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Post-Claim Underwriting: A Dangerous New Trend

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When 59-year-old Robin Beaton was diagnosed with Invasive HER-2 Genetic Breast Cancer, doctors told her she would need to undergo immediate surgery. At the time, Beaton, who had taken out an individual policy with Blue Cross and Blue Shield in December 2007, believed herself fully covered. You can imagine her surprise then, when the Friday before surgery she received a call from her insurer—her claim had been red flagged.

Several months earlier, Beaton had visited a dermatologist to help treat acne. A word had been written on her chart that did not mean, but could have been interpreted as meaning, pre-cancerous. Due to the size of the claim, Blue Cross launched a retroactive investigation into Beaton’s medical history and, upon discovering the chart, canceled her coverage.[1]

Beaton’s story is one of many like it. Over the last ten years, insurance powerhouses have disclaimed valid, often substantial claims with greater and greater frequency. The practice, known as post-claim underwriting, has already come to the attention of courts nationwide. Though in many states judicial action has already been taken to prevent or inhibit post-claim underwriting, the responsibility often falls on the insured to protect him or herself. In Beaton’s case, that meant contacting her Congressman, Joe Barton, to challenge and eventually override the cancellation in court.

In 1994, Lewis v. Equity National Life Insurance Co., defined post-claim underwriting: “When an insurer waits until after the insured makes a claim to determine whether the claimant is eligible for insurance according to the risk he presents.”[2] In other words, rather than investigating the insured’s medical history at the time of the policy’s signing, the insurance company waits until the insured files a claim to investigate the validity of the information provided on the application; if there is any discrepancy between the medical history the claimant provided and the medical history the insurance company uncovers during their investigation, the claim is denied and the policy canceled.

Understandably, insurance companies argue that this is not an unjust practice. “An insurer’s duty to investigate an applicant’s health and background before issuing coverage must be balanced with the time and money involved in doing so,” they argue. “It is physically and economically impossible for an insurer to fully and completely investigate every potential insured to try and discover the less obvious health defects.” [3] They believe that it is the applicant’s responsibility to paint a clear, concise picture of his or her medical history during the application process. And it is.

It is rarely as cut and dry as an untrustworthy applicant, however. Often times, as in the case of Robin Beaton, the insured is unaware of the discrepancy. Other times, application questions are ambiguously worded, resulting in none or partial disclosure of facts.

Such was the case for Cindy Hailey, a California resident who failed to provide information regarding her husband’s obesity and gastro-esophageal reflux disease. When Blue Cross retroactively canceled her family coverage three months after her husband was involved in a car accident that left him permanently disabled, she took the case to court. Though the trial ended in favor of Blue Cross, Hailey refused to drop the case, eventually bringing it to The Court of Appeals where the initial ruling was overturned. The court found that Hailey had not engaged in “willful misrepresentation” and thus had not broken contract. Furthermore, that it was the insurance companies responsibility “to make reasonable efforts to ensure the subscriber’s application [was] accurate and complete as part of the ‘pre-contract underwriting process.’”[4][5] The appellate court came to the conclusion that Blue Cross’s application was unclear, and that any misrepresentation was therefore the fault of the insurer and not the applicant.

New Jersey and New York have passed laws similar to those at work in California. N.J.A.C. 11:4-34.9, for instance, “provides the prohibitions against post-claims underwriting.” Specifically, “[N.J.A.C. 11:4-34.9] requires applications for long-term care insurance policies or certificates except those that are guaranteed issue to contain clear and unambiguous questions designed to ascertain the health condition of the applicant.”[6]

The issue at hand is primarily one of motive. What motivates an insurance company to sell a policy? The answer is, undoubtedly, profit. The insured, on the other hand, makes no profit. He purchases a policy only as a failsafe, as a means of maintaining a lifestyle—a means of breaking even. There is an essential imbalance in relationship where one party benefits while the other only fails to lose. That balance is only justified if the benefiting party takes on some greater responsibility—essentially, if that party earns its profit. In this case, that responsibility is taking the necessary steps to verify every applicants medical history before issuing a policy, and thereby eliminating the need for post-claim underwriting.

[1]  Beaton, Robin. “Testimony of Robin Beaton.” 11 June 2009. http://democrats.energycommerce.house.gov/Press_111/20090616/testimony_beaton.pdf.

[2] Flynn, Chris. “Post-Claims Underwriting Litigation: A Review of the Governing Law and Emerging Trends.” 2008 Web. 21 Jul 2009.

[3]  Schuman, Gary. “Post-Claim Underwriting: A Life and Health Insurer’s Boon or Bane” 2009 Web. 21 Jul 2009.

[4] Flynn, Chris. “Post-Claims Underwriting Litigation: A Review of the Governing Law and Emerging Trends.” 2008 Web. 21 Jul 2009.

[5] Sorrel, Amy. “California appeals court rules against insurers rescission practices.” American Medical News 11 Feb 2008 Web.21 Jul 2009. http://www.ama-assn.org/amednews/2008/02/11/prsc0211.htm

[6] “Proposed Repeal and New Rules: N.J.A.C. 11.4-34.” Department of Banking and Insurance. 21 Jul 2009 <http://www.state.nj.us/dobi/proposed/pn04_461.pdf>.

Written by Nick Bakshi

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