Court Decision May Change Post Claim Underwriting Practices

Article: Court Decision May Change Post Claim Underwriting Practices

Post claim underwriting, an insurance company practice of rescinding coverage due to misrepresentations made in applications, is the focus of a case that threatens to change insurers’ practices in favor of consumers.

The case

The case being appealed to California’s 4th District Court of Appeals is a challenge to Blue Cross of California’s practice of rescinding policies based on policyholders’ providing false information on applications. Industry experts say that Blue Shield, and many other insurers, routinely rescind policies without proof of misrepresentation – leaving insureds without any coverage.

The case revolves around a plaintiff insured who suffered severe injuries in a car accident shortly after signing up for coverage with Blue Cross. The insurer denied his claim and rescinded his policy claiming that he lied about his weight, recent hospital visits and other medical conditions on his application.

Proper rescission vs. bad faith

The California Health & Safety Code, which is a key component to the case, says that health care plans are responsible for resolving all reasonable questions about an application before entering into a contract for insurance – which means no post claim underwriting. However, insurers are allowed to rescind policies when they discover that a policyholder willfully misrepresented information on their application. In other words, they lied to their insurer to get coverage. Insurers have to have this option as fraud will always be a concern.

However, according to experts, the issue is that insurers are using that reason to rescind many more policies than they should – simply because they don’t want to pay the claims. Many policyholders have reported that insurers have never asked them for additional information or disputed specific facts of the application. So, when is a rescission appropriate and when does it constitute bad faith?

That’s the question this case may answer. Most rescission cases are currently dismissed or settled before ever going to court. However, if the appellate court concludes that insurers must now show a willful misrepresentation before rescinding policies, insureds may be able to have a jury decide whether the rescission was legitimate or not.