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.
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International Claim Association ♦ 101st Annual Education Conference Slide 3
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.
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International Claim Association ♦ 101st Annual Education Conference Slide 4
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.
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International Claim Association ♦ 101st Annual Education Conference Slide 5
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.
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International Claim Association ♦ 101st Annual Education Conference Slide 6
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.
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International Claim Association ♦ 101st Annual Education Conference Slide 7
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).
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 8
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.
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International Claim Association ♦ 101st Annual Education Conference Slide 9
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.
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International Claim Association ♦ 101st Annual Education Conference Slide 10
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
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Insurance Contracts: Right to Rescind
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
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International Claim Association ♦ 101st Annual Education Conference Slide 12
Insurance Contracts: Right to Rescind
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
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International Claim Association ♦ 101st Annual Education Conference Slide 13
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)
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 15
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.“
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International Claim Association ♦ 101st Annual Education Conference Slide 16
Insurance Contracts: Who Bears the Risk of Mistake?
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)
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 17
Insurance Contracts: Who Bears the Risk of Mistake?
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 18
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?
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 19
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
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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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 21
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 22
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 23
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 24
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 25
Post-Claim Underwriting: Leading Case (Cont’d)
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”
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 26
Post-Claim Underwriting: Leading Case (Cont’d)
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 27
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.
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International Claim Association ♦ 101st Annual Education Conference Slide 28
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
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International Claim Association ♦ 101st Annual Education Conference Slide 29
Post-Claim Underwriting: Insurers’ Perspective (Cont’d)
• 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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 30
Post-Claim Underwriting: Insurers’ Perspective (Cont’d)
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.
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International Claim Association ♦ 101st Annual Education Conference Slide 31
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
International Claim Association ♦ 101st Annual Education Conference Slide 32
Post-Claim Underwriting: Leading Case (Cont’d)
Wesley v. Union Nat. Life Ins. Co.
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.
Rescission is Not a 4-Letter Word
How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference
Slide 33
Post-Claim Underwriting: Leading Case (Cont’d)
Wesley v. Union Nat. Life Ins. Co.
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 34
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”
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 35
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”
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 36
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”
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International Claim Association ♦ 101st Annual Education Conference Slide 37
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)
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
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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…”
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
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Post-Claim Underwriting: Cases Prohibiting (Cont’d)
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.”
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 40
Post-Claim Underwriting: Cases Prohibiting (Cont’d)
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.”
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
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Post-Claim Underwriting: Cases Prohibiting (Cont’d)
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.”
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 42
Post-Claim Underwriting: Cases Prohibiting (Cont’d)
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 43
Post-Claim Underwriting: Cases Prohibiting (Cont’d)
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…”
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 44
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)
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 45
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 46
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.”
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 47
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 48
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.
Rescission is Not a 4-Letter Word
How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 50
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 51
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 52
Callil v. California Physicians’ Service (Cont’d)
•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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 53
Callil v. California Physicians’ Service (Cont’d)
•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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 54
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 55
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 56
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?
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 57
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 58
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 59
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 60
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 61
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
How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference
Slide 62
State Statutes and Regulations
• 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)
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 63
State Statutes and Regulations
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 64
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 65
Post-Claim Underwriting: The Plaintiffs’ Bar Reacts
“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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 66
Post-Claim Underwriting: The Plaintiffs’ Bar Reacts
“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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 67
Post-Claim Underwriting: The Plaintiffs’ Bar Reacts
“. . . ‘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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 68
Post-Claim Underwriting: The Plaintiffs’ Bar Reacts
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 69
Post-Claim Underwriting: The Plaintiffs’ Bar Reacts
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 70
Post-Claim Underwriting: The Plaintiffs’ Bar Reacts
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 71
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 72
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 73
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 74
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 75
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 76
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 77
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 78
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 79
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
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 80
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 81
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.”
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 82
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);
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 83
New California Regulations (Cont’d)
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.
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 84
New California Regulations (Cont’d)
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;
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 85
New California Regulations (Cont’d)
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
How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference
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
How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference
Slide 87
QUESTIONS?
Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting
International Claim Association ♦ 101st Annual Education Conference Slide 88
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]