Post-Claims Underwriting In California: Rescinding An Insurance Policy After The Insured Has Suffered A Loss

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When insureds make a claim under a policy, they are sometimes unexpectedly hit with a decision to rescind the insurance policy based on a purported misrepresentation in the insurance policy application.  This can happen in connection with any insurance policy, but is a particularly prevalent practice in the context of health, disability, and life insurance policies, and claimed misrepresentations regarding pre-existing health conditions.

An insurance company’s attempt to rescind a policy after a loss has occurred is often referred to as “post-claims underwriting,” which  “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 made, not after the policy was issued.’” (Hailey v. California Physicians’ Service (2008) 158 Cal.App.4th 452, 465.) Post-claims underwriting is “patently unfair” because a policyholder “obtains a policy, pays his premiums and operates under the assumption that he is insured against a specified risk, only to learnafter he submits a claim that he is not insured, and, therefore, cannot obtain any other policy to cover the loss.” (Id. (italics in original))

When an insurance company engages in post-claims underwriting, and attempts to rescind a policy after a loss, it sets up a high-stakes, all-or-nothing battle over the insurance claim.  If an insurance company prevails on an attempt to rescind, the policyholder is left without any coverage for his or her loss.  This can be a devastating result, as an insured is denied any policy benefits.  On the other hand, attempting to rescind can also backfire on the insurance company.  If a jury believes an insured is unjustly accused of fraud in order to support an attempt to rescind and avoid payment of policy benefits, it is likely to find bad faith conduct, and may also award punitive damages.

Under California law, an insurance company can rescind an insurance policy after a loss if it can prove the policyholder “has misrepresented or concealed information in seeking to obtain insurance.”  (DuBeck v. California Physicians’ Service (2015) 234 Cal.App.4th 1254, 1264.)    Some policies, like disability and life insurance policies,  have incontestability clauses, whereby after a certain period under some circumstances a policy cannot be rescinded based on misstatements in the policy application.  (See e.g., California Insurance Code §§10113.5 and 10350.2.)

In order to rescind an insurance policy, the insurance company must move “promptly upon discovering the facts” giving rise to rescission, give notice to the insured, andrefund all premiums.  (California Civil Code §1691.)  A right to rescind can be waived, including by failing to comply with these requirements.  (DuBeck,supra, 234 Cal.App.4th at 1264.)

Where an insurer affirmatively seeks to find a misstatement in the policy application to avoid a claim, they will usually find one.  As on California court of appeal noted, “given sufficient impetus — such as chronic illness — it is likely that any health insurer will be able to find some detail within an insured’s medical history that, post hoc, amounts to misrepresentation.” (Hailey, supra, 158 Cal.App.4th at 465.)

Where a policyholder makes a claim, and after making the claim, they are subjected to a rescission attempt, they may be experiencing a case of bad faith, post-claims underwriting. Under such circumstances, the insured should evaluate the alleged misstatement, and whether such information should have been discovered before the policy was issued.