Rescission is Not a Four-Letter Word

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2010 ICA Annual Education Conference

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Rescission is Not a Four-Letter Word

  1. 1. How to Recognize and Avoid Post-Claim UnderwritingRobert R. Pohls, Managing Attorney Gary Schuman, Senior Counsel - LitigationPohls & Associates Combined Insurance Company of AmericaLos Angeles, California Glenview, IllinoisInternational Claim Association101st Annual Education ConferenceAustin, Texas ♦ October 5, 2010
  2. 2. Contract Formation: Essential ElementsA 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
  3. 3. Contract Formation: ConsentEvery contract requires consenting parties. However, there is norequirement for a subjective meeting of the minds. Absent fraud, duress,or mistake, the parties’ consent is determined by the reasonablemeaning of their words and acts – ie., not from their unexpressedintentions or understanding.The manifestation of a party’s consent usually is accomplished through anoffer and an acceptance. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 3
  4. 4. Reality and Freedom of Consent: Undue InfluenceWhen a person gives his or her consent to a contract because of undueinfluence, the contract is voidable and their only remedy is to rescindthe 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. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 4
  5. 5. Reality and Freedom of Consent: DuressDuress is the unlawful confinement of a person, a member of thatperson’s family, or the person’s property.In rare cases of physical compulsion, a person is caused to manifestconsent when the person does not understand the transaction or does notintend to enter a contract. Under those circumstances, the contract isvoid.In other cases, an agreement made under duress is voidable. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 5
  6. 6. Reality and Freedom of Consent: FraudFraud may make the contract void or be grounds for rescission orreformation. 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 whodoes 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 beliefof the fact, also is actual fraud. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 6
  7. 7. Reality and Freedom of Consent: Mistake of Fact or LawIf there is mutual assent to the subject matter of the agreement, acontract results. However, it may be voidable and subject to rescissionwhen there is a harmful mistake as to some basic or material fact thatinduced the aggrieved party to enter it.A mistake of law generally affords no basis for rescinding a contractunless all parties are mistaken or one party is aware of the mistake andfails to correct it. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 7
  8. 8. Reality and Freedom of Consent: Mutual MistakeIf both parties are mistaken and neither is at fault (or both are equallyto blame), the mistake may prevent formation of a contract.Example: If the mistake involves the subject matter of the contract, thecontract is void because there was no meeting of the minds as to amaterial matter. Raffles v. Wichelhaus, 2 H.&C. 906 [two ships namedPeerless].But: If one party so negligently expressed himself or herself that theother party reasonably believed an agreement existed, the contract maybe 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
  9. 9. Reality and Freedom of Consent: Unilateral MistakeOriginal 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. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 9
  10. 10. Reality and Freedom of Consent: Unilateral MistakeOriginal 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. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 10
  11. 11. Insurance Contracts: Right to RescindCalifornia “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 §359New 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 Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 11
  12. 12. Insurance Contracts: Right to RescindNorth 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. §58-3-10Illinois “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 Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 12
  13. 13. Insurance Contracts: Right to RescindOhio 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 Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 13
  14. 14. Insurance Contracts: MaterialityRaffles v. Wichelhaus If the mistake involves the subject matter of the2 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
  15. 15. Insurance Contracts: Materiality“Materiality” is defined as affecting decisions of insurers in general.“Materiality to acceptance of risk or to the hazard assumed by theinsurer” has been defined as affecting the decision of the specificinsurer.But even in that case, it has been held that a court can decide on thebasis 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 theissue. 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
  16. 16. 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.“ Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 16
  17. 17. Insurance Contracts: Who Bears the Risk of Mistake?Whether the representation was intentionally or unintentionally false doesnot alter the injured partys 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 aninsured 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 insureand to rely upon him who would be insured for such information as itdesires as a basis for its determination to the end that a wisediscrimination 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
  18. 18. 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
  19. 19. Reality and Freedom of Consent: Mistaken Party’s NegligenceRelief may be granted for mistake “not caused by the neglect of a legalduty on the part of the person making the mistake.” Cal. Civil Code§1577.Not all carelessness constitutes a “neglect of legal duty.” M.F. KemperConstr. 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, 205Cal.App.2d 534 (1962) [one party’s fault in failing to know or discover factsis not a bar unless it amounts to a failure to act in good faith and inaccordance 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
  20. 20. Post-Claim Underwriting: What is it?Underwriting is the process by which an insurance companyidentifies and evaluates the risk it is being asked to insure.Since underwriting can be costly, there often is tension betweenthe need to properly evaluate risks and the need to do so on aneconomical basis.An insurer that chooses not to pursue certain information until(and unless) a claim is made during the contestable period isexposed to claims of post-claim underwriting: that it improperlywaited until after the claim to complete its underwriting. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 20
  21. 21. Post-Claim Underwriting: The TheoryIf the insurer has a right to investigate the applicant’s eligibility,it should not be allowed to ignore important information until aclaim arises.By then, the applicant will have relied on the issuance of a policyby not seeking insurance from another source.If the insurer is allowed to rescind the policy based on informationdiscovered after the claim arises, the applicant may have noopportunity to obtain any coverage for the loss.Because the applicant relied to his or her detriment, the insurermay 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
  22. 22. Post-Claim Underwriting: The Plaintiffs’ Perspective• An insurer issues coverage based solely on a review ofthe application• No investigation of the applicant’s health history isundertaken and, if appropriate, rejecting or rating theapplicant at the time coverage is sought.• Only when a claim is filed within the contestable timeperiod does the insurer undertake a comprehensiveinvestigation.• If “Material” misrepresentations are uncovered – coverageis 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
  23. 23. Post-Claim Underwriting: The Plaintiffs’ Perspective (Cont’d)• Insurer is financially able to thoroughly investigate theapplicant Insurer does so at claim time!• Insured pays premiums and believes he’s covered underthe policy.• Rescission at claim time most often results in the individualunable to obtain new coverage or the beneficiary is deniedlife 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
  24. 24. Post-Claim Underwriting: Leading CaseLewis 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 heartconditions.•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 andrescinded 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
  25. 25. 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-ContractualDamages•Judge grants Partial Summary Judgment to insurer onextra-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
  26. 26. 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 itsunderwriting at the time the policy application is made, notafter a claim is filed.”“It is patently unfair for a claimant to obtain a policy, pay hispremiums and operate under the assumption that he isinsured under a specific risk, only to learn after he submits aclaim that he is not insured, and therefore, cannot obtainany 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
  27. 27. 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
  28. 28. Post-Claim Underwriting: Insurers’ Perspective•Contacting all applicants to thoroughly review applicationresponses is time consuming•Contacting Healthcare providers is expensive and timeconsuming Doctors/hospitals/clinics are very busy – Insurer inquiries wait. Significant delay in processing applications. Staffing must be increased. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 28
  29. 29. Post-Claim Underwriting: Insurers’ Perspective (Cont’d)National Association of Insurance CommissionersReport on Rescissions in the Individual Health InsuranceMarket – December 3, 2009 • Five year time period – 2004 to 2008 Insurance Companies were surveyed • 6.7 million policies were issued • 27,246 rescissions Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 29
  30. 30. Post-Claim Underwriting: Insurers’ Perspective (Cont’d)• Applicants have the best knowledge of their medicalissues.• Applicant has a duty to tell the truth on an application –Insurer has the right to rely upon representations made byapplicant. 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
  31. 31. 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. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 31
  32. 32. Post-Claim Underwriting: Leading CaseWesley 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 Cocaineor Heroin use or hospitalization therefore.• Murdered within Contestable time period and Coroner’sReport revealed Cocaine in blood.• Investigation disclosed pre-issue hospitalizations forCocaine 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
  33. 33. 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 JudgmentMotion.• Underwriting decision made based on applicationresponses. 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
  34. 34. 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 theApplication - NOT the insurer’s conduct, denied benefits tothe beneficiary.• Important difference between Claim Investigation andUnderwriting 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
  35. 35. Post-Claim Underwriting: Cases Supporting WesleyNorthwestern Mutual Life Ins. Co. v. Babayn430 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
  36. 36. Post-Claim Underwriting: Cases re Post-Claim InvestigationJohn Hancock Mut. Life Ins. Co. v. Banerji858 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
  37. 37. 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” Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 37
  38. 38. 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 International Claim Association ♦ 101st Annual Education Conference Slide 38
  39. 39. Post-Claim Underwriting: Cases Prohibiting (Cont’d)Ingalls v. Paul Revere Life Ins. Group561 N.W. 2d 273 (N.D. 1997)• “Field men…are going to be judged…they are going to getraises, they are going to keep their jobs if they can close outor finalize 25 percent of the [open] claims that are sent outto them…” Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 39
  40. 40. Post-Claim Underwriting: Cases Prohibiting (Cont’d)Nassan v. National States Ins. Co494 N.W. 2d 231 (Iowa, 1993)• “[The insurer’s] quotas for underwriters amounted toreviewing eighty-five applications per day.”• “[T]his would necessarily result in the rubber stamping ofpolicy applications with no serious effort to weed out high-risk applicants.”• “The Company’s [post-claim underwriting] practicesreflected a broad plan to run large amounts of cash throughthe company that could be invested and ultimately paid outto the company’s principals prior to its collapse from anunreasonably 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
  41. 41. 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 excessof $8,500,000…Therefore, post-claims underwriting would allowContinental to increase its revenues by taking on newpolicyholders, while simultaneously decreasing its expendituresby denying coverage when claims were submitted.”• “Every Continental underwriter is required to amass 100 pointsper day in order to keep their job. 2.5 points are awarded if anunderwriter either pays or denies a claim, however, 5 points areawarded if the underwriter can find a pre-existing condition thatwould enable Continental to deny coverage.” Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 41
  42. 42. 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 byEnterprise in handling claims under its life insurancepolicies.***[A]s a matter of course Enterprise wouldrescind…on the grounds that the insured had made materialmisrepresentations on the insurance application regardlessof whether Enterprise in fact would have declined to writethe policy had it known that information at the time thepolicy was written.***Enterprise engaged in a systematicbad faith scheme of canceling policies without determiningwhether 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
  43. 43. 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
  44. 44. Post-Claim Underwriting: Cases Prohibiting (Cont’d)Mitchell, Jr. v. Fortis Ins. Co686 S.E. 2d 176 (S.C. 2009)• Evidence showed that Fortis has a company policy oftargeting policyholders with HIV. A computer programtargeted every policyholder recently diagnosed with HIV foran automatic fraud investigation, like Mitchell, insurancepolicies often were cancelled on erroneous information.Under such circumstances, the South Carolina SupremeCourt 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
  45. 45. 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
  46. 46. Knox-Keene Health Care Service Plan Act of 1975• “To promote the delivery and quality of health and medicalcare to the people of the state of California who enroll in, orsubscribe for the services rendered by, a health careservice plan or specialized health care service plan…”• Health care service plans are not considered to beinsurance companies within the meaning of CaliforniaInsurance 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
  47. 47. Health Insurance Access and Equity Act of 1993(Section 1389.3) “No health care service plan shall engage in thepractice of post-claims underwriting. For purposes of thissection, “post-claims underwriting” means the rescinding,canceling, or limiting of a plan contract due to the plan’sfailure to complete medical underwriting and resolve allreasonable questions arising from written informationsubmitted on or with an application before issuing the plancontract. This section shall not limit a plan’s remedies upona 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
  48. 48. Hailey v. California Physicians’ Service• Cindy Hailey completed an application for herself,husband, and son seeking health insurance from BlueShield• No medical problems were disclosed – coverage wasissued.• Mr. Hailey soon thereafter developed stomach problemsrequiring hospitalization and then, due to a car accident,became totally disabled, requiring a two month hospitalconfinement.• Blue Shield investigated and learned Mr. Hailey had anumber of medical conditions, resulting in the coveragebeing 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
  49. 49. Hailey v. California Physicians’ Service (Cont’d)• Appellate Court Reversed and remanded for trial – citingSection 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
  50. 50. 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 accuratelyassess the risk before issuing the contract.•Because the circumstances of each case vary, the Courtdid not set forth what pre-issue steps must be taken – this isa 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
  51. 51. Callil v. California Physicians’ Service•Ms. Callil was covered under a Blue Shield group HMOplan, which did not require individual underwriting.•To increase her physician network, Ms. Callil applied for anindividual health plan with Blue Shield, completing anapplication.•No health problems were disclosed, other then one ER visitfor pain cramps. Blue Shield, although having a signedmedical authorization by Ms. Callil, did no follow upinvestigation – 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
  52. 52. Callil v. California Physicians’ Service (Cont’d)•Soon thereafter, Ms. Callil underwent a hysterectomy andBlue 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
  53. 53. Callil v. California Physicians’ Service (Cont’d)•The trial court granted Blue Shield’s Summary Judgmentmotion. 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
  54. 54. 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
  55. 55. Nazaretyn v. California Physicians’ Service•Plaintiffs sought health coverage under a Blue Shieldhealth care service plan.•Both insured’s spoke limited English and relied on aninsurance broker to complete the application. They wouldlater assert the broker asked no health questions.•Coverage was issued and within the two year contestabletime period, pre-mature twins were born.•Blue Shield then investigated and learned of IVF (in vitrofertilization) treatments prior to the application beingcompleted.•The application specifically inquired about such treatmentsand 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
  56. 56. Nazaretyn v. California Physicians’ Service (Cont’d)•Appellate Court held such procedures cannot, as a matterof law, establish reasonable efforts to ensure the applicationis accurate and correct.•Blue Shield’s standard procedures may often yield novaluable information.•Given the likelihood of inadvertent error, the service planmust conduct a reasonable check on the informationprovided. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 56
  57. 57. California: Open Issues• Will the health care service plan decisions be so limited?• California Insurance Code requires an applicant todisclose all facts within his knowledge which are material tothe 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
  58. 58. 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
  59. 59. Nieto v. Blue Shield of California Life & Health Ins. Co.• Ms. Nieto and her domestic partner applied for an individual andfamily health plan.• The application listed only a “bulging disc” over five years ago,for Ms. Nieto’s partner. Ms. Nieto specifically denied taking anymedications and her last doctor visit was 3 years earlier the flu.• Blue Shield reviewed its internal databases and found noinformation. So too, Blue Shield inquired about the bulging discand was told this was an error – there are no current backproblems.• Coverage was issued and soon thereafter, Ms. Nieto soughtapproval for a hip replacement.• Blue Shield’s subsequent investigation disclosed multiplemedications and medical treatments by an orthopedist andchiropractor. 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
  60. 60. 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 therequirements 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
  61. 61. Nieto v. Blue Shield of California Life & Health Ins. Co. (Cont’d)• Ins. Code Section 332 requires the parties to an insurancecontract to communicate to the other in good faith all factswithin their knowledge which is material to the contract.• Hailey was rejected – decision under Knox-Keene Act.• Blue Shield’s underwriting process included sufficient stepsto 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
  62. 62. State Statutes and Regulations• Alabama • Hawaii– Ala. Admin. Code r. 482-1-091-.09 (2007) – Haw. Rev. Stat. § 431:10H-218 (2007)• Arizona • Idaho– Ariz. Admin. Code § R20-6-1011 (2007) – Idaho Admin. Code r. 18.01.60.015 (2007)• Arkansas • Illinois– 054- 00 Ark. Code § (2008) – 50 Ill. Code R. 2012.65 (2008)• California • Indiana– Cal. Health & Safety Code § 1389.3 (2008) – 760 Ind. Admin. Code 2-5-1 (2007) (et. seq.)– Cal. Ins. Code § 10384 (2007) • Iowa• Colorado – IOWA Admin. Code 191-39.8(514G) (2008)– 3 Colo. Code Regs. § 702-4 (2008) • Louisiana• Connecticut – La Admin. Code 37:XIII §1921 (2007)– Conn. Gen. Stat. § 38a-477b (2008) • Maine– Conn. Agencies Regs. § 38a-501-14 (2008) – 02-031-425 Me. Code R. § 11 (2008)– Conn. Agencies Regs. § 38a-528-7 (2008) • Maryland• Delaware – Md. Code Regs. 31.14.01.09 (2008)– 18-1400-1404 Del. Code Regs. § 11 (2008) • Massachusetts• District of Columbia – 211 Mass. Code Regs. 65.11 (2008)– D.C. Mun. Regs. 26-2607 (2008) – 211 Mass. Code Regs. 146.11 (2008)• Florida • Michigan– Fla. Admin. Code Ann. Rr. 69B-157.109 (2008) – Mich. Admin. Code r. 550.201 (2008)– Fla. Admin. Code Ann. Rr. 69O-157.109 (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
  63. 63. State Statutes and Regulations• Minnesota • Ohio– Minn. Stat. § 62S.21 (2007) – Ohio Admin. Code 3901-4-01 (2008)• Mississippi • Oregon– 28-000-054 Miss. Code. R. § 9 (2008) – Or. Admin. R. 836-052-0576 (2008)• Missouri • Pennsylvania (model reg)– Mo. Code Regs. Ann. tit. 20 § 400-4.100(2008) – 31 Pa. Code § 89a.110 (2008)• Montana • Rhode Island– Mont. Code Ann. § 33-18-215 (2007) – 02-030-044 R.I. Code R. §9 (2008)– Mont. Admin. R. 6.6.3106 (2008) • Tennessee• New Hampshire – Tenn. Comp. R. & Regs. R. 0780-1-61.11– N.H. Code Admin. R. Ann. Ins. 3601.10 (2008) (2008)• New Jersey • Texas– N.J. Admin. Code 11:4-34.9 (2008) – 28 Tex. Admin. Code § 3.3823 (2008)• New Mexico • Vermont– N.M. Code R. 13.10.15.22 (2008) – 21-020-024 Vt. Code R. § 8 (2008)• New York • Virginia– N.Y. C.C.R.& Regs. Title11 §52.25(d) (2008) – 14 Va. Admin. Code § 5-200-80. (2007)• North Carolina • West Virginia– 11 N.C. Admin. Code 12.1007 (2007) – W. Va. Code R. § 114-32-6 (2008)• North Dakota (model regs) • Wyoming– N.D. Admin. Code 45-06-05-05.1 (2007) – 044-000-037 Wyo. Code R. § 8 (2008)– N.D. Admin. Code 45-06-05.1-09 (2007) Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 63
  64. 64. State Statutes and RegulationsThe following states do not have any statutory or regulatory provisionsrelating 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
  65. 65. Post-Claim Underwriting: The Plaintiffs’ Bar Reacts“Insurance companies are weighing their duty to investigate aconsumer’s background before issuing coverage against the time,resources and money involved. They are resorting to post-claimunderwriting.” www.law360.comMany insurance companies don’t perform this underwriting prior to thepolicy being issued. This can be described as a “heads I win and tailsyou lose” scenario in which you will likely be the loser. If you die withinthe two year period, the insurance company will mount an extensiveinvestigation once the claim for benefits has been filed. This is what isknown as “post-claim underwriting.” They hold all of the cards in thisgame.” 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
  66. 66. Post-Claim Underwriting: The Plaintiffs’ Bar Reacts“From the insurers perspective, its the perfect scam. The insurer getsto collect premiums on a policy, but does not have to pay the benefitspromised.” www.alaskainjurylawblog.com“Post-claim underwriting is an unfair insurance practice in which aninsurer issues a policy to an applicant without thoroughly reviewing theirmedical records and only upon the submission of a claim, conduct athorough examination. If the insurer then finds a medical condition thatwould have disqualified the applicant from coverage in the first place,the insurer then attempts to rescind the policy, leaving the applicantuninsured.” 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
  67. 67. Post-Claim Underwriting: The Plaintiffs’ Bar Reacts“Underwriting/assessment of the risk to be insured should be donebefore 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 inunderwriting after a claim is made with an eye toward avoiding paymentof the claim on account of a misrepresentation about ones healthhistory on his or her application. This is called post claim underwriting.It is illegal in some states, and as this practice becomes more widelyexposed 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
  68. 68. Post-Claim Underwriting: The Plaintiffs’ Bar Reacts“. . . ‘post-claim underwriting’ occurs when the insurer examines representationsmade on the policy application only AFTER medical claims have beensubmitted. If ANY inaccuracies are uncovered, the company CANCELS THECOVERAGE ALTOGETHER. The insured is left with the medical bills and noinsurance at a time he or she needs it more than ever.” www.californiainsurancelawyerblog.comThere are “many excuses for rescission or what is often referred to as post-claim underwriting. In nearly every case, the policyholder is blamed for analleged mistake made on the original application. Rescission is the insurancecompanys way of saying ‘gotcha.’ They pore through the fine print looking for areason to deny your claim. In fact, the application process itself is complicatedand 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
  69. 69. Post-Claim Underwriting: The Plaintiffs’ Bar ReactsOne way that insurance companies try to avoid paying claims is by reevaluatingyour policy after you make a claim. In other words, insurance companies take asecond look at how and why your policy was issued in the first place with theassumption that since you are in need of benefits, the insurance companyobviously miscalculated how much of a risk you would be, therefore, the policyshould never have been issued. It then cancels/rescinds the policy and returnsthe 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 theyallow for people to falsely believe that they have insurance protection. Once thepolicy is issued, folks stop seeking additional insurance coverage and after theyneed 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
  70. 70. Post-Claim Underwriting: The Plaintiffs’ Bar ReactsPost insurance underwriting occurs when an insurance companyrefuses to pay your claim for a loss that should have been covered onthe grounds that you were a bad risk and the policy should never havebeen issued, then cancels or rescinds the policy. www.freeadvice.comRescission, sometimes known as "post claims underwriting," is theloophole health insurers use to avoid paying out benefits on cancerclaims and various other serious illness. They look for and find errors inthe policyholders paperwork that can help them justify canceling apolicy. 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
  71. 71. 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
  72. 72. Settlements and Fines: PacifiCarePacifiCare did not rescind coverage, but prospectively canceled IFPHMO coverage for specific enrollees.On June 11, 2008, PacifiCare of California voluntarily entered asettlement agreement with the DMHC to resolve claims of people whoseIFP 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
  73. 73. Settlements and Fines: Kaiser and Health NetDMHC alleged that Kaiser and Health Net enrolled members thenrescinded membership agreements in violation of a statute prohibitingpost-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
  74. 74. Settlements and Fines: Health NetIn 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 deficienciesIn 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
  75. 75. Class Action Litigation: Coast Plaza Doctors v. WellPointBy asserting standing as assignees of health plan members’ benefits,several California hospitals and a hospital association (representing 450hospitals) 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
  76. 76. Class Action Litigation: Ticconi v. Blue Shield of CaliforniaBlue Shield rescinded the class representative’s coverage 10 monthsafter coverage began and after he incurred $100,000 in medical bills.Class action sought to reverse all post-claim rescissions by Blue Shieldthat 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 “uncleanhands” was not available to statutory claims and Blue Shield’s failure tophysically 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
  77. 77. Class Action Litigation: Rodriguez v. Blue CrossPlaintiff incurred more than $100,000 in medical bills, after which BlueCross rescinded his coverage for a material misrepresentation in theapplication. - 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 Crossa right to arbitrate.Class allegations (of 2 plaintiffs) were dismissed by stipulation in May2010. Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 77
  78. 78. Class Action Litigation: Horton v. WellPointClass action filed on behalf of 6,000 members of the putative class.California Medical Association moved to intervene in 2006, alleging thatwhen a plan rescinds an individual policy it also refuses to pay providersafter they have provided treatment.Preliminary settlement was reached in May 2007 but terminated inDecember 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
  79. 79. Class Action Litigation: Horton v. WellPointEnhanced 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
  80. 80. Class Action Litigation: City of Los Angeles v. Anthem Blue Cross and Health NetLos Angeles’ City Attorney filed complaints against Anthem Blue Crossand Health Net which alleged they retroactively canceled health benefitscoverage 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
  81. 81. House Committee On Oversight and Government Reform“The current regulatory framework governing this market is a haphazard collection ofinconsistent state and federal laws. Protections for consumers and enforcementactions by regulators vary widely depending on where individuals live. The documentsproduced to the Committee indicate that insurance companies take advantage of theseinconsistent 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 misrepresentationsInsurance companies automatically investigate medical histories for allpolicyholders with certain conditions and have evaluated employee performance basedon 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
  82. 82. New California Regulations (Effective August 18, 2010)11 Cal. Admin. Code Section 2274.74:After receiving a claim, a request for service, a request forverification of eligibility, or other notice of a claim, an insurer isprohibited 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;” andb) 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
  83. 83. 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
  84. 84. 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; and7) 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
  85. 85. 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
  86. 86. 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; and6) 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
  87. 87. New California Regulations – ACLHIC v. California DOIPetition for administrative mandamus and complaint for declaratory relieffiled 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
  88. 88. QUESTIONS?Robert R. Pohls, Managing Attorney Gary Schuman, Senior Counsel - Litigation Pohls & Associates Combined Insurance Company of America10940 Wilshire Boulevard, Ste. 1600 1000 N. Milwaukee Avenue Los Angeles, California 90024 Glenview, Illinois 60025 Phone: 310.694.3092 Phone: 847.953.1506 Fax: 310.694.3093 Fax: 773.506.5080 Email: rpohls@califehealth.com Email: Gary.Schuman@Combined.com Rescission is Not a 4-Letter Word How to Recognize and Avoid Post-Claim Underwriting International Claim Association ♦ 101st Annual Education Conference Slide 88

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