Insurers’ Bad Faith Post-Claim Underwriting Rejected by Court

Wouldn’t it be great if you could get paid for making a promise to do something in the future, but when the time came to keep your side of the bargain you could cancel the contract and not have to pay? The person you made the promises to might be upset at paying you for all those years for nothing, but you get free money! Ignoring the moral and ethical flaws with the scheme, it would be a great way to improve your financial position. Of course, that’s how insurance companies often operate these days. One tool they use is “post-claim underwriting.” It is a terrible, dishonest practice that reneges on the insurer’s promises when the insured most needs the benefits promised in the insurance policy.

What is post-claim underwriting? In its simplest form, an insurance company takes a cursory look at your application, sells you a policy, collects premiums until you make a claim, and then does an “investigation” to determine that they should not have sold you the policy in the first place. Instead of doing a true underwriting analysis before issuing the policy, the insurer waits until after you make a claim and then decides you tricked them into insuring you. The insurance company then rescinds the policy, claiming you misrepresented something or failed to disclose something on your application for the insurance.

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. Of course, it is also a bad faith practice, a flagrant breach of the covenant of good faith and fair dealing that is part of every insurance policy, and may be a crime. Unfortunately, those problems will not deter an insurer who cares more about its bottom line than for the rights and interests of its insureds.

Unlike Alaska, some states have a statute that expressly prohibits post-claim underwriting. California has such a statute, but that did not stop health insurers from doing post-claim underwriting. The language of the statute is very explicit-it requires an insurer to complete its underwriting investigation before issuing the policy, not wait until after a claim is made. Might seem like a common sense requirement to you as an insurance consumer, but not to an insurance company who wants to cancel a policy. This is illustrated by the recent case of Hailey v. California Physician’s Service, 158 Cal.App.4th 452 (Ct. App. 4th Div 2007). Blue Shield contended that the statute requiring it “to complete medical underwriting” before issuing the policy really meant it could just look at the application, assign values to the risks disclosed, and issue a policy. Although it had a medical release from the prospective insured, it did no underwriting investigation to determine if it should insure the person. Blue Shield argued it could then do a “postclaim investigation” after a claim was made, and rescind the policy. The California court rejected that assertion, viewing the “postclaim investigation” as basically the same thing as “postclaim underwriting.” The court ruled that the insurer must do a reasonable underwriting investigation before issuing the policy or it will lose its ability to rescind the policy later, unless the insured willfully misrepresented something in the application. A wonderful rule to protect insurance consumers.

Beware that post-claim underwriting is not limited to health insurance. Insurance companies use it to avoid paying benefits under many forms of insurance. Post-claim underwriting is common in disability insurance, a policy that pays when a person is unable to work. Insurance companies even use post-claim underwriting to try to avoid liability on automobile policies.

The Alaska legislature should follow California’s lead and enact an express prohibition against post-claim underwriting. Although the California case shows that even a statute will not prevent this terrible, bad faith practice, an Alaska statute would at least give the insured a valuable tool to use to obtain some justice when her policy is wrongly rescinded. Even if the Alaska legislature fails to act, post-claim underwriting can be challenged in Alaska under common law principles. If you believe you are a victim of wrongful rescission of your policy, talk to an attorney at the Alaska Personal Injury Law Group experienced in insurance bad faith claims. We will gladly help you fight this reprehensible insurance practice.