Post-claims underwriting occurs when an insurer waits until a claim has been filed to obtain information and make underwriting decisions which should have been made when the application for insurance was first made. Although the insurer may ask an applicant for some underwriting information before it issues the policy, it will not follow up on that information until after a significant claim arises. Some statutes expressly prohibit insurers from rescinding a policy based on post-claims underwriting.
In Hailey v. California Physicians' Service, the court construed California's Health and Safety Code section 1389.3, the post-claims underwriting statute governing health care service plans. In Hailey, Mrs. Hailey completed a health insurance application on behalf of herself, her husband and her son; however, she mistakenly believed the medical history questions pertained only to her and did not provide answers for her husband or son. She also mistakenly listed her husband's weight as 240 pounds rather than 285 pounds.
Mr. and Mrs. Hailey signed the application, but Mr. Hailey did not read it. Blue Shield approved coverage. Mr. Hailey was subsequently admitted to the hospital for stomach problems. Blue Shield initiated an investigation and obtained medical records indicating that he had a history of obesity, hypertension and gastrointestinal problems. As a result, Blue Shield rescinded the policy. The Hailey family filed a bad faith action. The trial court granted summary judgment to Blue Shield, finding that misrepresentations and omissions in the application justified rescission.
But the Court of Appeal reversed, finding that rescission is precluded unless the carrier demonstrates that "it had made reasonable efforts to ensure the subscriber's application was accurate and complete as part of the pre-contract underwriting process" or that "the misrepresentation was willful."
The court first explained why it was unfair for insurers to engage in post-claims underwriting: "The harm from post-claims underwriting is manifest... An insurer has an obligation to its insureds to do its underwriting at the time a policy application is made, not after a claim is filed. It is patently unfair for a claimant to obtain a policy, pay his premiums and operate under the assumption that he is insured against a specified risk, only to learn after he submits a claim that he is not insured, and, therefore, cannot obtain any other policy to cover the loss. The insurer controls when the underwriting occurs... if the insured is not an acceptable risk, the application should [be] denied up front, not after a policy is issued. This allows the proposed insured to seek other coverage with another company since no company will insure an individual who has suffered serious illness or injury."
The appeals court next explained that a provider cannot "complete medical underwriting" within the meaning of section 1389.3 by "blindly accepting the responses on a subscriber's application without performing any inquiry into whether the responses were the result of mistake or inadvertence." The court concluded that "Blue Shield failed to demonstrate it made reasonable efforts to ensure the Haileys' application was accurate and complete as part of its pre-contract underwriting process."
Under Hailey, carriers are required to conduct a reasonable pre-coverage underwriting investigation, which means they cannot simply rely on information submitted on the application, but must verify the completeness and accuracy of the information.
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