In an insurance bad faith case, a retired judge, sitting as an arbitrator, has found a willful scheme to cheat the insured and imposed punitive damages against a health insurer for post-claim underwriting. Post-claim underwriting is a scheme where an insurer facing a claim for benefits “investigates” the policy application and rescinds the policy on the ground that some important information was not disclosed by the insured. Post-claim underwriting is discussed in more detail in an earlier article by the Alaska Personal Injury Law Group.
In the case reported upon here, the insured incurred medical bills of more than $125,000 for breast cancer treatment. While she was still being treated, the health insurance company did its post-claim underwriting and cancelled her policy. The poor insured was left facing not only a life-threatening event, but also huge medical bills with no way to pay them.
The ultimate unfairness was that this policy had been sold to her to replace a policy that unquestionably would have covered these bills. She did not need this new, replacement policy but the insurance company’s agent sold it to her anyway. The most likely reasons were to generate new business for the company and a commission for himself. It was the insurance company’s own agent, not the insured, who had filled out the application that the insurance company later used to cancel the coverage. None of that caused the insurance company to hesitate in the least when it came time to save $125,000 by canceling the policy.
Fortunately, the insured found a lawyer experienced in insurance bad faith cases. That bad faith insurance claims attorney uncovered evidence that the insurance company employees who do the post-claim underwriting were paid bonuses based in part on how many policies they cancelled. Those same employees were given goals for how many rescissions they were expected to make. One year, an employee was to rescind 15 policies a month. The next year that same person was to rescind 25 policies a month, 300 rescissions for the year. In following years, the goals were stated in terms of an annual goal of money the employee was expected to save the company by rescinding policies after claim were made. One employee's target goal was $6 million of savings one year, $6.5 million the next. Of course, those savings were to come at the expense of the insureds who had faithfully paid the insurance company for the health insurance they now drastically needed.
The arbitrator clearly explained what a nefarious scheme this was. The insurance company’s scam attacked the insureds when they were most defenseless and most in need of the insurance benefits they had paid for. He found that the insurance company was in bad faith because it paid no attention to its own guidelines when it came to rescinding these policies. The insurer also acted in bad faith by ignoring state statutes that explicitly prohibited post-claim underwriting. The arbitrator also believed some of the insurance company’s bad faith actions rose to the level of criminal conduct. Based on all this wrongdoing, he awarded the insured almost $130,000 for the medical bills that had not been paid, $750,000 in compensatory damages for what the insurer had put her through by wrongfully canceling her coverage, and $8,400,000 in punitive damages.
Fortunately, that is not the end of the story. The Los Angeles City Attorney is investigating criminal charges arising out of this scheme. I say fortunately, because insurance companies generally treat such scams as an economic game. Insurance companies who engage in such bad faith practices may get caught occasionally, but they play the odds. They fight such claims tooth and nail. If they ultimately lose and have to pay, it is just a minor offset against the huge profits they make by using these bad faith schemes against many insureds all across the country. The insurance company that gets caught has to pay a little bit, like the Las Vegas casino paying off the few winners, but it knows it typically will not get caught and that the odds overwhelmingly favor the house. Even $8.4 million in punitive damages pales in comparison to the profits generated by such bad faith insurance company scams. Maybe potential criminal liability will make insurers hesitate before cheating the insureds most in need of the protection they purchased.