Round and round the claim she goes, who’s the insurer nobody knows.

Jessica D. (Aetna / Highmark Blue Cross Blue Shield)

Jessica was admitted to the hospital for treatment. Upon admission, she presented an insurance card, which indicated she was insured by Highmark Blue Shield – PPO. Shortly after admission, the hospital contacted Blue Cross and verified that benefits were payable at 80% of Blue Cross’s "allowed amount", subject to a deductible. It was also told that pre-authorization was required for inpatient care.

The hospital received a letter on Highmark letterhead, but it appeared to originate from Magellan. It stated that Magellan was authorized by Highmark to administer claims and that it was responsible for determining medical necessity. The letter authorized treatment from the day of admission forward and stated that Magellan would conduct an "ongoing continued stay review will determine if additional days will be authorized". Thereafter, Magellan meticulously case-managed and approved all inpatient treatment, as was evidenced by eight separate authorization letters.

About a month after the patient was discharged from the hospital, information surfaced that indicated that the primary carrier was Aetna, not Highmark. So a claim was immediately submitted to Aetna. Aetna acknowledged receipt of the claim and it requested a copy of all the medical records, which were promptly provided to Aetna.

Delay after delay ensued in processing the claim. Eventually, Aetna referred the claim for processing to its administrator, Magellan. This posed an interesting situation, since Magellan had already case-managed and approved the entire course of inpatient treatment, on behalf of the "secondary" insurer, Highmark. Magellan denied the benefit claim, stating that it was submitted to Aetna "beyond the time allowed to file a claim for consideration under this plan". However, the claim had in fact been timely submitted to Aetna, but Aetna failed to promptly process or pay it. It appeared that processing of the claim got somehow side-tracked by Aetna’s referral of the claim to Magellan and Magellan’s failure to act on it in a timely manner.

Even if the claim had been submitted to Aetna technically "late" (which it wasn’t), California has a "notice-prejudice" rule, which states: "[A] defense based on an insured's failure to give timely notice [of a claim] requires the insurer to prove that it suffered actual prejudice. Prejudice is not presumed from delayed notice alone. The insurer must show actual prejudice, not the mere possibility of prejudice." Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 760-761, 15 Cal. Rptr. 2d 815, 845 (1st Dist. 1993) (citations omitted). See also: Unum v. Ward, 526 U.S. 358; 119 S. Ct. 1380 (Held: California's notice-prejudice rule is a "law . . . which regulates insurance," and is therefore saved from preemption by ERISA.).

The notice-prejudice rule has been broadly applied by the Courts. The rule itself is derived from the maxim that the law abhors a forfeiture. See, e.g. Hall v. Travelers Ins. Co., 15 Cal.App.3d 304, 93 Cal. Rptr. 159 (1971) (asserted breach of policy cooperation clause - "But such a breach cannot be a valid defense unless the insurer was substantially prejudiced thereby, and the burden of proving that such a breach resulted in prejudice is on the insurer." Id., 15 Cal.App.3d at 308); Baumler v. State Farm Mut. Auto. Ins. Co., 493 F.2d 130 (9th Cir. 1974) (asserted breach of policy cooperation clause - Proof of noncooperation requires establishing at least two elements: (1) that the insured in bad faith refused or neglected to cooperate with the insurer; and (2) that the noncooperation caused substantial prejudice to the insurer's preparation of a defense to a claim lodged against the insured. 493 F.2d at 134); See also: Othman v. Globe Indemnity Co., 759 F.2d 1458 (9th Cir. 1985), overruled on other grounds, Bryant v. Ford Motor Co., 832 F.2d 1080, 1082-83 (9th Cir. 1987), (under California law, an "insurer may deny coverage on the basis of the insured's refusal to cooperate if it is substantially prejudiced by the refusal." 759 F.2d at 1465); and see: Sequoia Ins. Co. v. Royal Ins. Co. of America, 971 F.2d 1385, 1394 (9th Cir. 1992), ("[n]oncompliance with notice and cooperation provisions, however, will bar recovery only if the insurer can establish substantial prejudice as a result.").

The Ninth Circuit discussed the notice-prejudice rule in an ERISA context in Carrington Estate Planning Svcs. v. Reliance Standard Life Ins. Co., 289 F.3d 644 (9th Cir. 2002). First, the Ninth Circuit observed: "The notice-prejudice rule recognizes that the primary and essential part of the contract [is] insurance coverage, not the procedure for determining liability . . . It must not be forgotten that the primary function of insurance is to insure.", and that "the notice requirement serves to protect insurers from prejudice, . . . not . . . to shield them from their contractual obligations" through "a technical escape-hatch. . . Hence, it had been stated that when the late notice does not prejudice the insurer the reason behind the notice condition in the policy is lacking, and it follows neither logic nor fairness to relieve the insurance company of its obligations in such a situation." 289 F.3d at 646-647 (internal citations omitted).

Application of the notice-prejudice rule is not limited to initial notice of claim, but it apples generally to provide that, absent prejudice, a forfeiture of insurance benefits may not be imposed for a mere technical breach of a contractual condition unrelated to the merits of an insurance claim. See, e.g., Foley v. Int'l Brotherhood of Electrical Workers, 91 F.Supp.2d 797, 803 n.6 (E.D. Pa. 2000), reversed on other grounds, 271 F.3d 551 (3d Cir. 2001): Even if Foley's [administrative] appeal [of an adverse benefit determination] were untimely, defendants would not prevail, because they have not shown that they were prejudiced by the untimely submission, as they are required to do under the Supreme Court's recent decision in Unum Life Ins. Co. v. Ward, 525 U.S. 358, 119 S.Ct. 1380, 143 L.Ed.2d 462 (1999).

To the extent that Aetna sought to impose a technical forfeiture of plan benefits, unrelated to the merits of Jessica's claim, by seeking to enforce some time limit for perfecting a claim or an administrative appeal, such action was clearly contrary to the law in California and thus contrary to the law of this Circuit. If indeed Aetna sought such a benefit forfeiture, then it was incumbent upon Aetna to demonstrate that it had been substantially prejudiced as the result of any delay in submitting information or pursuing administrative appeals. Aetna could show no such prejudice in light of the fact that: (a) Aetna had in its possession all of the most essential information needed to timely process the claim; and (b) Aetna’s own communications regarding the claim failed to satisfy even the most basic requirements of ERISA and the federal regulations.

Moreover, Aetna’s own claims administrator, Magellan, case-managed and certified the "medical necessity" of all treatment rendered from beginning to end. Ironically, Magellan carried out these acts on behalf of Highmark. But since Magellan was also under contract to Aetna to perform the very same kind of case management and claims review services as it had performed for Highmark, there was no reason why Magellan’s actions should have been any different for Aetna.

As it stood, no substantive decision had even been made on the claim; therefore, no prejudice could have possibly resulted from any late submission of information or a late decision. See: Jebian v. Hewlett Packard 349 F.3d 1098, 1107 (9th Cir, 2003) ("Just as there is good reason to avoid giving talismanic power to the language of discretion, there is reason as well to avoid endowing the sixty or 120-day deadlines with such significance that manipulation of deadlines could be employed tactically by either ERISA claimants or plan administrators. . . ERISA is designed to promote a good-faith bilateral exchange of information on the merits of claims, not hasty decision-making by administrators . . . ." )

These facts were called to the attention of both Aetna and Highmark. It took a series of letters and phone calls to get to the bottom of it, but it was ultimately determined that Highmark was the primary carrier after all. At that point, the claim was finally paid by Highmark.

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