Rescission is Not a Four-Letter Word

How to Recognize and Avoid Post-Claim Underwriting

Robert R. Pohls, Managing Attorney Pohls & Associates Los Angeles, California

Gary Schuman, Senior Counsel - Litigation Combined Insurance Company of America

Glenview, Illinois

International Claim Association 101st Annual Education Conference Austin, Texas ♦ October 5, 2010

Contract Formation: Essential Elements

A contract is “an agreement to do or not do a certain thing.”

The essential elements for forming a contract are:

1) parties capable of contracting;

2) consent;

3) a lawful object; and

4) sufficient consideration.

Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting

International Claim Association ♦ 101st Annual Education Conference Slide 2

Contract Formation: Consent Every contract requires consenting parties. However, there is no

requirement for a subjective meeting of the minds. Absent fraud, duress,

or mistake, the parties’ consent is determined by the reasonable

meaning of their words and acts – ie., not from their unexpressed

intentions or understanding.

The manifestation of a party’s consent usually is accomplished through an

offer and an acceptance.



Reality and Freedom of Consent: Undue Influence

When a person gives his or her consent to a contract because of undue

influence, the contract is voidable and their only remedy is to rescind

the contract.

Undue influence comes in three forms:

1) someone in whom confidence is placed or who holds real or

apparent authority using that confidence and/or authority for

the purpose of obtaining an unfair advantage;

2) taking advantage of another person’s weakness of mind; or

3) taking grossly oppressive and unfair advantage of

another’s necessities or distress.



Reality and Freedom of Consent: Duress

Duress is the unlawful confinement of a person, a member of that

person’s family, or the person’s property.

In rare cases of physical compulsion, a person is caused to manifest

consent when the person does not understand the transaction or does not

intend to enter a contract. Under those circumstances, the contract is

void.

In other cases, an agreement made under duress is voidable.



Reality and Freedom of Consent: Fraud

Fraud may make the contract void or be grounds for rescission or

reformation. Fraud also can give rise to an action for damages.

Fraud is the suggestion, as a fact, of that which is not true, by one who

does not believe it to be true. It generally involves:

1) a false representation or concealment of material fact;

2) made with knowledge of its falsity (or without sufficient

knowledge to warrant a representation);

3) with the intent to induce the person to whom it made to act

upon it;

4) an act in reliance upon the representation; and

5) resulting damage.

The suppression of that which is true, by one having knowledge or belief

of the fact, also is actual fraud.



Reality and Freedom of Consent: Mistake of Fact or Law

If there is mutual assent to the subject matter of the agreement, a

contract results. However, it may be voidable and subject to rescission

when there is a harmful mistake as to some basic or material fact that

induced the aggrieved party to enter it.

A mistake of law generally affords no basis for rescinding a contract

unless all parties are mistaken or one party is aware of the mistake and

fails to correct it.



Reality and Freedom of Consent: Mutual Mistake

If both parties are mistaken and neither is at fault (or both are equally

to blame), the mistake may prevent formation of a contract.

Example: If the mistake involves the subject matter of the contract, the

contract is void because there was no meeting of the minds as to a

material matter. Raffles v. Wichelhaus, 2 H.&C. 906 [two ships named

Peerless].

But: If one party so negligently expressed himself or herself that the

other party reasonably believed an agreement existed, the contract may

be enforced. Chakmak v. H.J. Lucas Masonry, 55 Cal.App.3d 124

(1976).



Reality and Freedom of Consent: Unilateral Mistake

Original rule A contract formed when one party has made a unilateral

mistake is not voidable unless the other party had

reason to know of the mistake or his or her fault caused

the mistake.

Modern rule A party who has made a unilateral mistake cannot

rescind a contract unless: 1) the mistake involved a

basic assumption about the contract; 2) the mistake

had a material effect on the agreed performances; 3) the

mistaken party does not bear the risk of the mistake;

and 4) enforcing the contract would be unconscionable.



Reality and Freedom of Consent: Unilateral Mistake

Original rule A contract formed when one party has made a unilateral

mistake is not voidable unless the other party had

reason to know of the mistake or his or her fault caused

the mistake.

Modern rule A party who has made a unilateral mistake cannot

rescind a contract unless: 1) the mistake involved a

basic assumption about the contract; 2) the mistake

had a material effect on the agreed performances; 3) the

mistaken party does not bear the risk of the mistake;

and 4) enforcing the contract would be unconscionable.



Insurance Contracts: Right to Rescind

California “If a representation is false in a material point, whether

affirmative or promissory, the injured party is entitled to rescind

the contract from the time the representation becomes false.”

Cal. Ins. Code §359

New York “No misrepresentation shall avoid any contract of insurance or

defeat recovery thereunder unless such misrepresentation was

material. “

N.Y. Ins. Law § 3105(b)

Virginia “No statement in an application or in any affidavit made before

or after loss under the policy shall bar a recovery upon a policy

of insurance unless it is clearly proved that such answer or

statement was material to the risk when assumed and was

untrue.”

Va. Code Ann. § 38.2-309




North Carolina “All statements or descriptions in any application for a

policy of insurance, or in the policy itself, shall be

deemed representations and not warranties, and a

representation, unless material or fraudulent, will not

prevent a recover on the policy.”

N.C. Gen. Stat. §58-3-10

Illinois “No such misrepresentation or false warranty shall defeat

or avoid the policy unless it shall have been made with

actual intent to deceive or materially affects either the

acceptance of the risk or the hazard assumed by the

company.”

215 ILCS 5/154




Ohio No answer to any interrogatory made by an applicant in his application for a

policy shall bar the right to recover upon any policy issued thereon, or be used in

evidence at any trial to recover upon such policy, unless it is clearly proved that

such answer is willfully false, that it was fraudulently made, that it is material,

and that it induced the company to issue the policy, that but for such answer

the policy would not have been issued, and that the agent or company had

no knowledge of the falsity or fraud of such answer.

Ohio Rev. Code §3911.06

The falsity of any statement in the application for any policy of sickness and

accident insurance shall not bar the right to recovery thereunder, or be used in

evidence at any trial to recover upon such policy, unless it is clearly proved that

such false statement is willfully false, that is was fraudulently made, that it

materially affects either the acceptance of the risk or the hazard assumed by

the insurer, that it induced the insurer to issue the policy, and that but for such

false statement the policy would not have been issued.

Ohio Rev. Code §3923.14



Insurance Contracts: Materiality

Raffles v. Wichelhaus If the mistake involves the subject matter of the

2 H.&C. 906 contract, the contract is void because there was

no meeting of the minds as to a material matter.

Cal. Ins. Code §334 “Materiality is to be determined not by the event,

but solely by the probable and reasonable

influence of the facts upon the party to whom the

communication is due, in forming his estimate of

the disadvantages or the proposed contract, or in

making his inquiries.”

Evidence that the insurer would have issued a policy on different terms (e.g.,

with higher premiums) can be enough.

Kentucky Cent. Life Ins. Co. v. Marin Bay Park Trust,

958 F.2d 377 (9th Cir.1992); Old Line Life Ins. Co. v.

Superior Court, 229 Cal.App.3d 1600 (1991)

Rescission is Not a 4-Letter Word

How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference

Slide 14

Insurance Contracts: Materiality

“Materiality” is defined as affecting decisions of insurers in general. “Materiality to acceptance of risk or to the hazard assumed by the insurer” has been defined as affecting the decision of the specific insurer. But even in that case, it has been held that a court can decide on the basis of common knowledge.

Santilli v. State Farm Life Ins. Co., 562 P.2d 956, 967 (Ore. 1977) And materiality has also been held to be determined by how “reasonably careful and intelligent men” would have regarded the issue.

Roberts v. National Liberty Group, 512 N.E.2d 792, 794 (III App. 1987)



Insurance Contracts: Who Bears the Risk of Mistake?

Cal. Ins. Code §331 Concealment, “whether intentional or

unintentional, entitles the injured party to rescind

insurance.”

Cal. Ins. Code §330 Concealment is a "[n]eglect to communicate that

which a party knows, and ought to communicate."

Cal. Ins. Code §333 "Each party to a contract of insurance shall

communicate to the other, in good faith, all facts

within his knowledge which are or which he

believes to be material to the contract and as to

which he makes no warranty, and which the other

has not the means of ascertaining.“




Whether the representation was intentionally or unintentionally false does

not alter the injured party's right to rescind the policy.

Telford v. New York Life Ins. Co., 9 Cal.2d 103, 105 (1937)

A fraudulent intent to deceive is not necessary for rescission where an

insured has made a false representation as to a material fact.”

Taylor v. Sentry Life Ins. Co., 729 F.2d 652 (9th Cir. 1984)

An insurer “has the unquestioned right to select those whom it will insure

and to rely upon him who would be insured for such information as it

desires as a basis for its determination to the end that a wise

discrimination may be exercised in selecting its risks."

Robinson v. Occidental Life Ins. Co., 131 Cal.App.2d 581, 586 (1955)




Statutes (and caselaw) vary by jurisdiction: - Materiality - Reliance - Materiality OR fraud - Materiality to acceptance of risk or to the hazard assumed by the insurer OR intent to deceive - Materiality to acceptance of risk or to the hazard assumed by the insurer OR fraud OR reliance - Materiality AND fraud AND reliance AND no knowledge by agent or insurer - Materiality to acceptance of risk or to the hazard assumed by the insurer AND fraud AND reliance



Reality and Freedom of Consent: Mistaken Party’s Negligence

Relief may be granted for mistake “not caused by the neglect of a legal

duty on the part of the person making the mistake.” Cal. Civil Code

§1577.

Not all carelessness constitutes a “neglect of legal duty.” M.F. Kemper

Constr. Co. v. Los Angeles, 37 Cal.2d 696 (1951). Thus, “ordinary”

negligence is not usually a bar to relief. See, e.g., Voge v. Rose, 205

Cal.App.2d 534 (1962) [one party’s fault in failing to know or discover facts

is not a bar unless it amounts to a failure to act in good faith and in

accordance with reasonable standards of fair dealing].

Question: When is the insurer’s neglect to discover the truth

enough to bar rescission?





Post-Claim Underwriting: What is it?

Underwriting is the process by which an insurance company

identifies and evaluates the risk it is being asked to insure.

Since underwriting can be costly, there often is tension between

the need to properly evaluate risks and the need to do so on an

economical basis.

An insurer that chooses not to pursue certain information until

(and unless) a claim is made during the contestable period is

exposed to claims of post-claim underwriting: that it improperly

waited until after the claim to complete its underwriting.

Post-Claim Underwriting: The Theory

If the insurer has a right to investigate the applicant’s eligibility,

it should not be allowed to ignore important information until a

claim arises.

By then, the applicant will have relied on the issuance of a policy

by not seeking insurance from another source.

If the insurer is allowed to rescind the policy based on information

discovered after the claim arises, the applicant may have no

opportunity to obtain any coverage for the loss.

Because the applicant relied to his or her detriment, the insurer

may be estopped from denying that coverage exists.



Post-Claim Underwriting: The Plaintiffs’ Perspective

• An insurer issues coverage based solely on a review of the application

• No investigation of the applicant’s health history is undertaken and, if appropriate, rejecting or rating the applicant at the time coverage is sought.

• Only when a claim is filed within the contestable time period does the insurer undertake a comprehensive investigation.

• If “Material” misrepresentations are uncovered – coverage is rescinded.



Post-Claim Underwriting: The Plaintiffs’ Perspective (Cont’d)

• Insurer is financially able to thoroughly investigate the

applicant

Insurer does so at claim time!

• Insured pays premiums and believes he’s covered under

the policy.

• Rescission at claim time most often results in the individual

unable to obtain new coverage or the beneficiary is denied

life insurance benefits.



Post-Claim Underwriting: Leading Case

Lewis v. Equity Nat. Life Ins. Co., 637 So. 2d 83 (Miss.1994) •Ms. Florence Lewis purchased Intensive Care Policy

$200 per day ICU Benefit Monthly premium was $3

•All application questions answered “No”, including heart conditions. •Policy issued based on the “clean” application. •Claim filed within contestable time for automobile accident – One night in ICU •Insurer first learned of pre-existing heart condition and rescinded policy



Post-Claim Underwriting: Leading Case (Cont’d)

Lewis v. Equity Nat. Life Ins. Co., 637 So. 2d 83 (Miss.1994) •Lawsuit filed seeking Policy Benefit and Extra-Contractual Damages

•Judge grants Partial Summary Judgment to insurer on extra-contractual damages

•Jury awards Ms. Lewis $200 policy benefit

•Appeal on issue on Extra-Contractual Damages

•Mississippi Supreme Court Reversed. Post-Claim Underwriting is illegal Insurer controls the Underwriting Process




Lewis v. Equity Nat. Life Ins. Co., 637 So. 2d 83 (Miss.1994) “An insurer has an obligation to its insureds to conduct its underwriting at the time the policy application is made, not after a claim is filed.” “It is patently unfair for a claimant to obtain a policy, pay his premiums and operate under the assumption that he is insured under a specific risk, only to learn after he submits a claim that he is not insured, and therefore, cannot obtain any other policy to cover the loss”




Lewis v. Equity Nat. Life Ins. Co., 637 So. 2d 83 (Miss.1994) • The Court acknowledged that

Small policies also include low premiums Insurers follow Simplified Underwriting Guidelines

• However, the Court ruled

Insurer still must bear the burden and expense of investigating the medical history of its insured’s prior to issuing coverage. Risk of the insured’s dishonesty is placed on the insurer.



Post-Claim Underwriting: Insurers’ Perspective

•Contacting all applicants to thoroughly review application

responses is time consuming

•Contacting Healthcare providers is expensive and time

consuming

Doctors/hospitals/clinics are very busy – Insurer

inquiries wait.

Significant delay in processing applications.

Staffing must be increased.



Post-Claim Underwriting: Insurers’ Perspective (Cont’d)

National Association of Insurance Commissioners

Report on Rescissions in the Individual Health Insurance

Market – December 3, 2009

• Five year time period – 2004 to 2008 Insurance

Companies were surveyed

• 6.7 million policies were issued

• 27,246 rescissions




• Applicants have the best knowledge of their medical

issues.

• Applicant has a duty to tell the truth on an application –

Insurer has the right to rely upon representations made by

applicant.

Duty of good faith applies to the insured as well as the

insurer.

First-party Insurer is not fiduciary




Underwriting v. Investigation

Application is a form of Underwriting.

Insurer is engaged in post-claim investigation of the

insured’s application responses.

Had insured truthfully disclosed information on the

application – it would have been rejected or rated.



Post-Claim Underwriting: Leading Case

Wesley v. Union Nat. Life Ins. Co.

919 F. Supp. 232(S.D. Miss. 1995)

• Mr. Wesley Purchased a Whole Life Insurance Policy

• Answered “No” to application question regarding Cocaine

or Heroin use or hospitalization therefore.

• Murdered within Contestable time period and Coroner’s

Report revealed Cocaine in blood.

• Investigation disclosed pre-issue hospitalizations for

Cocaine Addiction.

• Policy Rescinded and Beneficiary sued alleging Post-

Claims Underwriting (Lewis) Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting




919 F. Supp. 232(S.D. Miss. 1995)

• District Court Judge granted Insurer’s Summary Judgment

Motion.

• Underwriting decision made based on application

responses.

Insurer has the Right to rely on Application responses.

Any “Yes” answer on Application disqualified Applicant.

Questions on Application are one method to screen

applicants.



Slide 33



919 F. Supp. 232(S.D. Miss. 1995)

• The Insured’s conduct by misrepresenting facts on the

Application - NOT the insurer’s conduct, denied benefits to

the beneficiary.

• Important difference between Claim Investigation and

Underwriting a Policy after the fact.

• “Post-Claim Underwriting” and “Post-Claim Investigation”

are different.



Post-Claim Underwriting: Cases Supporting Wesley

Northwestern Mutual Life Ins. Co. v. Babayn 430 F. 3d 121 (3d Cir. 2005)

We note that the concept of “Post-Claim Underwriting” itself is nebulous…[The Insured’s] concept [citing Lewis]…would usurp [the] general [rule] that an insurer may investigate a questionable claim and prevent insurers from engaging in post-claim investigations, even in the face of incontrovertible evidence that an insured made a clear misrepresentation”



Post-Claim Underwriting: Cases re Post-Claim Investigation

John Hancock Mut. Life Ins. Co. v. Banerji 858 N.E. 2d 277 (Mass. 2006)

“To accept [the insured’s] argument that Hancock was obligated to investigate all of [the insured’s] (or any other insured’s) statements on and…application…would impose an enormous burden on insurers…”

Hussey v. Fidelity and Guaranty Life Ins. Co. 2008 WL 2415084 (S.D. Miss. 2008)

The insurer upon receiving a claim for death benefits “conducted a routine contestable claim investigation”



Post-Claim Underwriting: Cases re Post-Claim Investigation

(Cont’d)

Hornbeck v. Bankers Life Ins. Co.

176 S.W. 3d 699 (Ky. App. 2005)

“[Post-claim underwriting] has not been adopted by

Kentucky courts.*** The questions contained on the

application are intended to elicit information for this

purpose. An insurance company that issues a policy

based on the applicant’s answers, without any

investigation, is not precluded from raising the defense

of fraud or material misrepresentation…[T]he insurer is

justified in denying coverage rescinding the policy”



Post-Claim Underwriting: Cases Prohibiting

• Mitchell, Jr. v. Fortis Ins. Co.

686 S.E. 2d 176 (S.C. 2009), cert. den. _S. Ct._ (March 22, 2010)

• Vining v. Enterprise Financial Group, Inc. 148 F. 3d 1206 (10th Cir. 1998)

• White v. Continental General Ins. Co. 831 F. Supp. 1545 (D.Wyo 1993)

• Ingalls v. Paul Revere Life Ins. Co. 561 N.W. 2d 273 (N.D. 1997)

• Nassan v. National States Ins. Co. 494 N.W. 2d 231 (Iowa, 1993)



Post-Claim Underwriting: Cases Prohibiting (Cont’d)

Ingalls v. Paul Revere Life Ins. Group 561 N.W. 2d 273 (N.D. 1997)

• “Field men…are going to be judged…they are going to get

raises, they are going to keep their jobs if they can close out

or finalize 25 percent of the [open] claims that are sent out

to them…”




Nassan v. National States Ins. Co 494 N.W. 2d 231 (Iowa, 1993)

• “[The insurer’s] quotas for underwriters amounted to reviewing eighty-five applications per day.”

• “[T]his would necessarily result in the rubber stamping of policy applications with no serious effort to weed out high-risk applicants.”

• “The Company’s [post-claim underwriting] practices reflected a broad plan to run large amounts of cash through the company that could be invested and ultimately paid out to the company’s principals prior to its collapse from an unreasonably low premium structure.”




White v. Continental Gen. Ins. Co. 831 F. Supp. 1545 (D.Wyo. 1993)

• “Continental had experienced severe financial losses in excess of $8,500,000…Therefore, post-claims underwriting would allow Continental to increase its revenues by taking on new policyholders, while simultaneously decreasing its expenditures by denying coverage when claims were submitted.”

• “Every Continental underwriter is required to amass 100 points per day in order to keep their job. 2.5 points are awarded if an underwriter either pays or denies a claim, however, 5 points are awarded if the underwriter can find a pre-existing condition that would enable Continental to deny coverage.”




Vining v. Enterprise Financial Group, Inc. 143 F. 3d 1206 (10th Cir. 1998) • “a deliberate, willful pattern of abusive conduct by Enterprise in handling claims under its life insurance policies.***[A]s a matter of course Enterprise would rescind…on the grounds that the insured had made material misrepresentations on the insurance application regardless of whether Enterprise in fact would have declined to write the policy had it known that information at the time the policy was written.***Enterprise engaged in a systematic bad faith scheme of canceling policies without determining whether it had good cause to do so.”




Vining v. Enterprise Financial Group, Inc. 143 F. 3d 1206 (10th Cir. 1998)

The Court noted:

“Enterprise’s rescission conduct and loss ratios bear

some resemblance to those of the fictional insurance

company in John Grisham’s novel “The Rainmaker” and

in the motion picture of the same name.




Mitchell, Jr. v. Fortis Ins. Co 686 S.E. 2d 176 (S.C. 2009) • Evidence showed that Fortis has a company policy of targeting policyholders with HIV. A computer program targeted every policyholder recently diagnosed with HIV for an automatic fraud investigation, like Mitchell, insurance policies often were cancelled on erroneous information. Under such circumstances, the South Carolina Supreme Court said:

“Fortis post-claim underwriting practices played a pivotal role in the harm inflicted upon Mitchell…This evidence was probative of Fortis’s bad faith conduct…”



Post-Claim Underwriting: California Cases Prohibiting

•Ticconi v. Blue Shield of California Life & Health Ins. Co.

160 Cal. App. 4th 528 (2008)

•Blue Cross of California, Inc. v. Supreme Court 180 Cal. App. 4th 138 (2009)

•Hailey v. California Physicians’ Services 158 Cal. App. 4th 452 (2007)

•Callil v. California Physicians’ Services 2008 WL 5050431 (Cal. App. 2008)

•Nieto v. Blue Shield of California Life & Health Ins. Co 181 Cal. App 4th 608 (2010)

•Nazaretyan v. California Physicians’ Services _Cal. App. 4th _ (2010)



Knox-Keene Health Care Service Plan Act of 1975

• “To promote the delivery and quality of health and medical care to the people of the state of California who enroll in, or subscribe for the services rendered by, a health care service plan or specialized health care service plan…”

• Health care service plans are not considered to be insurance companies within the meaning of California Insurance code.

Insurers indemnify against loss, damage and liability Health care service plans arrange for health-care services for their members through a contracted network of providers



Health Insurance Access and Equity Act of 1993

(Section 1389.3)

“No health care service plan shall engage in the practice of post-claims underwriting. For purposes of this section, “post-claims underwriting” means the rescinding, canceling, or limiting of a plan contract due to the plan’s failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the plan contract. This section shall not limit a plan’s remedies upon a showing of willful misrepresentation.”



Hailey v. California Physicians’ Service

• Cindy Hailey completed an application for herself, husband, and son seeking health insurance from Blue Shield • No medical problems were disclosed – coverage was issued. • Mr. Hailey soon thereafter developed stomach problems requiring hospitalization and then, due to a car accident, became totally disabled, requiring a two month hospital confinement. • Blue Shield investigated and learned Mr. Hailey had a number of medical conditions, resulting in the coverage being rescinded. • Trial Court granted Blue Shield Summary Judgment



Hailey v. California Physicians’ Service (Cont’d)

• Appellate Court Reversed and remanded for trial – citing Section 1389.3

Blue Shield asked questions on the application but did not follow up until after the claim was filed – then conducted an extensive investigation into Mr. Hailey’s medical conditions.

• The Appellate Court Said: We agree nothing in the Hailey’s application raised any questions relating to [Mr. Hailey’s] health. But can a provider “complete medical underwriting” within the meaning of Section 1389.3 by blindly accepting the responses on a subscriber’s application without performing any inquiry into whether the responses were the result of mistake or inadvertence.



Slide 49

Hailey v. California Physicians’ Service (Cont’d)

•The Appellate Court further stated:

How easy to obtain medical records from the family physician before issuing coverage The likelihood of inadvertent error. And the potentially catastrophic consequences of an applicant’s error in completing the application

•A health care service plan must make “reasonable efforts” to ensure it has all the necessary information to accurately assess the risk before issuing the contract.

•Because the circumstances of each case vary, the Court did not set forth what pre-issue steps must be taken – this is a question of fact.



Callil v. California Physicians’ Service

•Ms. Callil was covered under a Blue Shield group HMO plan, which did not require individual underwriting. •To increase her physician network, Ms. Callil applied for an individual health plan with Blue Shield, completing an application. •No health problems were disclosed, other then one ER visit for pain cramps. Blue Shield, although having a signed medical authorization by Ms. Callil, did no follow up investigation – coverage was issued.



Callil v. California Physicians’ Service (Cont’d)

•Soon thereafter, Ms. Callil underwent a hysterectomy and

Blue Shield then investigated her medical history.

A Standard Practice when medical services are

requested within the first two years of coverage

Ms. Callil had, in fact, sought medical advice and

treatment in the weeks leading up to her application.

Coverage was rescinded




•The trial court granted Blue Shield’s Summary Judgment

motion.

Ms. Callil did not disclose any medical conditions on her

application – Blue Shield had no obligation to disbelieve

Ms. Callil’s representations.

Where there is no disclosure that places a reasonable

insurer on notice of the need to investigate, no further

action is required.




•The Appellate Court, citing Hailey, reversed.

Triable issues whether Blue Shield had completed its

necessary medical underwriting and taken reasonable

steps to confirm the accuracy and completeness of Ms.

Callil’s application

Blue Shield, aware of Ms. Callil’s last doctor visit,

conducted no follow-up investigation.



Nazaretyn v. California Physicians’ Service

•Plaintiffs sought health coverage under a Blue Shield health care service plan. •Both insured’s spoke limited English and relied on an insurance broker to complete the application. They would later assert the broker asked no health questions. •Coverage was issued and within the two year contestable time period, pre-mature twins were born. •Blue Shield then investigated and learned of IVF (in vitro fertilization) treatments prior to the application being completed. •The application specifically inquired about such treatments and the false answer resulted in rescission. •The trial court granted summary judgment to Blue Shield.



Nazaretyn v. California Physicians’ Service (Cont’d)

•Appellate Court held such procedures cannot, as a matter

of law, establish reasonable efforts to ensure the application

is accurate and correct.

•Blue Shield’s standard procedures may often yield no

valuable information.

•Given the likelihood of inadvertent error, the service plan

must conduct a reasonable check on the information

provided.



California: Open Issues

• Will the health care service plan decisions be so limited?

• California Insurance Code requires an applicant to disclose all facts within his knowledge which are material to the contract (Ins. Code Sec. 332).

• Will the Hailey decision apply to insurers?



California: Open Issues (Cont’d)

• California Insurance Code Section 10384:

No insurer issuing or providing any policy of disability

insurance covering hospital, medical, or surgical

expenses shall engage in the practice of post-claims

underwriting. For purposes of this section, “Post-Claims

Underwriting” means the rescinding, canceling, or

limiting of a policy or certificate due to the insurer’s

failure to complete medical underwriting and resolve all

reasonable questions arising from written information

submitted on or with and application before issuing the

policy or certificate.



Nieto v. Blue Shield of California Life & Health Ins. Co.

• Ms. Nieto and her domestic partner applied for an individual and family health plan. • The application listed only a “bulging disc” over five years ago, for Ms. Nieto’s partner. Ms. Nieto specifically denied taking any medications and her last doctor visit was 3 years earlier the flu. • Blue Shield reviewed its internal databases and found no information. So too, Blue Shield inquired about the bulging disc and was told this was an error – there are no current back problems. • Coverage was issued and soon thereafter, Ms. Nieto sought approval for a hip replacement. • Blue Shield’s subsequent investigation disclosed multiple medications and medical treatments by an orthopedist and chiropractor. Coverage was rescinded.



Nieto v. Blue Shield of California Life & Health Ins. Co. (Cont’d)

•The trial court granted Summary Judgment to Blue Shield

•The Appellate Court Affirmed!

•Blue Shield, following Ins. Code Sec. 10384, satisfied all the requirements necessary to support rescission.

Blue Shield had no duty to seek additional information

Even if family doctor contacted, nothing new would have been discovered Ms. Nieto did not disclose Orthopedic or Chiropractic physicians Negligent or inadvertent misrepresentations are sufficient materiality of the misrepresentations established



Nieto v. Blue Shield of California Life & Health Ins. Co. (Cont’d)

• Ins. Code Section 332 requires the parties to an insurance contract to communicate to the other in good faith all facts within their knowledge which is material to the contract. • Hailey was rejected – decision under Knox-Keene Act.

• Blue Shield’s underwriting process included sufficient steps to ensure the accuracy and completeness of the application. • Blue Shield did follow up on application responses.



State Statutes and Regulations

• Alabama

– Ala. Admin. Code r. 482-1-091-.09 (2007)

• Arizona

– Ariz. Admin. Code § R20-6-1011 (2007)

• Arkansas

– 054- 00 Ark. Code § (2008)

• California

– Cal. Health & Safety Code § 1389.3 (2008)

– Cal. Ins. Code § 10384 (2007)

• Colorado

– 3 Colo. Code Regs. § 702-4 (2008)

• Connecticut

– Conn. Gen. Stat. § 38a-477b (2008)

– Conn. Agencies Regs. § 38a-501-14 (2008)

– Conn. Agencies Regs. § 38a-528-7 (2008)

• Delaware

– 18-1400-1404 Del. Code Regs. § 11 (2008)

• District of Columbia

– D.C. Mun. Regs. 26-2607 (2008)

• Florida

– Fla. Admin. Code Ann. Rr. 69B-157.109 (2008)

– Fla. Admin. Code Ann. Rr. 69O-157.109 (2008)

• Hawaii

– Haw. Rev. Stat. § 431:10H-218 (2007)

• Idaho

– Idaho Admin. Code r. 18.01.60.015 (2007)

• Illinois

– 50 Ill. Code R. 2012.65 (2008)

• Indiana

– 760 Ind. Admin. Code 2-5-1 (2007) (et. seq.)

• Iowa

– IOWA Admin. Code 191-39.8(514G) (2008)

• Louisiana

– La Admin. Code 37:XIII §1921 (2007)

• Maine

– 02-031-425 Me. Code R. § 11 (2008)

• Maryland

– Md. Code Regs. 31.14.01.09 (2008)

• Massachusetts

– 211 Mass. Code Regs. 65.11 (2008)

– 211 Mass. Code Regs. 146.11 (2008)

• Michigan

– Mich. Admin. Code r. 550.201 (2008)

– Mich. Admin. Code r. 550.202 (2008)

– Mich. Admin. Code r. 550.212 (2008) Rescission is Not a 4-Letter Word


Slide 62


• Minnesota

– Minn. Stat. § 62S.21 (2007)

• Mississippi

– 28-000-054 Miss. Code. R. § 9 (2008)

• Missouri

– Mo. Code Regs. Ann. tit. 20 § 400-4.100(2008)

• Montana

– Mont. Code Ann. § 33-18-215 (2007)

– Mont. Admin. R. 6.6.3106 (2008)

• New Hampshire

– N.H. Code Admin. R. Ann. Ins. 3601.10 (2008)

• New Jersey

– N.J. Admin. Code 11:4-34.9 (2008)

• New Mexico

– N.M. Code R. 13.10.15.22 (2008)

• New York

– N.Y. C.C.R.& Regs. Title11 §52.25(d) (2008)

• North Carolina

– 11 N.C. Admin. Code 12.1007 (2007)

• North Dakota (model regs)

– N.D. Admin. Code 45-06-05-05.1 (2007)

– N.D. Admin. Code 45-06-05.1-09 (2007)

• Ohio

– Ohio Admin. Code 3901-4-01 (2008)

• Oregon

– Or. Admin. R. 836-052-0576 (2008)

• Pennsylvania (model reg)

– 31 Pa. Code § 89a.110 (2008)

• Rhode Island

– 02-030-044 R.I. Code R. §9 (2008)

• Tennessee

– Tenn. Comp. R. & Regs. R. 0780-1-61.11

(2008)

• Texas

– 28 Tex. Admin. Code § 3.3823 (2008)

• Vermont

– 21-020-024 Vt. Code R. § 8 (2008)

• Virginia

– 14 Va. Admin. Code § 5-200-80. (2007)

• West Virginia

– W. Va. Code R. § 114-32-6 (2008)

• Wyoming

– 044-000-037 Wyo. Code R. § 8 (2008)




The following states do not have any statutory or regulatory provisions

relating to post-claim underwriting :

– Alaska

– Georgia

– Kansas

– Kentucky

– Nebraska

– Nevada

– Oklahoma

– South Carolina

– South Dakota

– Utah

– Washington



Post-Claim Underwriting: The Plaintiffs’ Bar Reacts

“Insurance companies are weighing their duty to investigate a

consumer’s background before issuing coverage against the time,

resources and money involved. They are resorting to post-claim

underwriting.”

www.law360.com

Many insurance companies don’t perform this underwriting prior to the

policy being issued. This can be described as a “heads I win and tails

you lose” scenario in which you will likely be the loser. If you die within

the two year period, the insurance company will mount an extensive

investigation once the claim for benefits has been filed. This is what is

known as “post-claim underwriting.” They hold all of the cards in this

game.”

www.vpalaw.com




“From the insurer's perspective, it's the perfect scam. The insurer gets

to collect premiums on a policy, but does not have to pay the benefits

promised.”

www.alaskainjurylawblog.com

“Post-claim underwriting is an unfair insurance practice in which an

insurer issues a policy to an applicant without thoroughly reviewing their

medical records and only upon the submission of a claim, conduct a

thorough examination. If the insurer then finds a medical condition that

would have disqualified the applicant from coverage in the first place,

the insurer then attempts to rescind the policy, leaving the applicant

uninsured.”

www.ingramlawyers.com




“Underwriting/assessment of the risk to be insured should be done

before a policy is issued and before a loss is incurred and claim made.

Some insurance companies, however, perform little or no underwriting/

investigation during the application process, and instead only engage in

underwriting after a claim is made with an eye toward avoiding payment

of the claim on account of a misrepresentation about one's health

history on his or her application. This is called post claim underwriting.

It is illegal in some states, and as this practice becomes more widely

exposed it is being derided as unfair and impermissible.”

www.cleveland.injuryboard.com




“. . . ‘post-claim underwriting’ occurs when the insurer examines representations

made on the policy application only AFTER medical claims have been

submitted. If ANY inaccuracies are uncovered, the company CANCELS THE

COVERAGE ALTOGETHER. The insured is left with the medical bills and no

insurance at a time he or she needs it more than ever.”

www.californiainsurancelawyerblog.com

There are “many excuses for rescission or what is often referred to as post-

claim underwriting. In nearly every case, the policyholder is blamed for an

alleged mistake made on the original application. Rescission is the insurance

company's way of saying ‘gotcha.’ They pore through the fine print looking for a

reason to deny your claim. In fact, the application process itself is complicated

and encourages mistakes — and a reason for rescission.”

www.stephencryanpc.com




One way that insurance companies try to avoid paying claims is by reevaluating

your policy after you make a claim. In other words, insurance companies take a

second look at how and why your policy was issued in the first place with the

assumption that since you are in need of benefits, the insurance company

obviously miscalculated how much of a risk you would be, therefore, the policy

should never have been issued. It then cancels/rescinds the policy and returns

the premiums that you have paid. This is called "post claim underwriting" -

when the insurance company does its risk calculation after you file a claim.

Insurance companies who do this are seriously harming the public because they

allow for people to falsely believe that they have insurance protection. Once the

policy is issued, folks stop seeking additional insurance coverage and after they

need benefits, it is generally too late for them to get any other type of coverage.

In other words, they are hung out to dry.

www.explainmyclaim.com




Post insurance underwriting occurs when an insurance company

refuses to pay your claim for a loss that should have been covered on

the grounds that you were a bad risk and the policy should never have

been issued, then cancels or rescinds the policy.

www.freeadvice.com

Rescission, sometimes known as "post claims underwriting," is the

loophole health insurers use to avoid paying out benefits on cancer

claims and various other serious illness. They look for and find errors in

the policyholder's paperwork that can help them justify canceling a

policy.

Frank Darras, PR Newswire




Are you a victim of post claim underwriting?

Advocate Law Group has successfully litigated

dozens of post claim underwriting lawsuits. Call

us at 888-487-5342 to see if we can help you.

Consultations are free.

www.advocatelawgroup.com



Settlements and Fines: PacifiCare

PacifiCare did not rescind coverage, but prospectively canceled IFP

HMO coverage for specific enrollees.

On June 11, 2008, PacifiCare of California voluntarily entered a

settlement agreement with the DMHC to resolve claims of people whose

IFP HMP coverage was canceled.

- Administrative fine of $50,000

- Corrective action plan to address the completion of

medical underwriting

- Additional fine of $500,000 for violating corrective action

plan



Settlements and Fines: Kaiser and Health Net

DMHC alleged that Kaiser and Health Net enrolled members then

rescinded membership agreements in violation of a statute prohibiting

post-claim underwriting [Cal. Health & Safety Code Section 1389.3].

In May 2008, Kaiser and Health Net agreed to:

- offer the former members the option to purchase healthcare

coverage without medical underwriting

- give the former members the option to arbitrate any claim

disputes that arose while not covered

- pay $300,000 in administrative fines



Settlements and Fines: Health Net

In September 2008, Health Net entered another agreement to:

- reinstate 926 members without underwriting

- pay expenses for reasonable and medically necessary care

that would have been covered [est. $14 million]

- pay $3.6 million in penalties

- pay an additional $3.6 million penalty if a follow-up

examination finds that it did not correct all deficiencies

In the agreement, Health Net did not admit any wrongdoing.



Class Action Litigation: Coast Plaza Doctors v. WellPoint

By asserting standing as assignees of health plan members’ benefits,

several California hospitals and a hospital association (representing 450

hospitals) sought damages resulting from rescission practices.

Settlement was approved on October 6, 2008:

- Fund of $11,650,000 to be shared pro rata by hospitals

(includes a $2,980,000 attorneys’ fee award)

- Separate fund of $150,000 to reimburse rescinded members

who paid their own hospital bills after coverage was rescinded

- Class members provided a general release of all claims

relating to rescinded members



Class Action Litigation: Ticconi v. Blue Shield of California

Blue Shield rescinded the class representative’s coverage 10 months

after coverage began and after he incurred $100,000 in medical bills.

Class action sought to reverse all post-claim rescissions by Blue Shield

that involved a material misrepresentation in the application process.

The Los Angeles County Superior Court refused to certify the class,

reasoning that the class included persons with “unclean hands.”

The appellate court reversed, reasoning that the defense of “unclean

hands” was not available to statutory claims and Blue Shield’s failure to

physically attach a copy of insureds’ applications to their policies was a

“common” fact.



Class Action Litigation: Rodriguez v. Blue Cross

Plaintiff incurred more than $100,000 in medical bills, after which Blue

Cross rescinded his coverage for a material misrepresentation in the

application.

- Plaintiff brought a putative class action which stated claims for

breach of contract, unfair competition and declaratory relief.

- Blue Cross moved to compel arbitration.

Appellate court agreed that the plan documents did not give Blue Cross

a right to arbitrate.

Class allegations (of 2 plaintiffs) were dismissed by stipulation in May

2010.



Class Action Litigation: Horton v. WellPoint

Class action filed on behalf of 6,000 members of the putative class.

California Medical Association moved to intervene in 2006, alleging that

when a plan rescinds an individual policy it also refuses to pay providers

after they have provided treatment.

Preliminary settlement was reached in May 2007 but terminated in

December 2007. New settlement is awaiting court’s approval:

- Offer to reinstate coverage without medical underwriting

- Choice between payments between $100 - $90,000 per

member or reimbursement of actual out-of-pocket expenses

that would have been covered

- Use of “enhanced” underwriting and rescission procedures



Class Action Litigation: Horton v. WellPoint

Enhanced underwriting and rescission procedures include:

- Application Review Committee: all rescissions must be

approved by a committee that includes a Medical Director

- Member Liaison Program: dedicated liaisons make

reasonable efforts to contact members before submission to

Application Review Committee to gather information and

explain the purpose and potential results of retroactive review-

-Third Party Review: all rescissions must be reviewed and

approved by a third party

- Internal Appeals: if member contests a rescission, it must be

reviewed by a second Application Review Committee



Class Action Litigation: City of Los Angeles v.

Anthem Blue Cross and Health Net

Los Angeles’ City Attorney filed complaints against Anthem Blue Cross

and Health Net which alleged they retroactively canceled health benefits

coverage and engaged in unlawful post-claim underwriting.

Complaint seeks $1 billion in restitution and penalties.

Appellate court ruled:

- City Attorney has standing to enforce California’s health care

plan laws

- Case may proceed without regard to regulatory proceedings

- Outcome is not for DOI or DMHC to decide



House Committee On Oversight and Government Reform

“The current regulatory framework governing this market is a haphazard collection of

inconsistent state and federal laws. Protections for consumers and enforcement

actions by regulators vary widely depending on where individuals live. The documents

produced to the Committee indicate that insurance companies take advantage of these

inconsistent laws to engage in a series of controversial practices.”

Insurance companies rescind coverage:

- even when discrepancies are unintentional or caused by others

- for conditions that are unknown to policyholders

- for discrepancies unrelated to the medical conditions for which

patients seek medical care

- for family members who were not involved in misrepresentations

Insurance companies automatically investigate medical histories for all

policyholders with certain conditions and have evaluated employee performance based

on the amount of money their employees saved the company through rescissions.



New California Regulations (Effective August 18, 2010)

11 Cal. Admin. Code Section 2274.74:

After receiving a claim, a request for service, a request for

verification of eligibility, or other notice of a claim, an insurer is

prohibited from rescinding a policy unless it:

a) Completes medical underwriting by obtaining “health history

information about an applicant necessary to complete medical

underwriting from at least one source . . . other than self-

reported information provided by the applicant;” and

b) Resolves all reasonable questions arising from written

information submitted on or with an application by obtaining

and using “any necessary additional information external to the

health insurance application to resolve inconsistencies or

conflicts in the application.”



New California Regulations (Cont’d)

Complete medical underwriting must include:

1) Obtaining the applicant’s personal health record and

health history information from external verifiable sources;

2) Obtaining and evaluating commercially available medical

underwriting information;

3) Reviewing and evaluating each applicant’s health status

and health history by comparing personal health records

and self-reported information to other reasonably available

sources of information (e.g., medical records and prior

claim history);




Complete medical underwriting also must include:

4) Checking reasonably available health history information

for accuracy, completeness and consistency;

5) Verifying (with agent and otherwise) that application

information is accurate and complete;

6) Resolving all reasonable questions under underwriting

guidelines and ratings criteria; and

7) Determining whether to accept the “identified risk” before

issuing a policy.




Reasonable questions must be resolved by:

1) Applying medical underwriting guidelines to material

information provided by or through the agent;

2) Identifying any information in the application that appears

to be: a) inconsistent, ambiguous, doubtful or incomplete;

b) in conflict with other information in the application; or c)

in conflict of other information of which the insurer is

aware;

3) Conducting “reasonable and appropriate follow-up” of any

inadequate, unclear, incomplete, doubtful or otherwise

questionable or inconsistent material information;




Reasonable questions also must be resolved by:

4) Obtaining (and documenting) clarification from the

applicant, as reasonably and necessary, and resolving all

inconsistencies, doubts and questions before issuing a

policy;

5) Identifying any responses in the application which indicate

the applicant did not understand the question, partially

answered it, had doubts about the answer, or provided (or

omitted) answers that conflict with other information

gathered during underwriting; and

6) Obtaining and evaluating additional information to resolve

each such response. Rescission is Not a 4-Letter Word


Slide 86

New California Regulations – ACLHIC v. California DOI

Petition for administrative mandamus and complaint for declaratory relief

filed on August 16, 2010.

Challenges that the new regulations:

1) Improperly expand the definition of post-claim underwriting;

2) Contradict statutory provisions allowing insurers to take action when

confronted with insurance fraud;

3) Improperly uses the statutory prohibitions against post-claim

underwriting to prohibit rate adjustments;

4) Imposes specific underwriting requirements on insurers who are

entitled to rely on the applicant’s truthfulness;

5) Changes the statutory requirement that an application be either

attached to or endorsed on the policy;

6) Imposes a 90-day period for completing underwriting that is not

authorized by any statute. Rescission is Not a 4-Letter Word


Slide 87

QUESTIONS?



Robert R. Pohls, Managing Attorney

Pohls & Associates

10940 Wilshire Boulevard, Ste. 1600

Los Angeles, California 90024

Phone: 310.694.3092

Fax: 310.694.3093

Email: [email protected]

Gary Schuman, Senior Counsel - Litigation

Combined Insurance Company of America

1000 N. Milwaukee Avenue

Glenview, Illinois 60025

Phone: 847.953.1506

Fax: 773.506.5080

Email: [email protected]

Rescission is Not a Four-Letter Word

Documents

enterprise financial group

class action litigation

california physicians service

unilateral mistakeoriginal rule

plaintiffs bar reacts

appellate court reversed

california life

reasonable questions arising