California’s health insurance industry claimed victory and vindication last week when Blue Shield of California won the first ever jury trial in a health insurance rescission lawsuit, brought by an injured policyholder and his wife.

The highly watched case of Steve and Cindy Hailey was just one of a flurry in which insurers have been accused of wrongly denying coverage after policyholders get sick.

But new details in the case depict a more complicated – and some say less decisive – win that relied on shrewd legal maneuvering by Blue Shield. Though last week’s ruling came from the bench, before the jury could deliberate, the ruling was not based on the merits and relied on the couple recanting their story.

Those with a stake in future litigation fired criticism at Blue Shield’s tactics and asked why the deal-making wasn’t more transparent. At least one attorney involved in rescission cases said he would ask for an investigation by the State Bar or others because he believes a quid pro quo had been offered.

"I have learned information which leads me to believe that there has not been a full disclosure of all the facts that transpired in this settlement," said William Shernoff, a Claremont lawyer who represents dozens of other policyholders in separate cases. "There should be some sort of investigation to make sure there was no illegality or breach of ethics," Shernoff said. He declined to reveal what he knew of the agreement.

Blue Shield lawyers firmly denied making a financial settlement with the Haileys or their lawyer.

Still, the machinations behind last week’s ruling could be key to what, if any, lasting shake-up the trial has on similar lawsuits wending through the courts.

Health plans in California have already indicated they are emboldened by the ruling, while industry critics and some veteran trial attorneys were scratching their heads.

Hailey, a small business owner crippled in an auto accident, sued Blue Shield for revoking the couple’s insurance in 2001 after several errors were discovered on their application. They complained the insurer acted in bad faith because it left them with more than $400,000 in retroactive medical bills. Though the lawsuit was first dismissed, an appeals court
set a significant new precedent in the case saying the insurer must prove the couple lied rather than made mistakes.

Then last week, the Haileys abruptly reversed all of their claims and admitted to lying on the application. That about-face allowed an Orange County judge to rule mid-trial in favor of the company.

Blue Shield called the verdict "a complete vindication" of its behavior. "It means we acted properly every step of the way," Blue Shield spokesman Tom Epstein said in a statement last week.

But not mentioned in the verdict or in statements to the media were some concessions Blue Shield made to the plaintiffs. For instance, the company dropped a countersuit against the couple worth more than $100,000. Blue Shield also agreed to waive all court costs and fees, according to court minutes from last Friday, a day after the ruling.

That agreement shows the Haileys may have dropped their complaint to cut their losses in a trial that looked increasingly tough for them to win. Defense lawyers told the jury they would show a pattern of deceit by digging up the Haileys’ old medical records as well as a past felony conviction for bouncing checks that they did not disclose in a deposition.

Blue Shield lawyers insisted they could have won at trial.

"We think it became clear to the Haileys that they were in a no-win situation," said Greg Pimstone a partner at Manatt, Phelps and Pillips who represents Blue Shield. "Their decision to concede made perfect sense. They couldn’t continue and we wouldn’t settle."

John LeBlanc, a partner at Barger & Wolen who also represented Blue Shield, compared the unusual verdict to a summary judgment.

However, the ruling by Orange County Judge Peter Polos was not based on the merits of the case. Instead it came as a directed verdict, a rarely sought order that dismisses a case against a defendant before a jury can reach a decision.

And it came after the Haileys agreed to change their story and agreed to highly technical stipulations, many observers noted.

"This is really a settlement," said Bryan Liang, executive director of the Institute for Health Law Studies at the California Western School of Law. "You can call it a directed verdict, which it is, but the Haileys stipulated to certain facts… and it is an exchange."

Liang said the distinction was critical, because Blue Shield was attempting to "erase" the appellate precedent that the Hailey’s case created in 2007. A court of appeals ruled that insurance companies must prove policyholders lied on an application, not just made innocent mistakes, to rescind their policy.

Asked to comment on the case, Cindy Hailey said, "There’s nothing I can say."

The Haileys’ attorney, Michael G. Nutter of Santa Ana, did not return calls for comment.

The health insurance industry trade group has argued that rescission is a rare but necessary tool to weed out applicants who deny existing medical conditions to obtain valuable medical coverage.

"It only takes a few cases of dishonesty to make everyone else have to pay more," said Charles Bacchi, interim president of the California Association of Health Plans. He said the Hailey trial showed "dishonesty does exist in applications for health insurance."

Insurers have fought hard against legislative proposals to impose stricter rules to cut down on rescissions. One pending bill written by De La Torre D-South Gate, AB 2, would require insurers to complete thorough medical investigations up front before approving coverage, which would reduce the number of policyholders who believe are rescinded after falling ill.

Some health care advocates saw the Hailey verdict as a good sign for future lawsuits.

"Blue Shield lost by winning here," said Jerry Flanagan, health advocate for the Santa Monica-based Consumer Watchdog. "Blue Shield said all along that the standard is too high, we can’t meet it–and then they did it here."

Although a state court verdict sets no binding precedent, Blue Shield lawyers said they believe the outcome could sway future cases.

"We think it can be used in other litigation," LeBlanc said. "Blue Shield has received a number of summary judgments… now we have a directed verdict in our favor."

Shernoff, the Claremont attorney representing a slew of plaintiffs, said the Hailey trial would not affect future cases. "The appellate court opinion is the law," Shernoff said.

Representatives for the L.A. City Attorney said the trial would not derail their own investigations into Blue Shield and Blue Cross for alleged unfair and fraudulent business practices.