission rests upon information given by Bates to Health Net in the enrollment application.

In addition to violating the provision of Section 10381.5, Claimant also contended Health net acted in bad faith by violating the provisions of California Insurance Code Section 10384. Claimant argues the process by which the application was completed and submitted by Torrez raised reasonable questions which should have been resolved by a pre-insurance medical investigation. Had Health net done so, it was argued, it would have gained the exact information which was the basis for the subsequent rescission. Assuming, then, Health Net chose to decline Bates’ application, she would have been able to continue her policy with Universal and have avoided the disastrous consequences which flowed from the later rescission. In failing to complete medical underwriting, Health Net was guilty of postclaims underwriting which Section 10384 prohibits. [*13]

Claimant has advanced the further argument in support of her bad faith claim that if Health Net had conducted a full and fair investigation of the circumstances surrounding the completion of the application it would have realized rescission was not justified because of the requirement set forth by the California Supreme Court in Thompson v. Occidental Life Insurance Company (1973) 9 Cal. 3d 909, at page 916, that “ … if the applicant for insurance had no present knowledge of the facts sought, or failed to appreciate the significance of information related to him, his incorrect or incomplete response would not constitute grounds for rescission.”

As discussed in Claimant’s closing reply brief, Health Net’s further bad faith is reflected in the fact:

1. Health Net set annual rescission targets, expressed in terms of numbers of rescissions or anticipated savings;

2. A portion of the bonus paid to employees engaged in rescission work was tied to achieving rescission goals;

3. The clarification letter policy was disingenuous, and

4. Health Net documents; i.e., the enrollment application, clarification letter, rescission letter and guidelines mistake California rescission law. (See: Bates’ Closing Argument Reply Brief, Page 2.)

Health net has raised a number of arguments in support of its contention the Bates’ claim of bad faith is meritless. Initially, Health Net has noted the central question is whether Health Net acted unreasonably and without substantial justification (Closing Argument Opposition Brief, Page 1). In that regard, Arbitrator has been requested to consider: 1) Claimant’s misrepresentations regarding her heart and weight; 2) Claimant’s failure to provide a substantive response to Health Net’s letter requesting clarification; and, 3) Health Net’s efforts to comply with California insurance Code Section 10381.5 was consistent with existing law.

Health Net continued its argument that Bates failed to demonstrate Health Net’s bad faith with the assertion the enrollment application it used in 2003 was not intended to be a trap. The application used was consistent with those used by other insurers in the industry. In completing the application nothing Torrez did suggests any bad faith on Health Net’s part. Once Health Net discovered the [*14] omissions and/or misrepresentations regarding Bates’ heart and weight, Health Net had reasonable grounds to believe rescission was appropriate.

It is Health net’s additional contention that Ludwig and Fowler acted entirely proper throughout the rescission process. To the extent Fowler may have received bonus money related in some way to rescissions, the amount of money received was so small it was irrelevant (Ibid. Pg 32). Arbitrator has considered all of the contentions of the parties and the evidence which was submitted in support thereof.

Arbitrator has considered these contentions in the context of the applicable laws as set forth in the Judicial Council of California Civil Jury Instructions (CACI) Section 2330 (Implied Obligation of Good Faith and Fair Dealing Explained) which provides:

“In every insurance policy there is an implied obligation of good faith and fair dealing that neither the insurance company nor the insured will do anything to injure the right of the other party to receive the benefits of the agreement.

To fulfill its implied obligation of good faith and fair dealing, an insurance company must give at least as much consideration to the interests of the insured as it gives to its own interests.

To breach the implied obligation of good faith and fair dealing, an insurance company must, unreasonably or without proper cause, act or fail to act in a manner that deprives the insured of the benefits of the policy. It is not a mere failure to exercise reasonable care. However, it is not necessary for the insurer to intend to deprive the insured of the benefits of the policy.”

After consideration of all evidence submitted and the law as set forth in CACI Section 2330,

Arbitrator finds Health Net failed to satisfy the obligation of good faith and fair dealing it owed to Patsy Bates Specifically Arbitrator finds Health Net was primarily concerned with and considered its own financial interests and gave little, if any, consideration and concern for the interests of the insured. [*15] In its written closing argument. Health Net quoted BAJI 201:

“ The testimony of one witness worthy of belief is sufficient to prove any fact …”

To find Health Net breached its obligation of good faith and fair dealings Arbitrator need go no further than the testimony of Bates’ expert, Stephen Prater.

Prater has been teaching insurance law and practice at the university level for 25 years. His teaching includes substantial discussion of the issues involved in the Bates’ case; i.e., underwriting and claims handling, rescissions, Thompson issues, misrepresentations, point of sale issues and agent/broker issues. This experience alone would qualify Prater as an expert in. this case. However, in addition. Prater noted his numerous appearances as an expert testifying on insurance issues in trials (60) and depositions (hundreds) in approximately 20 states in the United States. Prater testified he has been hired to do consulting work with at least 2.5 insurance companies, including Blue Cross, Blue Shield and State Farm Insurance Company (RT, Pgs 11 and 12). Blue Shield used him as a mediator (RT Pg 17).

Health Net’s suggestion Prater lacked the necessary qualifications to testify as an expert is not supported by the evidence. Not only was Prater qualified, Arbitrator found him to be well-qualified.

Additionally, Arbitrator found him to be a credible witness.

Health Net has used some harsh language to describe Prater’s testimony. He was described as “a hired mouthpiece” whose testimony was not only “biased and pre-determined” but it was “fifteen years dated.” This attack on Prater’s credibility is somewhat understandable considering Health Net offered no expert testimony whatsoever at the hearing. If his testimony was “so far off the wall” as suggested, it would appear Health Net would have had little difficulty in producing at least one expert of its own.

Arbitrator finds the evidence in this case does support the opinions and conclusions expressed by Prater. Without consideration of his testimony, it would still be Arbitrator’s finding Health Net was guilty of bad faith in its dealing with Bates Starting with the circumstances by which the enrollment application was completed, Health Net’s reliance thereon, without any pre-acceptance investigation,, was particularly egregious. [*16]

Torrez completed the entire enrollment application. He made. no effort to explain the significance of the application Bates thought the form was used merely to transfer her health insurance from one company to another.

In the November 2000 agreement Torrez signed, he agreed “he will fully inform each applicant that the Company will rely solely upon these representations in rejecting, conditionally accepting or contracting with applicant, that the subsequent discovery of company of material facts known by applicant and either not disclosed or misrepresented on the application can result in rescission …” Torrez acknowledged he did just the opposite. He asked Bates to sign the application, nothing else. (Depo; Pg 65, Lines 5-14.)

On the first page of the application, it appears Bates’ weight was changed. Torrez initialed the change. He has acknowledged he made the change. This change should have been a red flag to Health Net there was a problem with compliance with California Insurance Code Section 103 82. This section requires that no alterations on the application shall be made without the applicant’s written consent. Nowhere on the form, or elsewhere, did Bates approve the alteration in writing. If Bates’ signature is being received as some form of ratification of the change, why didn’t she initial the change? It had to be obvious Torrez made the alterations at a later time. In so doing, he failed to comply with Section 10382 because he lacked her written consent.

For purposes of completing the application, Arbitrator does agree with the Bates’ assertions on this issue (Bates’ Closing Argument, Pages 6, 7 and 8) and finds Torrez acted as Health Net’s agent. Torrez violated the Health Net guidelines in several ways, not the least of which is the possibility of engaging in criminal conduct by violating Section 10382. Health Net’s claim the Bates’ application was “clean” and required no investigation lacks credibility.

Section 10384 of the Insurance Code defines postclaims underwriting as;

“… rescinding, canceling, or limiting of a policy or certificate due to the insurer’s failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the policy or certificate.” [*17]

Considering the manner in which Torrez violated Health Net’s guidelines, to include the possibility of engaging in criminal conduct Heath Net’s failure to conduct an investigation before the policy was issued is difficult to understand. As described by Prater, Health Net’s failure is particularly troubling since they were dealing with an applicant who already had a policy with significant coverage which it knew was going to be cancelled if the application was approved. All of the information Health Net used to rescind was located in the medical records it later obtained from Dr.(s) Petra Wong and Raghu Nandari. Compliance with Section 10384 would have made them available to Health Net.

Bates was diagnosed with breast cancer in September 2003. The treatment which was necessary involved the submission of claims or approval thereof under diagnostic cades used by Health Net to trigger a rescission investigation. Medical records were obtained and entries therein were compared to various responses on the Bates’ enrollment application. Health Net gave no consideration to the provisions of Insurance Code Section 10381.5. This section provides (in part):

“the insured shall not be bound by any statement made in an application for a policy unless a copy of such application is attached to or endorsed on the policy when issued as apart thereof.”

Arbitrator finds Health Net’s practice in 2003 of mailing the application to an applicant in a separate mailing than the mailing used for the policy, even if the two mailings were made within a day or two of each other, constitutes a violation of Section 1038L5. Health Net should not have proceeded with a rescission based on any statements Bates made in her application.

Health Net has argued its practice in 2003 can’t be considered bad faith even if Section 103815 was technically violated because a similar practice by Standard Insurance Company was involved in the case of Standard Insurance Company v. Caris and approved by a northern district federal court in 2000. Arbitrator finds this argument disingenuous in that no evidence was introduced in this hearing suggesting Health Net followed its procedure in reliance on the Caris opinion. [*18]

In addition to the violations of guidelines and statutes noted above, further evidence of Health Net’s bad faith is the bonus practice it pu in place, whether large or small which was tied in some respect to whether an employee met certain rescission goals.

It’s difficult to imagine a policy more reprehensible than tying bonuses to encourage the rescission of health insurance that helps keep the public well and alive. Arbitrator finds the question of the timing as to when the goals were set; i.e., before or after the fact of rescission, not particularly significant. It is clear to Powler and any other member of the rescission team the rescission goals were important because they came down the pike regularly on an annual basis. Health Net’s claim they didn’t amount to much lacks credibility.

In consideration of the discussion above, Arbitrator finds Bates is entitled to. 1) recover the amount of her unpaid medical bills; 2) emotional distress and punitive damages; and, lastly. 3) attorney fees pursuant to Brandt v. Superior Court (1985) 7 Cal 3d 813.

Arbitrator agrees with Health Net’s position the medical expense claim is essentially a contract claim and the collateral source rule is not applicable. Arbitrator agrees, also, that pursuant to BAJI 10.90 and 14.60 speculative damages may not be awarded. Arbitrator finds the claim for future medical expenses falls into this category. Arbitrator has reviewed Egari v. Mutual of Omaha Insurance Company (1979) 24 Cal 3d 809 and does not feel it supports the claim the entire balance of the contract amount of the Health Net policy should be awarded,

Health Net feels Bates’ emotional distress damages are minimal. Arbitrator could not disagree more. Bates had a viable policy with Universal she was encouraged to cancel. That would have never happened but for the shoddy practice of Health Net’s agent, exacerbated by its own institutional concern for its financial interests over those of its insured. Four years after Health Net’s failure to pay her medical bills, Bates’ appearance at the hearing demonstrated her obvious emotional distress. BAJI 12.72 defines emotional distress as:

“The term “emotional distress” means mental distress, mental-suffering or mental anguish. It includes all highly unpleasant mental reactions, such as fright, nervousness, grief, anxiety, worry, [*19] mortification, shock) humiliation and indignity, as well as physical pain.“

BAJI 12.13 defines “severe” as:

“The word “severe”, in the phrase “sever emotional distress,” means substantial or enduring as distinguished from trivial or transitory. Severe emotional distress is emotional distress of such substantial quantity or enduring quality that no reasonable person in a civilized society should be expected to endure it. In determining the severity of “emotional distress you should consider its intensity and duration”

It is bard to imagine a situation more trying than the one Bates has had to endure. She had valid health insurance, thinks simply she’s making a change when the rug was pulled from underneath and that occurred at a time when she is diagnosed with. breast cancer, one of the leading causes of death for women. With insurance she was insured she would receive proper care. Her care was changed when doctors found out she had an insurance problem (Nandan’s testimony, PT, Pg 33). At the hearing, Bates expressed her tremendous concern. At least several times during the hearing Arbitrator was required to take breaks so that Bates could regain her composure. Arbitrator felt her distress was genuine. Arbitrator is convinced it will last the rest of her life.

Arbitrator has reviewed the provisions of BAR 14.71 regarding an award of punitive damages in this case. This section provides (in part):

“If you find (Bates) suffered actual injury, harm or damage caused by (Health Net) you should then consider whether you should award punitive damages against (Health Net), for the sake of example and by way of punishment You should in your discretion award punitive damages, if, but only if, you find by clear and convincing evidence that (Health Net was guilty of oppression (fraud) (or) (malice) in the conduct on which you base your finding of liability. [*20]

“Oppression” means despicable conduct that subjects a person to cruel and unjust hardship in conscious disregard of that person’s rights. “Despicable conduct is conduct which is … “contemptible” or “miserable” that it would be looked down upon and despised by ordinary decent people … ”

The evidence, Arbitrator finds, was clear and convincing in establishing Health Net’s oppressive conduct in this case. Health Net paid no attention to its own guidelines when it examined the Bates’ application. It ignored statutory mandates. Obvious errors, one of which amounting to criminal conduct, were ignored. Bates’ disaster could have been totally avoided through very limited investigation. Health Net showed no concern for its obligation under Insurance Code Section 10384. Bates’ rights under Section 10381.5 were violated. Throughout the hearing, and in its closing argument, Health Net has attempted to shift the blame in this case to Patsy Bates. However, it was Health Net’s conduct which was reprehensible. From the initial review of the application to the rescission the evidence supports a finding Health Net’s primary concern was its own financial well-being.

Arbitrator has reviewed the cases of Downey Savings and Loan Association v. Ohio Casualty Co. (1987) 189 Cal App 3d 1072, Tomaselli v. Transamerica Insurance Co. (1994) 25 Cal App 4th 1269 and Delos v. Farmers Insurance Group (1979) 93 Cal App 3d 642. Arbitrator finds the position asserted by Bates as set forth in the closing Reply Brief (pgs 24,25 and 26) is well taken and supported by the cited authorities.

Based upon the discussion above as against Health Net Life Insurance Company Claimant Patsy Bates is awarded:

Unpaid medical expenses – $129,809.00

Interest pursuant to Civil Code Section 3 289 from October 1, 2003 to present (1603 days x 35.56 perday) – $ 57,002.68

Emotional distress – $ 750,000.00

Total special damages – $ 936,811.68

Punitive damages per Civil Code Section 3294 – $8.43 1.305.10 [*21]

Total Interim Award – $9,368,116.78

(Note: In computing punitive damages Arbitrator has adopted and incorporated herein the arguments set forth in Claimant’s Closing Argument Reply Brief starting on Page 20, Ln 10 through and including Page 22, Ln 16.)

Arbitrator used a multiple of 9

Arbitrator reserves jurisdiction to award attorney fees pursuant to Brandt v. Superior Court (1925) 7 Cal 3d 813 and costs pursuant to CCP 1032, et. seq. Claimant is directed to submit her request within 10 calendar days Respondent shall have 10 calendar days from the date of this interim award thereafter to submit any objections thereto. Arbitrator will submit a final award to the parties within 30 calendar days thereafter.

Dated: Feb. 21, 2008

Sam Ciancheii
Judge, Retired
Arbitrator