In Ghazarian, et al. v. Magellan Health, Inc., et al., __ Cal.Rptr.3d __, 2020 WL 4558915 (as modified on denial of rehearing, August 31, 2020), the Fourth District Court of Appeal of California recognized that, “Generally, an insurer is not liable for bad faith if its denial of a claim was reasonable.” However, the Court stated, “In this appeal, we clarify that to avoid bad faith liability, it is not enough than an insurer’s ultimate decision might be considered reasonable at first glance.” Because the Court of Appeal found that “the trial court erred by failing to look past an arguably reasonable denial to determine whether the insurer fairly evaluated its insured’s claim,” it reversed the trial court’s grant of summary judgment to the insurer, including on a claim of breach of the implied covenant of good faith and fair dealing (i.e., “bad faith”).
In this case, the insureds’ son, A.G., had autism and was receiving applied behavior analysis (“ABA”) therapy under a health insurance policy issued by Blue Shield. By law, the policy was required to provide A.G. with all medically necessary ABA therapy. Before A.G. turned 7 years old, Blue Shield authorized 157 hours of medically necessary ABA therapy per month. However, shortly after A.G. turned 7 years old, Blue Shield denied the insureds’ request for 157 hours of ABA therapy, and instead authorized only one-half of it as medically necessary. The insureds requested a review by the Department of Managed Health Care, and 2 of the 3 independent physician reviewers disagreed with the denial, whereas the other agreed.
The insureds also sued Blue Shield for bad faith, intentional interference with contract, and violation of California’s Unfair Competition Law, principally arguing that Blue Shield adopted unfair medical necessity guidelines that reduced the amount of ABA therapy autistic children receive after they turn 7 years old, regardless of their medical needs. Blue Shield moved for summary judgment. As to the bad faith claim, the trial court granted the motion, finding that since 1 of the 3 independent physician reviewers agreed with the denial, Blue Shield acted reasonably as a matter of law.
On appeal, the Court of Appeal noted California precedent that an insurer may be liable for bad faith if it, “employs a standard of medical necessity significantly at variance with the medical standards of the community….  [G]ood faith demands a construction of medical necessity consistent with community medical standards that will minimize the patient’s uncertainty of coverage in accepting his physician’s recommended treatment.” The insureds argued that Blue Shield’s medical necessity standards conflicted with established medical standards set by the Behavior Analyst Certification Board that grants national credentials to ABA professionals, which standards were that ABA treatment should not be constrained by age. Therefore, the Court of Appeal found genuine issues of material fact existed as to the reasonableness of Blue Shield’s medical necessity standards for ABA therapy and whether the insureds’ claim was unfairly denied based upon those standards, which precluded entry of summary judgment for Blue Shield.
Although the Court of Appeal acknowledged the “genuine dispute” rule under California law, which allows an insurer to avoid bad faith liability if it denied a claim because of the existence of a genuine dispute with its insured over coverage for the claim, the Court rejected the rule’s application under the facts of this case. The Court held that the genuine dispute rule applies to a denial only if it is, “founded on a basis that is reasonable under all the circumstances,” which the Court characterized as an objective standard. In other words, relative to Blue Shield’s motion for summary judgment, the Court stated that “the undisputed record must show Blue Shield fairly and thoroughly evaluated plaintiffs’ claim and its denial ‘was reached reasonably and in good faith.’” The Court concluded that the evidence in the record on Blue Shield’s motion did not meet that test because, among other things, (i) the insureds’ claim was not fairly evaluated if Blue Shield denied it based on unfair criteria and, (ii) although 1 of the 3 independent reviewing physicians agreed with Blue Shield’s denial, that physician did not evaluate Blue Shield’s medical necessity criteria.
Critically, the Court rejected Blue Shield’s effort to look only at the final determination. As the Court explained: “even if there is a genuine dispute as to the amount of treatment that is medically necessary for A.G., that dispute is immaterial because the claim was not fairly evaluated. Blue Shield did not reach this decision reasonably and in good faith. A health insurer is not absolved of bad faith liability if it bumbles into a facially reasonable medical decision using patently unfair medical necessity criteria. Even a stopped clock is right twice a day.” The Court refused to look at Blue Shield’s conduct in a vacuum, considering whether Blue Shield had a “pattern” of denying treatment “by adopting an unreasonable standard of medical necessity.”
The “genuine dispute” rule continues to be a defense to bad faith. However, this case teaches that an insurer may not be able to rely solely on whether there is a fair dispute as to the ultimate conclusion, if it has not treated its insured and the claim fairly along the way.