Post-Claim Underwriting: Can the Insurance Company Cancel Your Policy After You’ve Already Made a Claim?
Last month we asked the questions, Why do Life Insurance Claims get Denied? And what can you do about it? One of the actions we discussed was rescission of your policy and how that rescission may be done in bad faith. This area merits further discussion, so let’s dig deeper into how a life insurance policy gets canceled after a claim is filed, and how you should respond to an insurance company’s post-claim underwriting.
What is rescission?
Rescission refers to the act of rescinding – taking back or canceling – your insurance policy after it has already been issued. This cancellation could happen if, for instance, the insurance company became aware that you lied or misled on your application, and they would never have issued you a policy on the terms they did had they known the facts.
Underwriting is the process by which insurance companies decide whether to ensure an applicant, how much coverage to provide, and how much to charge in premiums. Arguably, this is the time when the insurance company should review your application and satisfy itself that the information is accurate and complete. Nevertheless, when a claim is filed, which may be many years down the road, a tactic of the insurance companies is to go back to the original application and pore over it to see how the death might relate to the initial physical exam or questions answered on the application. If they can find anything in the application that is incomplete, inaccurate, deceptive, or demonstrably false, they’ll rescind the policy and refuse to pay the claim.
Post-claim underwriting undertaken solely to avoid paying benefits is an example of insurance bad faith. When insurers engage in bad faith insurance tactics, they can be held liable not only for the benefits owed but also other damages their actions have caused, such as pain and suffering and punitive damages. Of course, it can be challenging to uncover the motives behind a company’s policy decisions. Policyholders in this position need the help of experienced insurance law attorneys who understand how to build and present a case of insurance bad faith.
Underwriting: the life insurance application process
When you apply for insurance, you’ll be asked a series of questions to assess your present health and medical risk factors. You’ll be asked about your height, weight, and whether you have any illnesses or diseases, including HIV/AIDS, heart disease, cancer, diabetes, depression, high blood pressure and more. You’ll also be questioned about your smoking habits, including how much you currently smoke or whether you’ve ever smoked at all in your life. The medical questionnaire is in-depth and comprehensive and will ask about your family medical history as well as your own personal medical history.
In addition to medical questions, you’ll also be asked about your job, your hobbies and your lifestyle to gauge whether you engage in any high-risk activities, including serving in the military. They will additionally inquire about your history of drug or alcohol use and whether you have any felony or DUI convictions.
Finally, you’ll be required to take a physical exam as part of the underwriting process. This is not a full-blown medical exam in a doctor’s office. More likely, a nurse sent from the insurance company will come to you and conduct a verbal review of your medical history, take some measurements such as blood pressure and weight, and collect blood and urine samples for diagnostic testing. This in-person physical will be used as a check against the answers you provided in the application and also to uncover any other issues that may not have been identified in your self-reporting (e.g., you may have high cholesterol and not even know it).
Put Your Best Foot Forward, but Don’t Fudge Your Application
The point of requiring a physical exam for life insurance is so the company can assess its risk of insuring you. Assuming you aren’t outright rejected based on your answers, you’ll be placed into a specific rate and risk classification, with your premium adjusted according to that classification. Typical categories are:
- Regular or Standard
- Regular or Standard Plus, or Select
- Preferred
- Preferred Best, or Preferred Plus
There is also a category known as Substandard, or Table Rated, for the highest risk insurance candidates. The better rated you are, the lower your premium will be. For this reason, you may feel moved to present yourself and your health in the best possible light. However, it is still important to answer all questions on the application accurately and completely. If the insurance company finds that you lied or misrepresented your health when you applied for insurance, they may have legitimate grounds to rescind the policy.
What Happens When a Policy is Rescinded?
When an insurance company legitimately rescinds a policy, they are required to pay back the premiums that you’ve paid, but they aren’t obliged to pay the benefits under the plan. Many states by law require that any misrepresentation be “material”; carriers can’t rescind policies for minor or insignificant errors. For example, California Civil Code section 1690 includes a right of rescission for fraud or mistake in a matter that was essential to the inducement of the contract.
What if the rescission is done in bad faith? You filled out your application to the best of your ability and didn’t intentionally omit anything or misrepresent yourself. Nevertheless, it’s inevitable that if an insurance company goes over your application with the intention of finding some error or inconsistency, they will. For this reason, some states severely limit the practice of post-claims underwriting. California is one state that is exceptionally consumer-friendly when it comes to insurance matters, and the legislature has put many protections in place to guard against bad faith post-claims underwriting.
Any time a policy is rescinded, you should contact an attorney to look into the matter on your behalf and see if you have a case. Find an experienced insurance lawyer who will review your case for free and represent you on a contingency basis, where you only pay a fee if the representation is successful. Insurance bad faith claims for wrongful rescission can net you the full amount of benefits you are entitled to under the policy, along with additional money damages for the harm you have suffered due to the insurer’s wrongful acts. A judge or jury may even award punitive damages for especially bad behavior on the part of the insurer.
