Equitable Defenses Did Not Defeat Class Certification
Blue Shield still faces a possible class action on “post claims underwriting.” California’s Court of Appeal, Second District (Los Angeles), issued a slightly modified opinion after rehearing against Blue Shield. The appellate decisions reverses the Los Angeles County Superior Court’s order denying a motion to certify a class under Proposition 64. In sum, the appellate court held that equitable defenses cannot be used to defeat a claim under California’s Unfair Competition Law (Bus. & Prof. Code, § 17200 [the “UCL”]) and Blue Shield could not raise as a defense fraud based on statements the insured made in an application for insurance because the application was neither attached to nor endorsed on to the policy when issued.
Plaintiff Augusto Ticconi alleged he applied for a policy of short term health and accidental death insurance from Blue Shield of California Life and Health Insurance Company and truthfully answered all health questions on the policy application. Blue Shield issued the policy to Ticconi effective January 1, 2004 with a one year duration. Ticconi’s application was not attached to or endorsed onto the Policy when issued. Thereafter, Ticconi required “significant health care services” totaling over $100,000. After Ticconi submitted his bills for payment, Blue Shield rescinded the Policy on the basis that Ticconi has made material misrepresentations in his application for insurance.
In his class action lawsuit against Blue Shield, Ticconi alleged Blue Shield had a practice of issuing policies without attaching or endorsing a copy his application in violation of Insurance Code §§ 10113 and 10381.5, and rescinding policies in violation of those statutes, which conduct constituted an unfair and unlawful business practice in violation of the UCL.
Ticconi moved for certification of a class defined as all California residents issued health insurance since May 2001 by Blue Shield and who thereafter had the policy rescinded by Blue Shield based upon alleged misrepresentations contained in the policy application. Blue Shield opposed the motion on the basis, among others, that there was a lack of community-of-interest required for class certification. The trial court denied Ticconi’s motion for class certification on the basis that Blue Shield’s defenses of fraud and unclean hands to Ticconi’s and other insureds’ claims raised individual factual issues and would require separate trials on the merits of each individual’s case based on its unique facts.
In reversing the trial court’s decision, the court of appeal noted that the unlawful conduct alleged by Ticconi was “postclaims underwriting.” The court found such practice to be “categorically prohibited” by Insurance Code § 10384. The court also stated that the consequence for failing to comply with Insurance Code § 10113 and 10381.5 is that the insured is not bound by statements made in the application and the insurer claim misrepresentation or omission based on the unattached and unendorsed application. The court further held that conduct in contravention of Insurance Code §§ 10113, 10381.5 and 10384, constitutes a predicate unlawful practice sufficient for a UCL cause of action.
The court of appeal found Ticconi’s defined class raised factual and legal issues relevant to Blue Shield’s liability and universal to class members, thus common issues of law and fact would predominate. The court found that equitable defenses of unclean hands were not available in a UCL action based on violation of a statute, because allowing such a defense would “sanction the defendant for engaging in an act declared by statute to be void or against public policy.” Fraud was not available to Blue Shield as a defense to the UCL cause of action because Blue Shield failed to attach or endorse the insureds’ application to the policy. Thus, it was error for the trial court to weigh the legal and factual issues associated with such defenses in denying Ticconi’s motion for class certification.
The case was remanded to the district court with instructions. The appellate court noted there were other issues to consider as to whether the class should be certified, including whether Ticconi’s claims were typical and whether he could adequately represent the class, especially since Ticconi’s policy had been reinstated and medical bills paid.
The California Supreme Court denied review (3/26/08).
