The Daily Journal
April  21, 2009

By Evan George
Daily Journal Staff Writer

Rescission Issue Far From Over For One Lawyer

Claremont Attorney Seeks Guilty Verdicts Against Insurers for Revoking Coverage

LOS ANGELES - William M. Shernoff believes he is close. The 71-year-old Claremont attorney has led a high-profile legal barrage against health insurance plans accused of unlawfully cutting off coverage once members become sick. He's won multi-million dollar settlements, he's won praise, but he is yet to win a "guilty" verdict. "That is the goal," Shernoff said recently as he prepared for another round in his five-year battle against health insurance rescissions.

With a slew of pending cases, he hopes to deliver the knockout punch that banishes the industrywide practice of post-claims underwriting, he said. And that would bring a poignant coda to Shernoff's endeavors in the field, which began with a precedent-setting insurance case now cited in his current litigation.

One of the targets is insurance giant Blue Shield of California. Shernoff's clients are the Simoeses, a dairy farming couple from Chino, whose health coverage was yanked by Blue Shield while the wife, Ana Maria, was recovering from an expensive gall bladder surgery in 2004.

Blue Shield had approved the treatments, but later said it found omissions in the policy application and saw fit to cancel it. The plan has denied any wrongdoing, but Shernoff wants to prove that Blue Shield illegally gave incentive bonuses to administrators who found reasons to rescind coverage from members with large medical tabs. A trial date is set for early next year. Similar allegations forced insurance company Health Net to pay $9.6 million last year to hairdresser Patsy Bates, a Shernoff client.

Health insurance rescissions have become Shernoff's crusade; stopping them his legacy. His lawsuits first exposed the practice, which health insurers maintain is rarely needed but legal, and have led to state actions. They haven't, however, produced new laws or regulations.

While health insurance companies have opted to settle the cases without any admission of guilt, Shernoff believes an actual finding of wrongdoing would be key to stopping the practice. Some observers say his crusade is a long shot. Others call it misguided. The government has closed its probe into the practice, and the big health plans have said they only rescind within the rules.

Shernoff is not convinced.

"The government isn't going to make these companies honest," Shernoff, who goes by Bill, said in his serene, even-toned voice. "It is important that there is balance, that insurance companies treat people fairly. That is what this whole body of bad faith law is - to try to deter unfair practices in the insurance industry because unfair practices cheat people." Shernoff ought to know, he helped write the law on the issue. Forty years ago, Shernoff won a landmark tort law case involving reneged duties in insurance cases in front of the state Supreme Court. Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809.

Shernoff's case developed a principle found in most states holding insurance companies to an implied contract of "good faith and fair dealing." Unlike medical malpractice, which has a cap on damages in California, bad faith claims can be worth millions.

That means Shernoff is in the rare position of citing his own case law, said health law professor Bryan Liang.

"He doesn't have to wait generations to be seen as having an impact on the law," said Liang, executive director of the California Western School of Law's Institute of Health Law Studies. " He is on the fast track to being in a lot of legal case books."

Shernoff has earned the respect of even his detractors, who believe his litigation risks upsetting the balance between consumer rights and industry protections.

"Bill is an extremely vigorous advocate," said Michael Cypers, a partner at Mayer Brown who has represented Blue Shield in rescission cases.

It is respect built on years of litigating some of the more pertinent and high-profile insurance cases in the country. In 1980, he helped secure an $87 million deal for financier Kirk Kerkorian whose insurer refused to pay claims related to a fire at his MGM Grand Hotel Grand. Shernoff is also credited with spearheading hundreds of payments, totalling $5.1 billion, to Holocaust survivors cheated of their relatives' life insurance policies by European firms.

Shernoff was born in Crivitz, Wis., the son of a lawyer who ran his practice above the family drugstore. He was the only lawyer in town and drafted wills and gave legal advice to nearby farmers.

In 1955, Shernoff went off to the University of Miami. He returned five years later and - inspired in part by his father - enrolled in Wisconsin Law School. He graduated in 2 ½ years. The draft was on, and Shernoff applied to the army's JAG Corps. In the military, he developed a tough skin as a litigator.

"You didn't win many court martial cases because the jury is just officers," Shernoff said. "The accused is always brought to a court martial by the general, and the general picks the jury. The deck is always stacked against you, but I was able to have a pretty good record at getting some people off with lesser sentences."

Some were accused of sex crimes and murder. But all deserved an advocate, and the role came naturally to him, Shernoff said.

When he left the military barracks three years later, personal injury work was the fad. The shy, straight-laced Shernoff came to San Francisco looking for a job. It was 1965.

He still remembers being stood up by his hero, personal injury guru Melvin Belli, whom Life magazine once crowned the King of Torts. "I wrote him saying I admired him," Shernoff said. "I wrote him saying, 'I think you're the greatest.'" He waited for three hours, but the King never showed.

Instead, Shernoff went to work for Claremont lawyer Herb Hafif. There he met a middle-aged roofer from Pomona named Michael Egan who would bolster his career. Egan had fallen off a ladder while working and had disability insurance through Mutual of Omaha. The policy paid $200 every month for life if someone was hurt in an accident, but only for three months if they were disabled by sickness. A company manager converted Egan's disability claim, arguing he was sick and not injured by the fall.

A jury awarded the Egan family a whopping $5.1 million in punitive damages. The appeal became even more crucial.

The California Supreme Court lowered the damages, but more importantly it upheld the basis for holding insurance companies accountable for bad faith.

"An insurer cannot reasonably and in good faith deny payments to its insureds without thoroughly investigating the foundation of its denial," Supreme Court Justice Stanley Mosk wrote in the Egan opinion.

Those words are like scripture to Shernoff.

In 1975, he founded his own law firm in Claremont. One afternoon, attorney Mike Bidart marched into the office and asked Shernoff to sue him. Bidart had injured a friend while playing racquetball, and the man was in a coma. Bidart had insurance and wanted to help pay for his medical bills. Shernoff sued for the money, and the two later became partners. Today, Shernoff Bidart Darras & Echeverria has 11 lawyers, and the firm has built a nationwide reputation on insurance matters, but particularly bad faith claims. Insured patients first came to Shernoff five years ago with complaints that they'd been unfairly rescinded. Many often showed up still sick, burdened with hundreds of thousands of dollars in medical bills and no insurance.

The cases have ballooned even beyond Shernoff's expectations. During a pivotal deposition in 2005, Shernoff questioned a Blue Cross employee about rescission practices at the health insurance company.

"I said, 'You rescinded this guy?'" Shernoff recounted recently. "And she said, 'Yeah, it's standard practice.'"

"Oh, how many rescissions do you do?" Shernoff said he asked. "Oh, 500 a month" was her answer.

The discovery led the way to a still-unresolved class action on behalf of at least 6,000 members. Shernoff's filed suits against Health Net, Blue Shield, PacifiCare and Nationwide. The lawsuits, which recount stories of patients, some with fatal diseases and fragile conditions, being cut off from health insurance when they need it the most, have drawn widespread media attention and sympathy. But they are far from over for plaintiffs.

Unlike deals reached by state regulators, a settlement negotiated by Shernoff and the Los Angeles city attorney gave Health Net customers new insurance policies and reimbursement for any incurred expenses plus some damages. Shernoff said he would repeat those deals with the bigger players, although it would fall short of a verdict.

In the meantime, he wants to get his hands on one piece of evidence he sees as the key in the case against Blue Shield. Shernoff is fighting hard for any records showing the company gave financial incentives to administrators who found reason to terminate policies that had become too expensive for Blue Shield. Blue Shield has fought to keep its records under seal. "That would break the case," Shernoff said of finding such evidence. "They are resisting me on getting those records. But eventually I'll get them."