Post – Claim Underwriting:

A Life And Health Insurer’s Boon Or Bane†

Gary Schuman

I.

Introduction

Life and health insurance companies find themselves in an extremely competitive environment.[1] Industry consolidation, greater sophistication of the consuming public and easy access to information have forced insurers to carefully review the manner in which they conduct business. They must constantly respond to new products introduced by the competition and look for ways to become more accessible in order to maintain existing customers and obtain additional business.

Insurers compete for business in many ways. One method is to simplify the process of buying and selling insurance by looking for ways to streamline the application and underwriting processes. ^[2] Not all individual insurance products require the same degree of underwriting. Some insurance applicants who seek large amounts of life, medical or disability coverage can be approved only after extensive medical, personal and financial information has been gathered and carefully evaluated.[3] Other applicants – such as those applying for low amounts of coverage – may be approved with only the information contained in the application.[4]

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. 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.[5] In order to make thorough medical and background examinations of every applicant for insurance, similar to those most insurers now make when the amount applied for is large, the insurer’s costs would not only significantly increase the price of insurance but also seriously inconvenience the individual applying for the coverage.[6]

II.

The Insurance Application and Underwriting Processes

Regardless of the size or type of insurance sought, the first formal step in the making of a life or health insurance contract is the completion and signing of a written application by the person who seeks to obtain the insurance.[7] The applicant’s health status is critical to a life or health insurer’s ability to evaluate the risk it is being asked to insure[8] and the application for insurance is one of the most important risk assessment tools provided to the insurer and its underwriters.[9]

The application contains a general identification of the applicant and a description of the type of insurance coverage desired. In addition, depending on the type of insurance applied for, it may be very detailed requesting information about the applicant’s employment, health and insurance history and other information, or it may be as simple as listing the insured’s name, address and beneficiary.[10]

Insurers usually design applications for lower face value coverage such as industrial,[11] supplemental[12] and credit insurance[13] to obtain all the necessary underwriting information, so that the underwriter will have to gather little or no additional information. These applications typically contain fewer and simpler health questions designed to ensure that the applicant fits the profile established by the insurer for the coverage. Completed applications are then submitted to the insurer’s underwriting department for review and evaluation.[14]

Underwriting is intended to ensure that each proposed insured receives an equitable, consistent evaluation and is charged an appropriate premium for the coverage offered.[15] One of the basic principles of insurance is that each individual insured should pay a premium that is proportionate to the amount of risk the company assumes for that person.[16]

The home office underwriter’s primary responsibility is to evaluate an individual’s anticipated mortality[17] or morbidity,[18] depending on the coverage applied for, in order to determine whether to approve that person for insurance coverage according to the insurer’s underwriting manual.[19] An underwriting manual is a detailed listing of various health and social conditions with information on impairments. It provides a guide to suggested underwriting action when impairments are present.[20] An insurance company is entitled to determine what risks it chooses to accept for insurance,[21] but it also has a responsibility to follow consistent risk selection practices and following the manual helps ensure that the insurer is acting in a fair manner.[22]

The agent plays an extremely important role in the application and underwriting process. This is especially true for the lower face value policies.[23] Underwriters have traditionally relied on the agent to gather initial information that can indicate whether a proposed insured is eligible for the coverage requested.[24] Agents see applicants in person, make an initial assessment of a proposed insured, and determine whether that person is likely to be approved for a specific type of coverage by performing field underwriting.[25] Field underwriting is the process of gathering initial information about the proposed insured and screening applicants who have requested coverage.[26] The agent is expected to obtain answers to every question on the application and to record the information obtained directly from the proposed insured’s response.[27] Home office underwriting, if any, is performed at the clerical level because the rate structure for this type of coverage makes little allowance for detailed assessment by an underwriter.[28]

This field-issued insurance is sold on the assumption that the applicant is truthfully disclosing to the agent all information requested on the application. An insurer relies on the truthfulness of the answers given by an insurance applicant, and the insured has the corresponding duty to supply complete and accurate information to the insurer.[29] The insurance company is entitled to the requested information so that it can assess the significance of the facts presented in the application.[30]

The insured, however, may not always disclose all information requested on the application. If an insurer does not discover the applicant’s misrepresentation and issues a policy based on the information provided in the application, the false information may later be discovered during an investigation of a claim submitted on the policy.[31] Coverage is then rescinded based on the underwriter’s determination that had the information been truthfully disclosed the policy would not have been issued.[32] Insurance carriers understandably seek to avoid liability on policies that they would not have underwritten,[33] or for which they would have charged more[34] had the application contained all of the material facts.[35] This action often results in litigation.

III.

Post-Claim Underwriting

Plaintiffs and some courts have attacked the above-described practice, referring to it as post-claim,[36] or retroactive underwriting.[37] This conduct has been described as an insurance company asking an applicant for health-related information and issuing a policy based on the responses without undertaking any independent investigation of the insured’s medical history.[38] A claim is subsequently submitted, and only then does the insurer investigate the claimant’s prior medical history by requesting additional information to see whether the insured actually qualified for coverage at the time it was purchased. Then, should it be determined the insured made a material misrepresentation coverage is rescinded.[39]

Plaintiffs charge that post-claim underwriting is an unethical practice in the insurance industry.[40] Their contention is that insurers engaging in that conduct are acting improperly and in bad faith when, instead of looking to pay the claim, they begin to search for all the things in the application that will allow the policy to be rescinded.[41] Extra-contractual and even punitive damages have been sought and occasionally awarded against insurers for this practice.[42]

A. Plaintiffs’ Challenges

1. Covenant of Good Faith and Fair Dealing

The first challenge for a plaintiff is premised on the fact that it has been widely accepted by courts and legislatures for many years that insurers have a special relationship with their insureds due to the nature of insurance contracts and the unequal bargaining position between the insured and the insurance company.[43] The economic dominance and superior ability of the insurer to protect itself carries special obligations when dealing with its insureds.[44]

In return for the timely payment of premiums, the insured relies on the insurer’s promise to provide necessary protection when certain contingencies occur. When buying insurance an insured usually does not seek to realize a commercial advantage but, instead, seeks protection and security from financial loss.[45] The whole purpose of insurance is defeated if an insurance company can refuse, without justification, to pay a valid claim.[46]

This duty of good faith and fair dealing imposes an obligation on the insurer not to impair the right of the insured to receive policy benefits and to give at least as much consideration to the insured’s interests as it does its own.[47] When an insured under a life insurance policy dies, an insured under a health policy is hospitalized or requires medical treatment, or an insured becomes disabled, the insurer must act quickly upon receiving the claim. Life, health and disability insurers have contractual obligations under their policies to their insureds and their beneficiaries to pay stipulated sums of money upon the happening of contingencies stated in their contracts.[48]

The implied obligation of good faith contemplates at least that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim.[49] When investigating a claim, an insurance company has a duty to search for evidence that supports its insured’s claim.[50] If the insurer seeks to discover only the evidence that defeats the claim, it holds its own interest above that of its insured and breaches the covenant of good faith and fair dealing.[51]

This implied duty arises because the first-party contract and the nature of the relationship with the insured effectively give the insurer an almost adjudicatory responsibility.[52] Thus, implicit in the contract and this relationship is the insurer’s obligations to deal fairly with its insured.[53] The insurer that delays unreasonably or refuses to honor its obligations violates the implied covenant of good faith and fair dealing.[54]

Critics contend an insurer has an obligation to its insureds to perform all necessary underwriting at the time coverage is applied for, and not thereafter. In other words, good underwriting practice requires the insurer to investigate an applicant’s medical history before approving the policy.[55] It is argued that it is unfair for an insured to purchase an insurance policy, pay all required premiums, and believe they are protected for covered losses, only to learn after the claim is submitted that they are not insured.[56]

The duty of the insurer to an insured is especially important when the insurer rescinds coverage. In this situation, the insured is not merely at the mercy of the insurer to be treated fairly in the processing of a single claim, but must rely on the insurer’s good faith for the continued existence of any coverage.[57] Forfeiture of an insurance policy is strongly disfavored, especially when the event that gives rise to the insurer’s liability has already occurred.[58] Not only is the insured prevented from recovering on the claim at issue, but also, such as when health insurance is involved, may be precluded from obtaining other coverage.[59] Courts attempt to prevent an insurer from taking advantage and failing to honor the reasonable expectations of insureds and intended beneficiaries.

2. Duty to Investigate

Insurance plaintiffs challenging the practice of post-claim underwriting in essence take the position that any misrepresentations contained in the application are excused because the insurer is fully capable of obtaining whatever facts it needs before it decides to issue coverage. If an insured is not an acceptable risk, the application should be denied immediately, not after the policy is issued.[60] The burden of investigating and ascertaining the facts affecting the applicant’s insurability should fall on the insurer. The insurer should not be allowed to deny benefits to the insured or beneficiary on the basis of information which, if it had been more careful to investigate, the insurer could have obtained before issuing the policy.[61] The insuer that refuses to investigate until after a claim is filed runs the risk that it has insured someone when it otherwise would not have.[62]

B. Cases Supporting Plaintiffs’ Position

The leading case challenging the practice of post-claim underwriting is Lewis v. Equity National Life Insurance Co.[63] On April 12, 1989, Mrs. Florence Lewis purchased an individual intensive care policy that provided a $200 per day benefit. Her monthly premium was $3. Specifically, she answered “no” to the application question: “Has any person proposed for intensive care or heart attack insurance ever been diagnosed or treated as a victim of heart attack, heart condition, heart trouble or any abnormality of the heart?”[64]

She was injured in an automobile accident on March 3, 1990 and spent one night in the ICU of a local hospital. Mrs. Lewis subsequently completed a claimant’s statement for the insurer. The claim form contained a statement from one doctor indicating heart treatment for a coronary occlusion in 1983. The claim form was submitted to the underwriting department and the policy was rescinded when it was determined that Mrs. Lewis had a pre-existing heart condition. The insurer undertook no further investigation, nor were inquiries made to the agent or any physician pertaining to the accident, Mrs. Lewis’ injury or her heart condition.

Mrs. Lewis sued alleging that although the agent asked no questions about her medical history, she told the sales agent that she was diabetic and had heart problems. She had also provided the agent with the names of her physicians. Mrs. Lewis signed the application, although she did not read it. The agent stated, to the contrary, that he did ask the usual health questions and that Mrs. Lewis denied having a heart problem.

The insurer sought summary judgment. The trial court granted the motion insofar as it related to Mrs. Lewis’ claim for punitive damages. A trial was then held and a jury awarded Mrs. Lewis $200.00 for her one day ICU confinement.

Mrs. Lewis appealed, arguing the punitive damage question should have been submitted to the jury. She contended that the insurer did not have a legitimate or arguable reason to deny her claim in that the sales agent made any misrepresentation on the policy application. So too, Equity National did not properly investigate her claim and engaged in the illegal practice of post-claim underwriting by waiting until the claim had been filed to obtain information and making underwriting decisions which should have been made when the application was reviewed, not after the policy was issued. The Mississippi Supreme Court agreed and reversed the trial court’s partial summary judgment order.

The court, addressing the issue of post-claim underwriting, reasoned that “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.”[65] Finding that the insurer "clearly waited until after Mrs. Lewis filed a claim on her policy before it chose to underwrite her policy or evaluate the risk involved,"[66] the court determined that the question of punitive damages should have been submitted to the jury for consideration.[67] Specifically, the court said:

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 specific 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. It therefore should be estopped from determining whether to accept an insured six months or more after a policy is issued. 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 a serious illness or injury.[68]

The court acknowledged that small policies such as the one sold to Mrs. Lewis are issued under simplified underwriting guidelines. Still, it determined that in essence, an insurer may not be able to rely on an insured’s candor in completing an application and must bear the burden and expense of investigating medical histories of its insureds prior to issuing policies.[69] This places the risk of the insured’s dishonesty upon the insurer.[70]

So too, the Alabama Supreme Court in Huff v. United Insurance Co.,[71] was extremely critical of the practice of post-claim underwriting. There, an agent for the insurer sold a life insurance policy to Mr. John Huff. The policy application contained questions concerning both his and his wife’s health. No health problems for either individual were indicated on the completed application. However, Mr. Huff had been treated previously for heart problems and Mrs. Huff had suffered from diabetes, along with complications including blindness.

Shortly after the policy was purchased, Mr. Huff died of a heart attack. United then investigated and discovered his medical condition. The insurer refused to pay the death benefit because Mr. Huff had made misrepresentations about his health on the application. The widow sued and the trial court granted the insurer partial summary judgment on all claims alleging fraud. The Alabama Supreme Court affirming the trial court’s decision, also stated:

This fact situation illustrates an all-too-common situation for Alabamians in life insurance transactions. United issued the policy without investigating the applicant’s health. As the law in Alabama currently stands, an insurance company may issue a life insurance policy with its knowledge of its applicant’s health coming solely from its agent’s questioning of the applicant about his or her health history. The benefits from this type of transaction lie solely in favor of the insurance company and its agent. The insurance company receives premiums month after month, while the agent retains a commission from the sale. But when the insured dies, the insurance company refuses to pay the benefits provided by the policy. Its refusal is based upon its discovery, for the first time, that the insured’s health was poor. When the policy is sold, an agent is not required to delve thoroughly into the applicant’s background for the details of his health history. Such a requirement could prevent situations like the one in this case.[72]

There was no evidence that the agent knew of Mr. Huff’s poor health when he sold him the policy. However, the court thought that had United been required to investigate Mr. Huff’s medical history before issuing the policy, it most likely would not have been issued. The court stated that it would be in the interest of the insurer and the applicant but also of judicial economy for the insurer to investigate the applicant’s health history before issuing a policy. However, until the insurer is required to conduct a pre-issue investigation, the sale of this type of life insurance policy with no serious attempt to determine the applicant’s true health history will continue to frustrate the “beneficiaries” of the insured.

C. Insurance Industry Position

These critics and courts, unfortunately, do not consider or simply choose to ignore long standing principles of first-party insurance law as they relate to the insured’s obligations to the insurer and the requirements an insurer must satisfy before coverage may be rescinded. Policies issued on the basis of incorrect or even fraudulent information provided by an insured result in excessive claims and increased premiums for all insurance customers.[73] If insurers are precluded from voiding an insurance policy in which a material misrepresentation was made in the application, insurers would likely have to depend entirely on independent examinations to assess their relative risks and the total cost of all premiums would substantially increase.[74]

Trust is an essential element of underwriting.[75] Although underwriters carefully examine applications for signs of false or misleading information, they presume that the information presented by the applicant and the agent is true.[76] It is a well established principle of insurance law that an applicant has a duty to act in good faith towards an insurer.[77] This duty includes making a full and complete disclosure of all relevant information requested when completing an insurance application so the insurer can evaluate the risk and determine whether the applicant meets its underwriting standards.[78] The proposed insured alone has complete knowledge of facts concerning his health, and the statements and answers in the application often are the determining factors the insurer uses in deciding whether to issue a policy.[79] This traditional view allows an insurer to rely upon the information contained in an insured's application for insurance and provides that it does not have to independently verify the accuracy of reported information.[80]

The law also recognizes that insurers must be provided with the ability to challenge claims without fear of tort liability. The obligation to pay meritorious claims is accompanied by the right to deny those claims that are without merit.[81] The insurer should not be required to honor a contract that it entered into on the basis of the proposed insured’s representations contained in the application when in fact these statements were false and the risk that the insurer assumed was either greater than that which it believed it was assuming or was one that the insurer would not assume at all.[82]

The plaintiffs’ challenge to post-claim underwriting is especially important because it not only attacks a specific insurer’s conduct but also an entire method of doing business nationwide in the insurance industry. This article examines the statutory and common law principles surrounding the insurer/insured first-party relationship. It will demonstrate that post-claim underwriting is not illegal but, to the contrary, is a valid method utilized by insurers to protect themselves from adverse selection practiced by a small portion of the public that purchased insurance.

An insurer is entitled to rely upon the information provided by prospective insureds on applications when issuing coverage and any material misrepresentation contained therein provides the insurer with an appropriate basis to rescind coverage.[83] There are already in force adequate protections for the insured against an insurer’s abusive conduct. In fact, many of the cases finding insurer liability for post-claim underwriting really are using this doctrine as a “catch-all” for existing insurance law principles when rejecting an insurer's ability to rescind due to the insured’s misrepresentation contained in the application.

IV.

Statutory/Common Law Governing Rescinding Coverage

Generally, the duty to provide insurance is strictly a matter of contract law.[84] Absent an agreed or implied contractual provision, there is no duty to insure.[85] An application for insurance is an offer that, like any other offer, does not become a contract until accepted by the insurance company. No insurance company can be required to provide insurance coverage to every applicant who seeks coverage. The power of acceptance lies with the insurance company, and without its acceptance, no valid contract exists.[86] Once an insurance is issued, however, there are in place specific rules governing an insurer’s ability to cancel coverage should it discover false answers in the application.

A. Rescinding Coverage

It is a basic principle of contract law that if one party to a contract has been led to make it by the misrepresentation of the other party, the contract is voidable at the option of the innocent party.[87] This principle is as applicable to insurance policies as to other contracts.[88] A combination of statutory law and court decisions determine whether a misrepresentation will avoid an insurance contract. The rule in most states is that when an applicant for life, health or disability insurance is asked on an application for material information about his health or medical history and the specific information requested is not provided or answered untruthfully, and coverage is issued in reliance thereon, the insurer is entitled to rescind the policy.[89] With respect to all of the grounds for rescission, the insurer bears the burden of proof to establish facts supporting rescission[90] by either a preponderance of the evidence[91] or by clear and convincing evidence.[92]

1. Misrepresentation

A misrepresentation in an insurance application is an untrue statement or fact.[93] Incomplete answers or a failure to disclose material information on an application for insurance may also constitute a misrepresentation.[94] However, a misrepresentation alone is not by itself grounds for denial of coverage. The “materiality” of the misrepresentation must be established.[95]

2. Materiality

The question of materiality is determined by the extent the false answer influenced the insurer to assume the risk of coverage.[96] Generally, if the insurer with knowledge of the true facts would not have issued a policy or would have issued one under different terms from that which it did issue, the test of materiality has been satisfied.[97] When a misrepresentation is material it deprives the insurer of its freedom of choice in determining whether to accept the risk.[98] If the information given by the applicant is false, but the insurance company would have issued the same policy regardless, then it is not material.[99] Consequently, the question of materiality is determined at the time the policy was issued.[100]

Materiality often is a question of fact[101] but, in the appropriate situation, may become a question of law.[102] In most cases the proof offered by the insurer consists of testimony or affidavits by company underwriting personnel or the medical director as to what the company would have done had it had all the facts,[103] supplemented, in some cases, by portions of the company’s underwriting manual.[104]

3. Reliance

The third element is that, at the time the policy was issued, the insurer reasonably relied on the representation made by the applicant.[105] An insurance company cannot avoid liability on a policy if it can be shown the insurer did not actually rely on the applicant’s misrepresentation.[106] This failure of reliance can be established if the insurer had actual knowledge of the true facts, or at least a sufficient indication that would have put a prudent person on notice.[107] This may preclude the insurer from rescinding its contract if it disregarded that notice and did not make reasonable inquiries to confirm or refute those indications.[108]

Similarly, when an applicant gives sufficient information to alert an insurance company to his particular medical condition or history, the insurer then becomes obligated to make such further inquiry as is reasonable under the circumstances in order to ascertain the facts surrounding the information given.[109] The question of what constitutes “sufficient indications” is ordinarily one for the trier of fact.[110]

The mere fact that the insurer conducts an independent investigation does not, by itself, indicate a lack of reliance.[111] This is true unless the investigation discloses facts sufficient to expose the falsity of the representations of the applicant or facts that are of such a nature as to place upon the insurer the duty of further inquiry, but the insurer decides to issue the policy anyway.

This point is illustrated in Story v. Safeco Life Insurance Co.[112] The insurer rescinded a life insurance policy based on the insured’s material misrepresentation of his health on the application. The insured admitted on the application only that he was under treatment for controlled high blood pressure. Two doctors and a VA Hospital were listed on the application. One doctor was contacted and a policy was issued at a rated premium. The insured died less than one year later. Only then did the insurer contact the VA hospital and learn the insured had been treated for coronary artery disease. Coverage was rescinded.

The plaintiff argued the insurer knew or reasonably should have known the insured had this condition. The court found that an insurer having knowledge the insured had some or all the risk factors for a disease does not necessarily equate with knowledge that the insured actually has the disease. So too, the court rejected the plaintiff’s argument that once an insurer begins an investigation it is accountable for any information obtained or which easily could have been obtained. The insurer’s investigation in not obtaining VA Hospital records was at most negligently conducted. Mere negligence in discovering facts concerning an insured’s misrepresentations is not equivalent to knowledge of those facts.[113]

4. Additional Requirements for Rescinding Coverage

Many courts hold that a material misrepresentation alone, even if innocent, voids the contract.[114] Some state statutes and courts require that an insurer seeking to avoid a policy on the basis of misrepresentation also show fraud by the applicant.[115] Intent to deceive may involve either the insured’s knowledge of the falsity of the statement and its materiality to the risk[116] or circumstances in which the insured must have known the statement to be material to the risk.[117] Several states have statutes that require that the facts misrepresented must contribute to the actual loss.[118] In these states the law imposes a far greater burden on an insurer than that imposed at common law.

5. Application Questions

Questions in an application seek to elicit material information. The insurance company that intends to rely exclusively on the application should ask questions tailored to yield all the information that it needs. This is because the use of a nonmedical application may produce a pool of policyholders who will have higher mortality or morbidity rates than those that would be produced by full medical underwriting. The foregoing requirements governing an insured’s duty to disclose and an insurer’s ability to rescind coverage are applied based on the type of questions asked by the insurer in the application.

a. Objective Questions

Objective questions call for information within the applicant’s knowledge, such as whether he has been examined or treated by a physician, or “have you ever had (naming various conditions).” These representations are considered to be objective because their truth or falsity may be established by direct evidence.[119] These questions do not ask the applicant to respond in the affirmative only if the applicant believes the treatment or conditions presented a serious health threat. An applicant’s failure to disclose pertinent information will not be excused on the grounds that the applicant thought the problem to be minor.[120] Nor must an insurance applicant completely understand all effects of a health condition before a duty to disclose this information to an insurer is triggered. The insurance company, not the insured, determines whether the matters concerning which the insured consulted a physician and whether the treatment received was serious or unimportant. An insured is not entitled to take this choice away from the insurer by failing to disclose information specifically inquired about that is considered by the insurer to be material to the risk.[121]

b. Subjective Questions

In contrast, there are other situations in which an applicant is asked to respond to questions on the application that call for statements that amount to matters of opinion or judgment. Subjective questions are concerned with more ambiguous issues, such as what is the state of the applicant’s health.[122] Courts have been more lenient when reviewing an applicant’s misrepresentations made in response to a subjective question than to an objective question because the question is directed toward probing the applicant’s knowledge and belief.[123] Insureds in such instances sometimes interpret their policy application questions very differently from their insurers. Insureds believe that their responses to application questions are correct.

In order to be material and entitle an insurer to cancel a policy, an incorrect statement to a subjective question must be one that the applicant could be reasonably expected to have sufficient information to answer or state he lacked knowledge to give a responsive answer.[124] There is no breach of the duty to disclose if the applicant is ignorant of the relevant information, or if the applicant acting in good faith does not understand the significance of the information he fails to disclose. A layperson will not be held to the level of knowledge or understanding that a doctor or other expert might have had.[125] However, an applicant’s belief is to be accepted only to the extent that it is not clearly contradicted by the factual knowledge on which it is based. Thus, if the underlying facts known to the insured were in clear contradiction to his statements, his stated belief will not be accepted and the insured will be deemed to “know” of the misrepresentations.[126]

Representations of good health, as distinguished from answers to purely factual questions, are subjective and call for statements of opinion.[127] An answer to a “good health” question on an application representing that the insured is in good or sound health or free from any disease or illness is a representation only that the applicant in good faith believes and is justified in believing that he is a well person and his health is not impaired by any condition that would ordinarily be regarded as a “disease.”[128] The representation is not regarded as false unless the insured actually knows, or should have known, that he was suffering from a serious illness or unless the insured had symptoms that a reasonable person would regard as indicative of a lack of good health.[129]

The terms “sound health” and “good health” are considered to be words of common usage and understanding, and it is not necessary to include in the application a definition of these words.[130] Nor does utilizing such a question make the application “illegal,”[131] against public policy[132] or invalidate a rescission.[133] It simply heightens the insurer’s burden of proof to sustain its decision to cancel coverage.[134]

The insurer willing to take the risk of asking only general or subjective questions, will also take the chance of paying benefits to the insured (or his beneficiary) who was not in good health when he applied for the policy. An insurer can protect itself against insuring an individual it otherwise would not accept by asking objective questions such as whether the applicant has ever been diagnosed for specific medical conditions it deems material.[135] The insured, when specifically asked about these conditions on the application and fails to disclose them, has made a misrepresentation.[136]

c. Intent to Deceive

The distinction between objective and subjective application questions becomes especially important in states requiring an insurer to prove the insured’s intent to deceive as an essential element for rescinding coverage. Whether the insurer has demonstrated the insured’s subjective intent to deceive, when required by state law, depends greatly upon the specificity and nature of the questions asked in the insurance application.[137] If an insurance applicant makes a statement as to a past event, such as treatment by a doctor, proof that the statement was false, at least where the event was such that it could not reasonably have been forgotten satisfies the requirement of a knowingly false statement. The applicant’s motive in making it is immaterial.[138] The rule is the same when the statement relates to subjective matter such as the applicant’s knowledge of the state of his health. If it is established that the applicant must have known that he was not in good health, the policy is voidable for misrepresentation.[139] However, the statement will not void the policy if there is no evidence to show contrary knowledge of the applicant.[140]

d. Ambiguity

Questions on the application also raise the issue of ambiguity. An answer to an ambiguous question will not support a misrepresentation defense when a person could reasonably interpret a question as the applicant did. Ambiguities must be interpreted against the insurer.[141]

When the insurer asks clear and unambiguous questions, the duty rests with the insured to furnish truthful, accurate and complete responses in order to allow the insurer to adequately evaluate any risks revealed.[142] Questions that request specific information regarding medical history and that do not call for the applicant to interpret technical medical terminology but rather are written in everyday language that a layperson should be able to understand have been held to be clear and unambiguous.[143]

The words in a policy must be given their plain and ordinary meaning.[144] Courts will not engage in a strained interpretation of the terms of an insurance contract in order to create an ambiguity when none exists.[145] The usual goal of policy interpretation is to give effect to the mutual intent of the parties.[146]

e. Insurer’s Duty to Request Information

Insurers sometimes contend, usually without success, that the insured misrepresented himself by failing to volunteer information that was not asked for on the application. It is the insurance company’s responsibility to ask the questions that it wants answered.[147] The general rule is that there is no duty on the part of the insured to volunteer information beyond what is requested by the insurance application nor is there a duty to volunteer any health information if the application asks no health questions. An applicant has neither concealed nor misrepresented information when he has answered fully and truthfully all the questions asked of him.[148]

An insurer is not entitled to rescind on the ground that the policy would not have been issued had the insurer been aware of specific information, when it did not ask for the information in the application.[149] This rule includes situations in which the insured, knowing he is seriously (even terminally) ill, deliberately seeks out “no questions asked” insurance in order to obtain insurance that otherwise would not have been sold had the true facts been disclosed.[150]

This rule is illustrated in U.S. Life Credit Life Insurance Co., v. McAfree.[151] There, McAfree, an insurance agent, learned his wife was suffering from terminal cancer. He proceeded to enter into a number of credit transactions and buy a number of credit life insurance policies valued at $188,459 which did not require health information of any kind from prospective insureds. Mrs. McAfree died and the credit insurers sought to rescind coverage. The trial court granted their request. The appellate court reversed.[152] It held that an insurance company that does not ask information and does no underwriting of the risks it insures should expect a certain percentage of such poor risks. Otherwise, any life or health insurer, whenever a claim is presented, may seek out prior health problems to avoid paying the claim. That, according to the court, is precisely the kind of post-claim underwriting that state laws were designed to prevent.

B. Incontestability

The insured, in addition to the strict requirements an insurer must satisfy to rescind coverage, is also protected by the policy’s incontestability requirement. The incontestability provision is a contractual limitation period on claims of misrepresentations and certain insurer rights other than misrepresentation.[153] The vast majority of states require by statute such a provision be included in life and health insurance policies.[154]

Most contestable clauses provide that the policy becomes incontestable at the end of a stated period (usually two years) provided the insured is then alive.[155] The insured must survive the running of the contestable period for the policy to become incontestable. If the insured dies during the period of contestability, the insurer may contest the policy even after the end of the period.[156]

The object of the incontestable statutes and policy provisions is to promote the certainty of insurance obligations.[157] An incontestability provision requires the insurer to investigate and act with reasonable promptness if it wishes to deny liability on the ground of misrepresentation. If the insurer discovers a misrepresentation in the application it must rescind the policy prior to the expiration of the applicable contestable time period.[158] The provision affords insureds with protection that, after a specific period of time, they may be assured that benefits under an insurance policy will be paid upon the occurrence of a covered loss.[159] In essence, incontestability provisions prohibit insurers from collecting premiums for many years and then investigating an insured’s medical history when a claim is submitted,[160] one of the primary arguments raised by critics of post-claim underwriting.

Some legislatures and courts go further and place an additional burden on the insurer by finding that a “contest” for the purpose of the incontestable clause requires legal action taken in court, such as a declaratory judgment. This action must be commenced prior to the expiration of the contestable time period.[161]

VI.

Insurer Obligations – Good Faith v. Fiduciary

Inherent in each first-party insurance contract relationship is a duty of good faith and fair dealing.[162] Plaintiffs contend that an insurer’s duty of good faith and fair dealing in essence is fiduciary in nature. The insurer violates its covenant of good faith in this situation because it places its own interests above that of the insured.[163] Bad faith occurs if an insurer knowingly or recklessly denies a first-party claim for insurance benefits without having a reasonable basis for doing so.[164] This includes failing to investigate an insured’s health prior to the issuance of coverage.[165] Accordingly, the practice of post-claim underwriting is illegal per se.[166]

The reasonableness of the insurer’s conduct is judged based on objective standards governing the insurance industry.[167] The insured need not prove the insurer’s intent or state of mind.[168] However, bad faith involves unfair dealing rather than simply a mistake.[169] To breach the implied covenant of good faith, the insured must prove not only that the insurer withheld benefits due under the policy but also that the reason for withholding benefits was unreasonable or without proper cause. A mistake is not bad faith if it stems from a reasonable stance or a fairly arguable policy interpretation, even though a court ultimately construes the disputed clause in a different manner.[170] This duty of good faith imposed on a first-party insurer does not rise to the level of a fiduciary relationship with the insured.[171]

A fiduciary duty is a formal, technical relationship of confidence and trust[172] that imposes upon the fiduciary greater duties as a matter of law than the first-party insurer owes to its insured.[173] The fundamental rule of a fiduciary obligation is the duty of loyalty. One who is acting as a fiduciary for another has the duty to act with the utmost good faith on behalf of, and for the benefit of, the other person.[174] The essence of a fiduciary relationship is that the parties do not deal on equal terms, because the person in who trust and confidence is reposed and who accepts that trust and confidence is in a superior position to exert a unique influence over the dependent party.[175] The party in whom the confidence is reposed can take no advantage from his acts relating to the interest of the other party without the latter’s knowledge or consent.[176] Fiduciaries are governed by no less than the strictest standard of care imposed by law.[177]

Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another. A fiduciary’s role may be assumed by formal appointment involving a guardian and ward, trustee and beneficiary, principal and agent, doctor and patient, or attorney and client.[178] This relationship may also arise from a more informal confidential relationship wherein one person comes to rely on and trust another in his important affairs and the relations there involved are not necessarily legal, but may be moral, social, domestic or merely personal.[179]

A. First-Party Insurance

The relationship between the insurer and its insured in the first-party context[180] is still contractual rather than fiduciary. Courts recognize that the relationship between the first-party insurer and the insured has a fiduciary-like character, such as equal consideration, fairness and honesty,[181] but examining these types of insurance policies they have not found a level of trust sufficient to establish an actual fiduciary relationship.[182] The extent of the duty of good faith and fair dealing required of an insurer in this quasi-fiduciary relationship differs significantly from what would be required in true fiduciary relationships.

The first-party insurer must not thwart in bad faith the insured’s reasonable expectations under the policy.[183] This is a significantly lesser obligation than that owed by a fiduciary.[184] It merely “requires abstinence by all parties from commission of wrongful conduct which injures the ‘right of [another] to receive the benefits of the agreement.’”[185] The implied covenant of good faith and fair dealing does not entitle the insured to payment of claims that are excluded by the policy, nor to protection in excess of that provided for in the contract, nor to anything inconsistent with the limitations contained in the contract.[186] It is not unreasonable for an insurer to resolve good faith doubts about the claim against the claimant.[187]

Courts have not applied fiduciary law to first-party insurance relationships because of the detrimental effect of such an imposition on ordinary business transactions. Ordinarily, the first-party claim involves a coverage dispute between insurer and insured. All contested insurance claims create an adversarial relationship between the insurer and the insured.[188] The insured seeks the payment of money. The insurer’s self-interest is to resist payment when circumstances justify that action. The insurer’s right to investigate and deny claims must be protected, even though the right appears to conflict with a duty of loyalty to and the best interests of an insured.[189] In addition to the private right of an insurance company to protect its interests, there is a public right against inflated premiums that would result from payment of non-payable claims.[190] Under a true fiduciary relationship, however, the insurer would have to place the insured’s interest above its own.[191]

B. Third-Party Insurance

A fiduciary relationship between the insurer and insured is limited to areas in which the insurer exercises a strong degree of control over the insured’s interests.[192] Third-party insurance coverage, such as liability for the operation of automobiles, homeowner’s, landlord-tenant, and general liability,[193] offers a greater conflict and potential for bad faith conduct. Here, the insurer is obligated to pay sums that the insured is requested to pay to a third-party in discharge of the insured’s own personal legal liability to that third-party. The physical injury is that of a third-party, not the insured. The insured’s potential liability exists independent of any insurance.[194]

The third-party insurer takes on the additional responsibility of defending the claim on behalf of its insured and typically has exclusive authority to accept or reject offers of settlement.[195] The insured bears a disproportionate share of the risk if the insurer fails to accept a reasonable settlement offer within policy limits. This is because the insurer is bound under the express terms of the policy only to pay up to the policy limits, and the insured’s legal liability exposure to a third party may far exceed these policy limits.[196] Thus, the insurer can risk an indeterminate award against its insured knowing that its own financial risk is limited.[197] The insured is wholly dependent upon the insurer to see that, in dealing with claims by third parties, the insured’s best interests are protected. That control gives rise to a fiduciary relationship between the insurer and the insured.[198]

In the first-party situation, on the other hand, the reasons for finding a fiduciary relationship and imposing a corresponding duty are absent. The insurer is not in a position to expose the insured to a judgment in excess of policy limits through its unreasonable refusal to settle a case nor is the insurer in exclusive control of the defense.[199] No relationship of trust and reliance is created by the contract; it simply obligates the insurer to pay claims submitted by the insured in accordance with the contract.[200] Clearly, then, it is difficult to find a theoretically sound basis for analogizing the duty owed in a third party context to that owed in a first-party context.

VII.

Post-Claim Underwriting Analyzed

A. Courts Rejecting the Illegality of Post-Claim Underwriting

A number of courts following the above stated insurance laws and principles have actually rejected the argument that post-claim underwriting is illegal. These courts support the well established rule that an insurer has the right to rely on the insured’s truthfulness when completing the application and should the insured materially misrepresent his health conditions, the insurer may, through an investigation conducted subsequent to the issuance of the policy, rescind coverage.[201]

In Wesley v. Union National Life,[202] Thomas Wesley purchased a whole life insurance policy, naming his mother as beneficiary. He signed an application, falsely answering questions regarding any hospitalizations, cocaine or heroin use and physician consultations within the prior three years.

The insured was shot and killed six weeks later. The coroner’s report noted cocaine in Wesley’s blood at the time of death. The insurer then began an investigation and learned Wesley was confined in a California hospital’s chemical dependency unit due to his cocaine addiction. The policy was rescinded and this lawsuit followed. The plaintiff argued, citing the Lewis case, that the insurer violated Mississippi law because it engaged in post-claim underwriting.

The court disagreed and granted the insurer’s motion for summary judgment, noting that questions on the insurance application are one method for screening out applicants who present unacceptable risks. An insurance company has the right to rely on the information supplied in the application in determining whether to accept the risk. Here, the insurer made an underwriting decision not to insure applicants who answered, “yes” to any of the application questions. In answering three of these questions falsely, “the insured bypassed the [insurer’s] underwriting process.”[203] The court went on to state that when an applicant makes material misrepresentations in the application, the law grants an insurance company the right to rescind the entire policy. This is true even if the insurer might have issued another type of coverage. The insurer is not required to provide coverage that would or might have been available if the applicant had answered questions truthfully.

The court recognized the important difference between investigating a claim and underwriting a policy after the fact. The insured’s misrepresentations, not the acts of the insurer, denied him the life insurance benefits altogether.[204] The court noted:

Plaintiff appears to confuse post claim underwriting with post claim investigation of eligibility. To deny the [insurer] the right to engage in post claim investigation would mean that insurers would have to investigate every answer by every applicant before insuring them and to pay claims regardless of the misrepresentations contained in the application.[205]

So too, in Brandt v. Time Insurance Co.,[206] Brandt, a Type II diabetic, obtained a health insurance policy from Time through a broker. The application contained a question that asked “[w]ithin the past five (5) years, have you . . . ever received any medical or surgical diagnosis or treatment, including medication for . . . diabetes . . . Note: The policy . . . cannot be issued if YES is answered on [this question].”[207] Brandt answered “No.” Several months later she was diagnosed with terminal stomach cancer and her medical bills were submitted to Time. The insurer learned only then of Brandt’s diabetes and rescinded coverage.

Brandt sued Time and her broker. She alleged Time engaged in post-claim underwriting, which constituted an unfair and deceptive business practice. Time moved to dismiss these allegations, which the trial court granted and the appellate court affirmed.[208] Illinois law recognizes that an insurer has no general duty to investigate the truthfulness of answers given to questions asked on an application for insurance as part of its underwriting process. “An insurance company has the right to rely to the truthfulness of the answers given by an insurance applicant, and the insured has the corresponding duty to supply complete and accurate information to the insurer.”[209]

Similarly, in Marshall v. Universal Life Insurance Co.,[210] the plaintiff purchased a life insurance policy for her three and one half year old daughter. She answered in the negative an application question “To the best of your knowledge, have you been to a physician or clinic for treatment or diagnosis of any condition in the last 5 years?”[211] The insured died within the first two years of coverage from a heart condition. The insurer then conducted an investigation and determined that a doctor or clinic had seen her daughter on twenty-one occasions for viral infections, sickle cell tract and pneumonia. Coverage was rescinded.

The plaintiff sued and obtained an award of contract, extra-contractual, and punitive, damages. The appellate court reversed, in part, ruling that it was a material misrepresentation for the answer to be “no” to the question regarding having been seen or treated by a doctor or clinic prior to that time. The insurer was under no duty at that time to discover whether the “no” answer was a misrepresentation. It had the contractual and statutory right to investigate the claim when the insured died within the two year incontestable period.[212]

Finally, in Kirsh v. UNUM Life Insurance Co., of America,[213] the plaintiff was issued a disability policy that was later rescinded for material misrepresentations in his application. The plaintiff alleged, in part, that the insurer engaged in illegal post-claim underwriting. The court, affirming the trial court’s summary judgment ruling for the insurer, stated:

[E]ven if we were to consider [the plaintiff’s] argument of UNUM’s . . . post-claims underwriting . . . [his] breach of his duty to disclose his diagnosis of colon cancer to UNUM overrides those defenses to rescission. Had [the plaintiff] disclosed the . . . test and its results, UNUM certainly would have investigated, obviating any problem of “post-claims underwriting.” In short, [the plaintiff] cannot take advantage of his own non-disclosure to manufacture defenses to rescission.[214]

These decisions, unlike Lewis[215] and Huff,[216] recognize that the applicant actually controls the application process. The insurer requests specific information on the application and the applicant has the duty to truthfully answer the questions and permit the insurer to decide whether the risk is acceptable. The insured’s conduct, not that of the insurer, creates the problem at claim time, and the insured should not benefit from his or her wrongful actions.

There have been a number of decisions where the courts have simply noted that the insurer had first conducted an eligibility investigation only after the loss occurred and yet still upheld the insurer’s right to rescind coverage. The issue of post-claim underwriting was not addressed. These courts have, sub silentio, supported the insurer’s right to conduct a post-claim investigation.[217]

B. Post-Claim Underwriting Under Guise of Traditional Insurance Law Concepts

A number of other courts, although finding an insurer liable for post-claim underwriting, were in fact simply condemning conduct that violated more traditional rules of first-party insurance law.[218] In each instance the insurer’s conduct went far beyond simply failing to conduct a pre-issuance investigation of the insured’s health.[219]

1. Conflict of Interest

Several insurers were found to have placed their own pecuniary interests above those of their insureds. Internal policies and procedures were utilized to sell policies and collect premium but also to avoid liability at claim time, all to the detriment of their insureds.

In White v. Continental General Insurance Co.,[220] several Wyoming insureds sued for insurance breach of contract and bad faith when the insurer rescinded health coverage for material misrepresentations. One of the insureds, Vic White, signed a completed application, answering “no” to all of the questions regarding his medical history. Once the application was received, the underwriting department conducted a telephone interview wherein White confirmed his medical information answers on the application. In reliance on the answers he gave both in his application and during the telephone interview, the insurer ceased its background investigation and issued him a policy. When he received the policy, he never reviewed it, even though the policy and a subsequent letter from the insurer advised him to do so.

White later filed a claim for thyroid cysts. Continental only then learned he had been previously treated for manic depression, which had not been disclosed on the application. Continental’s underwriting guidelines required the company to decline to insure any applicant with a history of depression. Accordingly, Continental rescinded his policy.

A second insured, Laurie Davis, also applied for and received medical coverage, representing in her application and telephone interview that she was a non-smoker and received a policy at the lower premium. No pre-issue investigation was undertaken. Thereafter, Continental learned she did smoke. Her policy was also rescinded. Continental admitted it still would have insured Davis, but at a higher rate.[221]

Continental sought summary judgment. The plaintiffs countered this motion by arguing the insurer acted in bad faith by engaging in the practice of post-claim underwriting, and that this conduct is prima facia evidence of the lack of a reasonable basis for denying to pay benefits. The insurer argued as to Mr. White’s claim that it had no duty to investigate the answers he gave because it had no reason to assume that his answers were not truthful or accurate. The District Court actually acknowledged that the insurer was entitled to rely on the answers that White gave in his application as well as the subsequent telephone conversation. The court stated that White is, in effect, asking the court to impose a duty on the insurance company to investigate the truthfulness of each and every answer to every question in an application for coverage. However, the court also ruled that the issue of “materiality” of White’s misrepresentation was a question for the jury to decide.

Here, discovery revealed Continental previously had experienced severe financial losses and post-claim underwriting would allow it to increase its revenues by accepting new insureds, while at the same time decreasing its expenditures by denying coverage when claims were submitted. Continental had in place a “bonus plan,” that required each underwriter to reach one hundred points per day to keep their job. Two and one half points were awarded if a claim was paid or denied. However, five points were awarded if the underwriter could find a pre-existing condition that would allow Continental to deny coverage.

Summary judgment sought by the insurer was denied based on the insurer’s post claim underwriting. The evidence supporting the court’s decision, however, was based on the insurer's conflict of interest with its insureds created by its system of rewarding underwriters for finding reasons to deny claims. Based on this evidence, the court concluded that there were genuine issues of fact relating to post-claim underwriting and plaintiff’s bad-faith claim.

In Nassan v. National States Insurance Co.[222] the plaintiff, age eighty-five, applied for a nursing home insurance policy. The application disclosed a three-day hospital confinement for a bowel obstruction. The policy was issued without further investigation. The plaintiff was hospitalized two months later and then placed in a nursing home. The insurer, nine months after the claim was first filed, notified the plaintiff that her policy was being rescinded for material misrepresentations because her medical records revealed prior treatment for chronic confusion and hypothyroidism.

The jury awarded actual and punitive damages, which the Iowa Supreme Court affirmed. The plaintiff’s insurance expert’s criticism of National States went far beyond the “post-claim underwriting” challenged by plaintiffs. He testified the insurer was engaging in “cash flow underwriting” as well as “post-claim underwriting.”[223] He described the former practice as a broad plan to run large amounts of cash through the company that could be invested and ultimately paid out to the company principals prior to its collapse from an unreasonably low premium structure. He felt the premium charged for this policy was only one-third of that charged by other companies for similar coverages. Accordingly, the premiums charged could not possibly be adequate to cover its claims and administrative costs.

This expert also concluded, after reviewing the insurer’s underwriting practices that its quotas for underwriters amounted to reviewing eighty-five applications per day. This requirement resulted in the underwriters rubber stamping the acceptance of policy applications with no serious effort to weed out high-risk applicants. This, coupled with the company’s seemingly deliberate delay in processing claims, led the expert to conclude that the company was applying post claim underwriting as an attempt to rescind policies after claims had been made.

Finally, the evidence showed the insurer based its rescission decision on a single reference found in several pages of hospital records. However, the discharge summary revealed these conditions were only suspected and not confirmed. The jury could have found that the insurer had been engaging in a calculated scheme to sell insurance to elderly people, by means of low-ball pricing and lenient underwriting practices, that would ultimately render the company unable to pay the promised benefits.

Similarly, in Ingalls v. Paul Revere Life Insurance Group,[224] the insurer paid disability benefits for almost two years and then offered the insured a lump sum settlement. Only after this proposal was rejected did the insurer begin investigating the information provided on the insured’s application for disability insurance. The insured’s disability policy then was rescinded for an alleged material misrepresentation regarding his income. The trial court awarded compensatory and substantial punitive damages, which the North Dakota Supreme Court affirmed, holding that the insurer’s failure to define what precise income information is sought in the application for disability insurance prevented it from later rescinding coverage.

An expert for the plaintiff testified the insurer engaged in “post claim underwriting” by “instead of looking to pay the claim and provide a basis for paying the claim, you look for all the things in the application that you might be able to dig up that would allow you to rescind the policy.”[225] In essence, Paul Revere first attempted to negotiate a settlement. Only after the insured refused, did the insurer seek to investigate the validity of his application answers. There also was evidence that field adjustors were evaluated based on the number of claims they were able to close. They needed to finalize twenty-five percent of their claims in order to maintain their jobs and receive raises. The belated attempt to rescind coverage could be seen as a pretext to avoid a long term and expensive claim.

In Vining v. Enterprise Financial Group, Inc.,[226] Milford Vining purchased an automobile as well as credit life insurance to protect the car payments in the event of his death. He signed an application representing he was in good health and not treated for any heart or other cardiovascular diseases. Ten years prior to this purchase he suffered from coronary artery disease and underwent coronary bypass surgery. Thereafter he underwent testing and took medication without any symptoms right up to the date he died fifteen months after purchasing the vehicle and insurance. The dealership finance and insurance manager had not been trained to sell this insurance, including what constituted “good health.” A claim was filed and the insurer requested medical records, rescinding coverage on the same day they were received.

Evidence established that Enterprise would rescind life insurance policies issued on a guaranteed basis as soon as claims were made on the ground the insureds made material misrepresentations on the application. This decision was made regardless of whether the insurer in fact would have declined to write the policy had it known of that information at the time the policy was written. The Oklahoma Department of Insurance had previously investigated and fined this insurer for its business practices, including having extremely low loss ratios. Enterprise, according to the court, engaged in a systematic, bad faith scheme of canceling policies without determining whether it had good cause to do so. In fact, the judge in this case characterized Enterprise’s conduct as similar to the fictional insurance company portrayed in John Grisham’s novel, “The Rainmaker.”[227] A verdict for $800,000 plus interest and attorney’s fees was sustained on appeal.

In Meyer v. Blue Cross & Blue Shield of Minnesota,[228] Darwin Meyer applied for a health insurance policy and failed to disclose in his application that he had been treated for a cough, kidney stones and a shoulder injury. Nor did he disclose that he was also covered by other health coverage. When Blue Cross received his application, it requested and obtained additional medical information from his physician. Blue Cross issued him a policy.

Several months later M. Meyer was diagnosed as HIV-positive, and subsequently developed AIDS. Blue Cross learned about his expensive medical treatments and requested additional medical information. Blue Cross thereafter rescinded the policy. An underwriter testified that a policy would not have issued if he had seen the medical record notation “cough, etiology uncertain.” Blue Cross’ policy was to decline coverage whenever an applicant had a condition of unknown origin. The trial court granted the insurer’s motion for directed verdict.

The appellate court reversed. The failure to record occasional visits to a doctor about apparently minor disturbances was not a sufficient reason to deny recovery. There were questions whether even if the information was furnished, Blue Cross would have inquired further. Blue Cross also may have possessed medical information prior to issuing coverage that Meyer had been treated for a variety of medical conditions which should have alerted Blue Cross to investigate further.

A jury, according to the court, is not required to accept even uncontradicted testimony of an insurance underwriter if improbable or if the surrounding facts and circumstances afford reasonable grounds for doubting the underwriter’s credibility. The court determined the insurer had engaged in “retro-active underwriting.”[229] Actually, the issue was whether the alleged misrepresentations were material and whether the insurer could reasonably rely on such representations based on medical information already in its possession.

Finally, in Gulf Guaranty Life Insurance Co. v. Duett,[230] Duett purchased a pick-up truck for $26,100.90 to be paid in three annual installments of $8,700.30. He also purchased a level credit life insurance policy. He made two annual payments on the vehicle, but died prior to making the final one. The insurer paid the final $8,700.30 installment and the widow argued that level life insurance meant that should her husband die at anytime during the life of the policy, the insurer must pay the full $26,100.90. The trial court granted summary judgment to the widow and also ordered the insurer to pay $15,000 in punitive damages. The Mississippi Supreme Court affirmed the summary judgment but reversed the punitive damage award, holding the amount of punitive damages was for the jury to determine.

The concurring opinion said, in part, that the insured contracted for a level policy that, by definition, covers the full amount of the loan for its duration. The insurer had no arguable basis to act otherwise. The refusal to pay full policy benefits amounted to post-claim underwriting.[231] In fact, liability was premised on a post-claim misinterpretation of the policy language.

2. Agent Knowledge

A recurring issue in misrepresentation cases is the allegation by the insured or beneficiary that the insured told the sales agent the truth, and the agent recorded the information on the application incorrectly. This issue of agent knowledge has been the basis for a number of cases upholding decisions against insurance companies under the guise of post-claim underwriting.

An insurer is prevented from avoiding a policy for untrue representations in the application where the insured discloses the true facts to the agent and the agent, in filling out the application, does not state the facts as they are disclosed to him.[232] Nor can the insurer rely on incorrectly recorded answers when the incorrect answers are entered pursuant to the agent’s advice, suggestion or interpretation.[233] The agent’s knowledge of the truthfulness of the statements is imputed to the insurer.[234] It is only when the applicant has acted in bad faith, either on his own or in collusion with the insurer’s agent that a court will refuse to impute the knowledge of the agent to the insurance company.[235]

In Union Security Life Insurance Co. v. Crocker,[236] the insurer issued credit life insurance through lending institutions, including the First Alabama Bank of Choctaw. The application contained nine specific questions regarding an applicant’s medical history and all were required to be answered “no” in order for the applicant to qualify for coverage. The insurer reserved the right to review health records “after the fact” whether insurance should have been issued.

Mr. Crocker applied for a loan at this bank. The manager had already completed the application for insurance, marking all health questions “no.” Yet, Crocker was suffering from Parkinson’s Disease and twice had undergone major heart surgery within the last ten years. The bank branch manager personally knew the Crockers, and had knowledge of Mr. Crocker’s health problems. Crocker died less than one year later of heart disease. The insurer investigated and rescinded coverage.

The court upheld a punitive damage award in favor of the insured's widow due to the insurer's bad faith in conducting post claim underwriting. The court's punitive damage decision was, however, based almost exclusively on the legal concept that the agent’s actions in intentionally falsifying the application were imputed to the insurer. The evidence also established that the bank manager had an incentive to sell the insurance regardless of the borrower’s eligibility. He would receive a commission even if benefits were denied for any future claim.

So too, in Southern United Life Insurance Co. v. Caves,[237] the insured, having a history of heart disease, applied for a car loan and credit life insurance. The insurer did not have a written application requesting health information and the branch manager had no specific instruction on determining an applicant’s eligibility. She simply was expected to use her own discretion in determining who qualified for insurance. The certificate only said the insured must be “in insurable health at the time [the insurance] was written . . . that the company had 31 days . . . to investigate and accept or reject the insurance.”[238] The only investigation the insurer ever undertook involved the insured’s character and mode of living, and no medical review was ever conducted. The insured died of a heart attack less than a month later, and at that time medical records were obtained. Coverage was rescinded.

The court noted:

[W]here an insurance company makes no effort to establish clear and meaningful guidelines to assist its agents in discerning persons eligible for coverage but merely relies on the agents’ judgment to select those persons appearing to be healthy, that company by its actions manifests an intention to “insure the world.”[239]

Additionally, there was evidence the loan officer knew of the insured’s heart problems, which was imputed to the insurer. Finally, there was no evidence to show that under the insurer’s normal underwriting procedures Mr. Crocker would have been rejected.

In American Income Life Insurance Co. v. Hollins,[240] Deloise Hollins for many years had suffered from “female problems.” She purchased a hospital indemnity policy due to her problems becoming more severe. She alleged that she fully disclosed her medical problems to the agent and was told her condition would be covered as long as she had not undergone surgery. The agent completed the application that failed to disclose any health problems. Hollins signed it without reviewing the document. Coverage was issued and several months later she underwent surgery for her condition. She spent four days in the hospital and sought the $100 per day hospital benefit. The insurer then conducted an investigation regarding Ms. Hollins’ health and coverage was rescinded for material misrepresentation.

The trial court ruled in favor of Hollins, awarding contract and punitive damages finding that only after she filed a claim for benefits did the insurer conduct an investigation that amounted to post-claims underwriting. The Mississippi Supreme Court affirmed, holding that under Mississippi law when an agent takes charge of completing the application, the insurer may not rescind coverage if the true facts were provided to the agent. This is so even if the applicant does not review the completed application. The evidence also disclosed Hollins previously purchased other coverage with this insurer and had not only disclosed her medical condition on the application but had filed a claim. Thus, the insurer had prior notice of this condition. Yet, only after receiving a claim under the most recent policy did the insurer review the insured’s medical information and determine that she was not eligible for coverage.

In Reserve Life Insurance Co. v. McGee,[241] McGee applied for a medical/hospitalization policy, and signed an application that contained a number of specific health questions. The agent asked general questions regarding his health and he responded that his health was good. The agent told him the insurer would first contact his doctor prior to issuing the coverage and McGee signed an authorization for the release of his medical records.

One month later the insurer issued a policy without any further investigation. McGee, in reliance on this policy, dropped his prior policy. That same year he was hospitalized for bladder cancer. When the claim was received, the insurer undertook an extensive medical investigation and discovered two treatment dates by his doctor for transient ischemic attack. Coverage was rescinded for material misrepresentation. A jury ruled against the insurer. The Mississippi Supreme Court upheld a punitive damage award in favor of an insured based on a health insurer's bad faith in conducting “postclaims underwriting."

The court's decision that the insurer engaged in “post claim underwriting” actually appears to be based on the fact that the insurer failed to consider information already provided to it by its insured. The insured at the time of application had specifically advised the insurer's agent that all information concerning his medical history was available from his physician, and the insurer was authorized to obtain that information from the physician before issuing the policy.[242]

3. Failing to Provide the Insured With a Policy

In Gardner v. League Life Insurance Co.,[243] the plaintiff was a member of the Muskegon Credit Union, which purchased death and disability protection to pay outstanding loan balances of its member borrowers. The master group policy between the insurer and credit union specifically required the member to be physically able to perform, or within a reasonable time to resume, the usual duties of his occupation to qualify for credit insurance.

The plaintiff had a history of back trouble and reinjured his back on April 12, 1969. Five days later he applied for and received a loan with the Credit Union, along with credit insurance. When the insurer learned of his disability, policy benefits were denied. The court disagreed and expressly found that the insurer was estopped from denying liability for its failure to provide the plaintiff with notice of the policy and its exclusionary provisions. The court stated:

Defendant is engaged in post claim underwriting as a legitimate vehicle to diminish the cost of insurance. This method of underwriting is predicated upon a determination of coverage at the time a claim is filed which retroactively applies the physical requirements to evaluate the member's eligibility at the time the loan was procured. The injustice of informing a disabled borrower at the time the claim is filed that he has no insurance protection is obvious and the need for notice is beyond peradventure.[244]

Michigan law required that a certificate be issued to the debtor at the time the indebtedness is incurred unless an application for insurance is used. This guarantees that debtors will be given notice of the insurance provision by which they are governed. The Credit Union purchased the coverage for the debtor, so no such documents were provided to him. To enforce this requirement a borrower must be given proper notice. Such notice is the only safeguard against potential abuses of post-claim underwriting.

Similarly, in Krauss v. Manhattan Life Insurance Co.,[245] Krauss, an attorney, was employed as a part-time officer of Lettercraft, Inc. The company provided group life insurance to employees of its members. This master policy provided a maximum of $25,000 for part-time employees and officers but this limitation was never brought to the attention of Krauss. Nor did the insurer even inquire into his work status. Instead, a $50,000 certificate of insurance was issued, which was later increased to $100,000.

Krauss died and the insurer paid only $25,000. The appellate court rejected this action, holding that by failing to inquire about his part-time status on its application (or at any time prior to his death), by issuing insurance in a higher amount and by accepting premium based on these higher coverages, the insurer was estopped from relying on the master policy’s limitations. The concurring judge’s opinion states that the insurer was estopped from making post-claim underwriting adjustments. Once again, the real issue was the insurer’s failure to provide the insured with appropriate notice of policy limitations.

(iv) Third-party Insurance Duty of Care

There have been several decisions preventing an insurer from rescinding coverage when a third-party will be prejudiced by that action. In each instance, the insurer was mislead into issuing an insurance policy due to the insured’s misrepresentations contained in the application. Only after a post-claim investigation did the insurer learn of the misrepresentations. These courts, however, barred the insurer from rescinding coverage for the particular loss at issue because of the damage that another party would suffer.

Barrera v. State Farm Mutual Automobile Insurance Co.[246] involved an action by a pedestrian against an automobile liability insurer to recover the amount of a judgment obtained against a motorist it insured. The insurer denied the validity of the policy based on material misrepresentations contained in the application for coverage.

Sandra Alves, a named insured, struck Eva Barrera in her car. In conjunction with obtaining insurance, Mr. Alves made the false representation that his driver’s license had not been suspended, revoked or was renewal refused within the past five years. Barrera obtained a judgment against the Alveses and sued State Farm to collect the judgment. The insurer proceeded to file a cross-claim against its insured and Barrera alleging the policy should be rescinded ab initio based on the insured’s misrepresentations when he obtain the insurance.

The California Supreme Court assumed the insured had misrepresented facts on the application. The insurer, however, had conducted no further investigation beyond asking the insured questions about his driving record. Evidence suggested State Farm did not investigate to save costs. This sacrificed the interests of the insured and the general public who were the potential victims of the insured’s negligence. The court, reversing a lower court’s summary judgment in favor of State Farm held that despite the insured’s misrepresentation, in order to preserve its rights to rescind the insurance policy:

An automobile liability insurer must undertake a reasonable investigation of the insured’s insurability within a reasonable period of time from the acceptance of the application and the issuance of the policy. This duty directly inures to the benefit of third persons injured by the insured. Such an injured party, who has obtained an unsatisfied judgment against the insured, may properly proceed against the insurer; the insurer cannot then successfully defend upon the ground of its own failure.[247]

The court concluded this obligation to investigate derived principally from the public policy underlying California’s Financial Responsibility Law and the “quasi-public” nature of the insurance business. The “quasi-public” nature of an insurance contract requires the court to “look to the reasonable expectation of the public and the type of service which the entity holds itself out as ready to offer.”[248]

The reasonable expectation of the public is that insurance companies provide them with insurance. This expectation would be frustrated if the courts allowed an insurer to “perpetually postpone the investigation of insurability and concurrently retain its right to rescind [the insurance policy] until the injured person secures a judgment against the insured and sues the carrier.”[249] Accordingly, the automobile liability company’s failure to conduct a reasonable investigation prevents it from rescinding coverage.[250] The insurer may cancel coverage so long as coverage is in force through the time of the accident.

The same principle was applied to health insurance in St. Joseph Hospital & Medical Center v. Reserve Life Insurance Co.[251] Montney completed an application for a group health insurance policy on September 1, 1981, misrepresenting his height and weight. Later, two large masses were discovered and Montney was referred to a cancer doctor. He was diagnosed as having chronic myclogenous leukemia and admitted to the hospital on Oct. 14. He informed the hospital of his insurance coverage. The hospital verified coverage for this and for a subsequent confinement by telephoning the insurer. The insurer, however, later learning of Montney’s misrepresentations, rescinded coverage.

St. Joseph’s Hospital sued the insurer for the services rendered to Montney. The jury ruled in favor of the hospital finding that the insurer was guilty of negligent misrepresentation and was estopped from denying coverage. The appellate court reversed. The Arizona Supreme Court reinstated the compensatory award. Despite the insured's misrepresentation, the court found that the insurer's conduct supported the hospital's claim for relief.

The hospital based its claim, in part, on the insurer's willingness to verify the existence of health insurance coverage to the hospital without engaging in any significant underwriting prior to receiving a claim. Montney was not required to undergo a pre-issue medical exam nor did the insurer investigate the accuracy of his application until after the claims were submitted. The court held that a supplier of commercial information must exercise reasonable care and competence in the accuracy of facts upon which the information is based. The insurer knew hospitals intended to use and rely on this information and thus had a duty of care. The insurer should not have held itself out as having the ability to provide coverage information if it knew that its underwriting practices did not place it in a position to respond accurately to a particular request.[252] In a footnote, the court expressly recognized that this practice constituted "post claim underwriting."[253]

So too is the case of Cleveland Clinic Foundation v. Commerce Group Benefits, Inc.,[254] where a hospital twice admitted an individual who was a member of a health plan. Each time, the defendant, a claim administrator, incorrectly stated the individual was insured. In fact, due to pre-existing medical problems, she should have been excluded from health insurance coverage. The clinic sued seeking the full cost of treatment alleging negligent misrepresentation.

The court, ruling for the clinic, found the defendant had sufficient information in its files to determine the patient did not qualify for coverage yet verified coverage anyway. The defendant negligently misrepresented to the clinic that the patient did have benefits and it continued to treat this individual in reliance on that representation of benefits.[255]

The insurers in the foregoing cases may have been able to rescind coverage had the insureds sought benefits directly. However, once a third-party became involved due to no fault of its own, benefits could no longer be denied.

IX.

Conclusion

Risk selection enables an insurer to provide needed coverage to customers at a fair price. The application for insurance completed by the insured at the time insurance is requested performs a critical role and is one of the most important and fundamental risk assessment tools available to the insurer for the purpose of underwriting the coverage sought. Many insurance policies are issued based solely on the responses contained in the application. Cost is an important factor. Obtaining detailed information in each instance may not be cost-effective, especially for small amounts of insurance.

The insurer’s reliance on such representations is justified. Trust and ethical behavior are essential elements in underwriting. Insurers have the right to presume that the information provided in the application by the applicant is true. The law imposes no duty on an insurer to conduct an independent investigation of insurability before issuing an insurance policy. To find otherwise would condone insurance fraud.

Individuals may, however, fail to disclose important information on the application because they realize truthful answers may result in higher premiums or even denial of coverage. This conduct violates the basic principle of good faith and fair dealing in the insurance relationship, which applies to both applicants and insurers. An insurance company having issued coverage in such an instance may, within the contestable period, rescind the policy once it learns the insured made material misrepresentations in the application. This is true regardless of whether the insurer conducted a pre- or post-issue eligibility investigation. The insurer should not be required to honor a contract entered into based on incorrect representations contained in the application that, if properly disclosed, would have affected the insurer’s decision to issue the policy applied for.

ENDNOTES

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† Submitted by the author on behalf of the FDCC Life, Health and Disability Section.

[1] Bertram Hartnett & Irving I. Lesnick, The Law of Life and Health Insurance § 12.01 at 12-4 (2003). Insurers often advertise “peace of mind” to sell their products. Andrew Jackson Life Ins. Co. v. Williams, 566 So. 2d 1172, 1175 n.5 (Miss. 1990). In response, insureds pay premiums for insurance in the event coverage is needed. Bonenberger v. Nationwide Mut. Ins. Co., 791 A.2d 378, 382 (Pa. 2002).

[2] Harnett & Lesnick, supra note 1, § 3.01 [5] at 3-14-17.

[3] Insurers rely on information provided by the Medical Information Bureau (“MIB”), Attending Physician Statements, Para-Medical Examinations and Inspection Reports. Barbara F. Brown & Jane L. Brown, Life and Health Underwriting – 1998 Life Office Management Associates, at 12-13. The MIB is a data exchange among insurers that provides life, health, and disability coverage. Insurer members report to the MIB medical information about their insureds relating to the insureds risk for mortality or morbidity. The MIB then codes this information and makes it available to its other member companies. Are You on File?, Chi. Trib., Aug. 23, 2002, § 13 at 3. An inspection report is a form of investigative consumer report. They are conducted to learn about an applicant’s personal life, activities, occupation and financial status. Brown & Brown, supra at 176.

[4] Brown & Brown, supra note 3, at 52 and 230. Hartnett & Lesnick, supra note 1, § 3.01 [2][a] at 3-5. Small policies, such as credit insurance, are often issued under simplified guidelines and the insurer does not seek independent information regarding the applicant’s health. Stewart v. Gulf Guar. Life Ins. Co., 846 So. 2d 192, 204 (Miss. 2002).

[5] Golden v. Northwestern Mut. Life Ins. Co., 551 A.2d 1009, 1014 (N.J. Super. Ct. App. Div. 1988).

[6] Tingle v. Pacific Mut. Ins. Co., 837 F. Supp. 191, 193 (W.D. La 1993). In fact, some insurers actually “over underwrite.” In other words, they place significant resources into investigating an applicant when, based on the amount of coverage sought, age and medical history, less investigation is sufficient. Nat’l Underwriter, Life & Health/Financial Services Ed., Feb. 18, 2002 at 12.

[7] William F. Meyer, Life and Health Insurance Law § 5:1 at 81 (1971).

[8] Jackson Nat’l Life Ins. Co. v. Receconi, 827 P.2d 115, 126 (N.M. 1992); Norwick v. United Security Life Co., 152 N.W.2d 439, 441 (S.D. 1967). Almost all insurance companies require some proof of eligibility before issuing coverage. Fitts v. Fed. Nat’l Mortgage Assoc., 236 F.3d 1, 5 (D.C. Cir. 2001).

[9] Underwriting in the Life and Health Insurance Company, Life Management Institute 53 (1985).

[10] Brown & Brown, supra note 3 at 230. There are different underwriting criteria for life and disability insurance products. Some conditions that are important for disability coverage, such as muscular-skeletal disorders, are not important for life insurance. Charles E. Soule, Disability Income Insurance – The Unique Risk at 133 (4th ed. 1998). So too, underwriting requirements vary among companies. The Dangers of Over Underwriting, Nat’l Underwriter, Life & Health/Financial Services Ed., Feb. 18, 2002, at 12. An insurer has the obligation to ask questions of the applicant it deems necessary to properly evaluate the application. Mattox v. Western Fidelity Ins. Co., 694 F. Supp. 210, 216-17 (N.D. Miss. 1988). The applicant has the corresponding duty to disclose all information requested on the application. Kloutas v. Life Ins. Co. of Virginia, 35 F. Supp. 2d 616, 623 (N.D. Ill. 1998).

[11] This type of insurance is life insurance “characterized by (a) death benefits of $2,500 or less, (b) a weekly, bi-weekly, or monthly premium payment schedule, (c) collection or premiums at the policyholder’s home by the agent, and (d) minimum underwriting requirements.” Brown & Brown, supra note 3 at 230.

[12] Coverage that supplements or adds to the amount of coverage owned by an individual. Id. at 211.

[13] Credit life and disability insurance protects a borrower or the estate should the borrower die or become disabled. Willey v. United Mercantile Life Ins. Co., 990 P.2d 211, 218 (N.M. Ct. App. 1999). This is not a stand-alone policy that provides a sum of money to the beneficiary when the insured dies. It is actually a part of a financing or loan arrangement to pay the remaining balance of the loan to the creditor should the insured die prior to the loan’s repayment. Barber v. Balboa Life Ins. Co., 747 So. 2d 863, 866-67 (Miss. Ct. App. 1999).

[14] The process of accepting or rejecting an applicant for insurance is called “underwriting.” Harnett & Lesnick, supra note 1, § 3.01 at 4.

[15] “Underwriting and pricing are critical to the sale of insurance. Underwriting standards help determine whether the applicant is a good, bad or questionable risk.” Employees’ Benefit Assoc. v. Grissett, 732 So. 2d 968, 978 (Ala. 1998).

[16] Underwriting in the Life and Health Insurance Company, supra note 9, at 2. “Insurance is boring, but at its heart, it is a pretty straight forward business. Control your risk and take a long-term view so long as you can handle the inevitable bumps in the road.” Ken Brown, Cigna Pummeled for not Insuring Big Risks, Wall Street J., Sept. 5, 2002 at C1.

[17] The relative incidence of death occurring among a given group of people. Brown & Brown, supra note 3, at 243.

[18] The relative incidence of sickness and injury occurring among a given group of people. Id. at 243.

[19] Guardian Life Ins. Co. v. Tillinghast, 512 A.2d 855, 859-60 (R.I. 1986) (the underwriter’s expertise is in evaluating risks the insurer may want to assume).

[20] Shapiro v. Allstate Life Ins. Co., 609 N.Y.S.2d 323, 324 (App. Div. 1994).

[21] Friedman v. Prudential Life Ins. Co. of Am., 589 F. Supp. 1017, 1027 (S.D.N.Y. 1984). As noted in Kirsh v. UNUM Life Ins. Co. of Am., No. B152445, 2002 WL 1293016 (Cal. Ct. App. June 12, 2002) at *5, the issue of materiality is subjective and determined from the insurer’s standpoint. An insurer establishes its underwriting guidelines through industry experience and studies on mortality and morbidity rates as well as other criteria such as policy lapse rates and other factors. Brown, supra note 3, at 10.

[22] Chicago Ins. Co. v. Kreitzer & Vogelman, 210 F. Supp. 2d 407, 413 (S.D.N.Y. 2002). On the other hand, failure to have an underwriting manual may create a question for the jury. Capital Life & Acc. Ins. Co. v. Phelps, 66 S.W.3d 678, 682 (Ark. Ct. App. 2002); Richison v. Boatman’s Ark., Inc., 981 S.W.2d 112, 116 (Ark. Ct. App. 1998).

[23] Industrial insurance is designed to provide a small benefit covering burial expenses. Small premiums often are collected weekly by the agent. Torres v. Fid. & Guar. Life Ins., 611 N.E.2d 733, 735 n.5 (Mass. App. Ct. 1993).

[24] Brown, supra note 3, at 21.

[25] Id. at 23.

[26] Id.

[27] Id. at 81. On the other hand, an insurer is estopped to deny liability when its agent knows the true facts but improperly completes the application. The agent’s actual knowledge is imputed to the insurer. Only if the applicant acts in bad faith individually or in collusion with the agent will be insurer be able to void coverage in this instance. Brandt v. Time Ins. Co., 704 N.E.2d 843, 849 (Ill. App. Ct. 1998).

[28] Hartnett & Lesnick, supra note 1, § 3.01 at 13-14; Brown & Brown, supra note 3, at 52, 234-35.

[29] Golden v. Northwestern Mut. Life Ins. Co., 551 A.2d 1009, 1014 (N.J. Super. Ct. App. Div. 1988); Buemi v. Mut. of Omaha Ins. Co., 524 N.E.2d 183, 186 (Ohio Ct. App. 1987).

[30] The condition and state of an applicant’s health is important to an underwriter’s decision to accept or reject the risk. Norwick v. United Sec. Life Co., 152 N.W.2d 439, 441 (S.D. 1967). As stated in Fitts v. Fed. Nat’l Mortgage Assoc., 236 F.3d 1 (D.C. Cir. 2001) “[v]irtually all insurance policies require proof of eligibility before dispensation of benefits – hardly a surprising fact, since insurance companies are not in the business of giving away money to anyone who requests it.” Id. at 5.

[31] Matilla v. Farmers New World Life Ins., 960 F. Supp. 223, 224 (N.D. Cal. 1997) (insurer routinely investigates any claim filed within the contestability period); Rowe v. Metro. Life Ins. Co., No. Civ. A. 00-2211, 2001 WL 685940 at *1 (E.D. La. June 18, 2001); Lauer v. Am. Family Life Ins. Co., 769 N.E.2d 924, 925 (Ill. 2002); Marshall v. Universal Life Ins. Co., 831 P.2d 651, 653 (Okla. Ct. App. 1991).

[32] “The most litigated single issue in life and health insurance is whether there has been a misrepresentation in the application for insurance entitling the insurer to avoid paying the contract benefit.” Harnett & Lesnick, supra, note 1, at § 4-1.

[33] Wesley v. Union Nat’l Life, 919 F. Supp. 232, 234 (S.D. Miss. 1995). Insurance companies have the same rights as individuals to limit their liability. Estate of Doe v. Paul Revere Ins. Group, 948 P.2d 1103-1112 (Haw. 1997).

[34] Parker v. Prudential Ins. Co. of Am., 900 F.2d 772, 778 (4th Cir. 1990); Mut. Benefit Life Ins. Co. v. JMR Elec. Corp., 848 F.2d 30, 34 (2d Cir. 1988) (per curiam); White v. Continental Gen. Ins. Co., 831 F. Supp. 1545, 1549-50 (D. Wyo. 1993).

[35] Wesley, 919 F. Supp. at 234-35. The applicant’s health status is critical to the insurer’s ability to evaluate the risk. Jackson Nat’l Life Ins. Co. v. Receconi, 827 P.2d 118, 126 (N.M. 1992).

[36] Richison v. Boatman’s Ark., Inc., 981 S.W.2d 112, 114 (Ark. Ct. App. 1998).

[37] Meyer v. Blue Cross & Blue Shield of Minn., 500 N.W.2d 150, 151 (Minn. Ct. App. 1993).

[38] Post-claim underwriting has been referred to as a practice whereby an insurer “automatically” approves applications and, only when a claim is submitted, investigates the insured’s eligibility with the intent to deny the claim and cancel coverage. Herald v. Blue Cross Blue Shield of Neb., No. A-93-379, 1994 WL 440399 at *3 (Neb. Ct. App. Aug. 16, 1994). In fact, one insurer was found to engage in just such a practice. Nassen v. Nat’l States Ins. Co., 494 N.W.2d 231, 234-35 (Iowa, 1992). See notes 270-281 infra, and accompanying text.

[39] Eichenseer v. Reserve Life Ins. Co., 894 F.2d 1414, 1416 (5th Cir. 1990) (dissent); Richison v. Boatman’s Ark., Inc., 981 S.W.2d 112, 114 (Ark. Ct. App. 1998); Provident Indem. Life Ins. Co. v. James, 506 S.E.2d 892, 894 (Ga. Ct. App. 1998); Southern United Life Ins. Co. v. Caves, 481 So. 2d 764, 767 (Miss. 1985). One court characterized the definition of post-claim underwriting as “self-explanatory.” Richison, 981 S.W.2d at 114.

There is also the related doctrine known as “reunderwriting.” Here, some health insurers not only evaluate an insured’s risk at the time coverage is initially applied for but also on the policy’s renewal date. These insurers argue this practice limits premium increases for healthy insureds while increasing (sometimes significantly) premiums for less healthy insureds who file claims. Side Effect – Insurer’s Tactic: If You Get Sick, The Premium Rises, Wall St. J. Apr. 9, 2002, at A1. This practice, although permitted for (and regularly practiced by) homeowner and auto insurers, has been challenged by insurance regulators and consumer groups when used by health insurers. They argue homeowners and drivers have more control over their claim history than an individual has over their health. The practice of reunderwriting will price sick people out of the market for health insurance and deny them access to the medical care they need. Id. at A20. The groups also contend that this practice violates the basic insurance principal of risk-sharing. American Medical Says It Will Stop Reunderwriting, Wall St. J., Aug. 7, 2002, at B9.

[40] Hays v. Jackson Nat’l Life Ins. Co., 105 F.3d 583, 590 (10th Cir. 1997)(“unreasonable, irresponsible and reprehensible”); Richison, 981 S.W.2d at 114 (common law fraud and unfair and deceptive trade practices); Brandt v. Time Ins. Co., 704 N.E.2d 843, 846 (Ill. App. Ct. 1998); Hatch v. State Farm Fire & Cas. Co., 842 P.2d 1089, 1097 (Wyo. 1992) (bad-faith).

[41] The court in Charles Greco v. Torchmark Corp., 2000 Life Health & Accid. Ins. Cas. (CCH) ¶ 7005 (N.D. Miss. 1999) defined post-claim underwriting “as a systematic investigation of claims made within two years after the policy’s issuance causing delay in payments in claims during these investigations. Id. at p. 10, 016, n.2. The plaintiff in Richison, 981 S.W.2d 112, argued this practice constituted “prima facie” bad faith. Id. at 114.

[42] Vining v. Enter. Fin. Group, Inc., 148 F.3d 1206, 1213 (10th Cir. 1998); Greer v. Burkhardt, 58 F.3d 1070, 1074 (5th Cir. 1995), (citing Lewis); Nassen v. Nat’l States Ins. Co., 494 N.W.2d 231, 233, 238-39 (Iowa 1993); Lewis v. Equity Nat’l Life Ins. Co., 637 So. 2d 183, 186 (Miss. 1994) (jury to determine amount of punitive damages for the insurer’s illegal post-claim underwriting). But see Stanford v. Veterans Life Ins. Co., No. Civ. A.1:91 CV 271-D-17, 1994 WL 1890816 at *4 (S.D. Miss. Oct. 24, 1994) (no punitive damages for post-claim underwriting). A recent article aregues for a finding of bad faith per se when an insurer engages in post-claim underwriting, see Thomas C. Cady & Georgia L. Gates, Post-Claim Underwriting, 102 W. Va. L. Rev. 809 (2000).

Punitive, unlike compensatory, damages are intended to punish a defendant and deter future wrongful conduct. Cooper Indus., Inc., v. Leatherman Tool Group, Inc., 532 U.S. 424, 432 (2001). They may be properly imposed to further a state’s legitimate interests in punishing illegal conduct and deterring its repetition. BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 568 (1996). Insurance companies, like other corporate entities, face a greater exposure to a punitive damage award from a jury. Juries have often had a bias against large, especially out-of-state corporations. TXO Prod. Corp. v. Alliance Resources Corp., 519 U.S. 443, 486, 491 (1993) (O’Connor, J., dissenting). “[J]urors naturally think little of taking an otherwise large sum of money out of what appears to be an enormously larger pool of wealth.” TXO Prod. Corp., 519 U.S. at 491. In fact, the Supreme Court of Appeals of West Virginia acknowledged that there is a strong temptation to transfer wealth from out-of-state corporations to in-state plaintiffs. Garnes v. Fleming Landfill, Inc., 413 S.E. 2d 897, 906 (W. Va. 1991). The award of extra-contractual damages for insurer bad faith “once thought to be a rarely applicable remedy...appears now with great frequency.” Employees’ Benefit Assoc. v. Grissett, 732 So. 2d 968, 978 (Ala. 1998).

[43] Vis v. Prudential Prop. & Cas. Ins. Co., 33 P.3d 487, 492 (Cal. 2001); Austero v. Nat’l Cas. Co., 133 Cal. Rptr. 107, 110 (Ct. App. 1976). The duty to act in good faith does not arise from the terms of the insurance policy. This duty is imposed by law. Moffett v. Haliburton Energy Servs., Inc., 291 F.3d 1227, 1236 (10th Cir. 2002); Pulley v. Preferred Risk Mut. Ins. Co., 897 P.2d 1101, 1102 (Nev. 1995). This duty is implied, Macomber v. Travelers Property & Cas. Corp., 804 A.2d 180, 182 (Conn. 2002), because of the special relationship between the parties to an insurance policy. White v. Continental Gen. Ins. Co., 831 F. Supp. 1545, 1555 (D. Wyo. 1993); Kirkwood v. CUNA Mut. Ins. Soc., 937 P.2d 206, 211 (Wyo. 1997), State Farm Mut. Auto Ins. Co. v. Shrader, 882 P.2d 813, 815 (Wyo. 1994).

[44] Vining v. Enter. Fin. Group, Inc., 148 F.3d 1206, 1213 (10th Cir. 1998) (an insurer has a legal duty to deal fairly and act in good faith with its insureds); Rattan v. U.S. Auto Assoc., 101 Cal. Rptr. 2d 6, 10 (Ct. App. 2000) (an insurance policy imposes on insurers public as well as private obligations). Tectonic Realty v. CNA Lloyd’s of Tex., 812 S.W.2d 647, 651 (Tex. App. 1991); Caserotti v. State Farm Ins. Co., 791 S.W.2d 561, 565 (Tex. App. 1990)

[45] Rawlings v. Apodaca, 726 P.2d 565, 570-71 (Ariz. 1986); Mariscal v. Old Republic Life Ins. Co., 50 Cal. Rptr. 2d 224, 227 (Ct. App. 1996); Harvey v. Farmers Ins. Co., 983 P.2d 34, 39 (Colo. Ct. App. 1998); Ingalls v. Paul Revere Life Ins. Grp., 561 N.W.2d 273, 283 (N.D. 1997). The court in Fletcher v. Western Nat’l Life Ins. Co., 89 Cal. Rptr. 78, 95 (Ct. App 1970) noted that the risks for which an individual purchases insurance are normally those which he cannot afford to bear without this coverage. Similarly, Judge Lent’s dissenting opinion in Farris v. U.S. Fid. & Guar. Co., 507 P.2d 1015, 1028, n.4 (Or. 1978):

[T]hat insurers sell their product as being not only an agreement to indemnify the insured for certain kinds of loss but also to relieve the purchaser from anxiety concerning all aspects of claims is readily apparent in our society. One cannot watch televised entertainment for very long without being exposed to commercials for the sale of insurance...As such advertisements reflect, the relationship between insurer and insured does not merely concern indemnity for monetary loss . . .

See also Andrew Jackson Life Ins. Co. v. Williams, 566 So. 2d 1172, 1174, n.5 (Miss. 1990). (Insured purchases coverage for peace of mind.).

[46] Noble v. Nat’l Am. Life Ins. Co., 624 P.2d 866, 867-68 (Ariz. 1981). “The insurer’s ability to unilaterally cancel an insurance policy and the insured’s inability to prevent cancellation demonstrates a great disparity in bargaining power between the two parties.” Union Bankers Ins. Co., v. Shelton, 889 S.W.2d 278, 283 (Tex. 1994).

[47] State Farm Mut. Auto Ins. Co. v. Superior Court, 13 P.3d 1169, 1175, n.3 (Ariz. 2000); Egan v. Mut. of Omaha Ins. Co., 24 Cal. 3d 809, 818-19 (Cal. 1979). An insurer may not ignore evidence supporting coverage. To do so, constitutes a breach of the covenant of good faith and fair dealing. Mariscal v. Old Rep. Life Ins. Co., 50 Cal. Rptr. 2d 224, 227-28 (Ct. App. 1996). In fact, some courts here found that “an insurer has an even greater duty than the insured to act fairly and in good faith.” Price v. N.J. Mfrs. Ins. Co., 846 A.2d 617, 623 (N.J. Super Ct. App. Div. 2004).

[48] Zilisch v. State Farm Mut. Auto Ins. Co., 995 P.3d 276, 280 (Ariz. 2000). “An insurance contract is one where an insurer, in return for an agreed premium, assumes specified risks of financial loss which might otherwise befall the insured.” Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 203, 211 (1979).

[49] Stenger v. Provident Life & Accid. Ins. Co., 121 F. Supp. 2d 1238, 1249 (E.D. Wis. 2000); Mariscal v. Old Republic Life Ins. Co., 50 Cal. Rptr. 2d 224, 227 (Ct. App. 1996); Bonenberger v. Nationwide Mut. Ins. Co., 791 A.2d 378, 382 (Pa. 2002); Billings v. Union Bankers Ins. Co., 918 P.2d 461, 465 (Utah 1996); Trinity Evangelical Lutheran Church v. Tower Ins. Co., 661 N.W.2d 789, 800 (Wis. 2003).

[50] Mariscal, 50 Cal. Rptr. 2d at 225, 277.

[51] Id. The reasonableness of an insurer’s decision must be reviewed based on what the insurer knew at the time the decision was made, not based on later events which show the insurer made a mistake. Chateau Chamberary Homeowners Ass’n. v. Associated Int’l Ins. Co., 108 Cal. Rptr. 2d 776, 784 (Ct. App. 2001). However, an insurer also has a duty to continually reevaluate its position should it deny the claim. Sobley v. Southern Nat’l Gas Co., 302 F.3d 325, 335 n.19, 339 (5th Cir. 2002) (on appeal after 201 F.3d 561).

[52] Rawlings v. Apodaca, 726 P.2d 565, 570 (Ariz. 1986); Arnold v. Nat’l County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987). Subsequent to a loss the insured finds himself in “dire financial straits.” Tokles & Son, Inc. v. Midwestern Indemn. Co., 605 N.E.2d 936, 945 (Ohio, 1992).

[53] Rawlings, 726 P.2d at 570; White v. Unigard Mut. Ins. Co., 730 P. 21d 1014, 1018 (Idaho, 1986). An insurer “must exercise an honest and informed judgment.” Trinity Evangelical Luthern Church v. Tower Ins. Co., 661 N.W.2d 789, 796 (Wis. 2003).

[54] New England Life Ins. Co. v. Signorello, 119 F. Supp. 2d 1052, 1067 (N.D. Cal. 2000). Most states recognize a cause of action for breach of the covenant of good faith and fair dealing in the context of first-party insurance. However, courts don’t agree as to the nature of the breach. Some jurisdictions find that the breach sounds in tort, Hangarter v. Provident Life & Accid. Ins. Co., 373 F.3d 998, 1009 (Cal. law); Vaughn v. McMinn, 945 P.2d 404, 406 (Colo. 1997); Masonic Temple Assoc. v. Ind. Farmers Mut. Ins. Co., 779 N.E.2d 21, 26 (Ind. Ct. App. 2002); Smith v. Safeco Ins. Co., 78 P.3d 1274, 1276-77 (Wash. 2003) (en banc) 2003 WL 22508858; Hatch v. State Farm Fire & Cas. Co., 842 P.2d 1089, 1097 (Wyo. 1992). Other states find such a breach is only contractual, Hartz v. Liberty Mut. Ins. Co., 269 F.3d 474, 476 (4th Cir. 2001) (Maryland law); Lone Star Steakhouse & Saloon, Inc. v. Liberty Mut. Ins. Group, No. 02-1185-WEB, 2003 WL 22149669 at *1 (N.D. Kan., Aug. 14, 2003); N.Y. Univ. v. Continental Ins. Co., 662 N.E.2d 763 (N.Y. 1995); Employer’s Fire Ins. Co. v. Love It Ice Cream Co., 670 P.2d 160, 165 (Or. Ct. App. 1983). Still other courts have found such a breach to be contractual in nature but permit damages beyond those awarded for contract breach. Acquista v. N.Y. Life Ins. Co., 730 N.Y.S.2d 272, 278 (App. Div. 2001) (recognized that an insured should have an adequate remedy to redress an insurer’s bad faith refusal to pay benefits). Contra Harris v. Provident Life & Accid. Ins. Co., 310 F.3d 73, 80 n.3 (2d Cir. 2002); Brown v. Paul Revere Life Ins. Co., No. 00CIV. 9110 (KMW) (HBP) 2001 WL 1230528 at *4-5 (S.D.N.Y Oct. 16, 2001). Still other states, such as Illinois, preempt punitive damages in first-party insurance benefit denial cases by statute and provide a specified penalty instead. 215 Ill. Comp. Stat. Ann. 5/155 (West 1998). See O’Neill v. Gallant Ins. Co., 769 N.E.2d 100, 111 (Ill. App. Ct. 2002). Finally, some states hold that an insurer’s breach sounds in both contract and tort. Hamilton v. Md. Cas. Co., 41 P.3d 128, 132 (Cal. 2002).

A detailed analysis of first-party insurance bad-faith is beyond the scope of this article. See Marc S. Mayerson, “First Party” Insurance Bad Faith Claims: Mooring Procedure to Substance, 38 Tort Trial & Ins. Prac. L. J. 861 (2003) for a general discussion of this subject.

[55] Mut. Ben. Life Ins. Co. v. Morley, 722 F. Supp. 1048, 1053 (S.D.N.Y. 1989), Lewis v. Equity Nat’l Life Ins. Co., 637 So. 2d 183, 186 (Miss. 1994). This is especially important when the application and/or eligibility requirements are not specific (i.e. “good health” representation). The insurer must clearly notify the applicant what criteria are necessary to qualify for insurance. This is the only safeguard “against the potential abuse of post-claim underwriting.” Norgan v. Am. Way Life Ins. Co., 469 N.W.2d 23, 25 (Mich. Ct. App. 1991).

[56] Krauss v. Manhattan Life Ins. Co., 700 F.2d 870, 874 (2d Cir. 1983); Stewart v. Gulf Guar. Life Ins. Co., 846 So. 2d 192, 198 (Miss. 2002); Lewis, 637 So. 2d at 188-189. Its purpose is to protect the reasonable expectations of the parties. Ins. Concepts & Design, Inc. v. Healthplan Servs., Inc., 785 So. 2d 1232, 134 (Fla. Dist. Ct. App. 2001). As stated in Keller v. First Nat’l Bank, 403 S.E. 2d 424 (W. Va. 1991):

In most insurance cases, the plaintiffs pay for and believe they have insurance, to discover only after disaster strikes, no insurance. The insurer has the plaintiff’s money and after the disaster informs the plaintiff that no insurance exists. The insured always loses. Without the disaster, the insurer keeps the premiums even though there is no insurance and with the disaster, the potential insured becomes uninsured and the insurer returns the premium.

403 S.E.2d at 427.

[57] Union Bankers Ins. Co. v. Shelton, 889 S.W.2d 278, 283 (Tex. 1994).

[58] LeMaster v. USAA Life Ins. Co., 922 F. Supp. 581, 585 (M.D. Fla. 1996).

[59] Am. Income Life Ins. Co. v. Hollins, 830 So. 2d 1230, 1238 (Miss. 2001), Dixie Ins. Co. v. Mooneyham, 684 So. 2d 574, 591 (Miss. 1996) (McRae, J. dissenting); Lewis v. Equity Nat’l Life Ins. Co., 637 So. 2d 183, 189 (Miss. 1994); Ainsworth v. Combined Ins. Co. of Am., 774 P.2d 1003, 1011, n.7 (Nev. 1989); Arnold v. Western Nat’l County Mut. Fire Ins. Co., 725 S.W.2d 165, 167 (Tex. 1987).

[60] Mattox v. Western Fid. Ins. Co., 694 F. Supp. 210, 216 (N.D. Miss. 1988); Lewis v. Equity Nat’l Life Ins. Co., 637 So. 2d 183, 189 (Miss. 1994).

[61] Lewis, 637 So. 2d at 188-89.

[62] Mattox, 694 F. Supp. at 216. One court states that post-claim underwriting may apply even to a delay in making claim payments where there is a systematic eligibility investigation undertaken for claims filed within two years of purchase. Greco v. Torchmark Corp., No. Civ. 1:98 Civ 196-JAD, 1999 WL 33537116 at *2, n.1 (N.D. Miss. Oct. 29, 1999).

[63] 637 So. 2d 183 (Miss. 1994).

[64] Id. at 184.

[65] Id. at 189. The court’s ruling came into question in Barber v. Balboa Life Ins. Co., 747 So. 2d 863 (Miss. Ct. App. 1999). Here, Mr. Barber purchased credit life insurance and failed to disclose his hypertension on the application. He died within the contestable time period and coverage was rescinded. Id. at 864. The trial court voided the recession because of an untimely investigation and the premium refund was sent to the creditor, not the estate. Id. at 866. The appellate court affirmed because the money should have been refunded to the debtor. The dissenting opinions would not have prohibited the insurer from rescinding coverage because any pre-issue failure to investigate the insured’s health. Lewis, 637 So. 2d 183, did not apply because of the insured’s knowledge of his serious health problems. Thus, the insurer should be entitled to rescind . Id. at 874-75.

However, the Mississippi Supreme Court reaffirmed its holding that post-claim underwriting was illegal in Am. Income Life Ins. Co. v. Hollins, 830 So. 2d 1230 (Miss. 2001). Citing, Lewis, 637 So. 2d 183, the court said “[a]n insurer has an obligation to its insured to do its underwriting at the time a policy application is made, not after a claim is filed.” Am. Income Life Ins., 830 So. 2d at 1236.

But cf Gordon v. Nat’l States Ins. Co., 851 So. 2d 363 (Miss 2003). Here, the insured applied for two six thousand dollar life insurance policies, signing an application in which he denied, among other things, that within the past two years he had received medical treatment for heart failure. The application stated that if the applicant responds in the affirmative he is not eligible for coverage. Id. at 364. Based solely on the representations contained in the application, the insurer issued coverage. The insured died approximately six months later and only then did the insurer conduct an eligibility investigation by obtaining medical records. These records indicated the insured had, in fact, been under treatment for congestive heart failure. Coverage was rescinded. The widow argued to the insurer that the agent knew of her husband’s heart condition. The agent specifically denied any such knowledge, but the insurer made a decision to pay the claim in full anyway. Id. at 364-65. A lawsuit alleging insurer bad-faith was then filed seeking consequential and punitive damages. Summary judgment for the insurer was granted and affirmed on appeal. Id. at 365-66. The Mississippi Supreme Court said “National’s initial denial of payment was justifiably based.” Id. at 365. Only after the allegation of agent knowledge was asserted did the insurer reconsider. The court also states “[n]o evidence has been presented to suggest that National acted with malice, gross negligence or reckless disregard in handling . . . [the] claim.” Id. at 366. Had the trial and state supreme court followed its holdings in Lewis, 637 So. 2d 183 and Hollins, 830 So. 2d 1230, a finding of illegal post-claim underwriting should have followed. Yet, there is no mention of this conduct.

Even more recently, the court in Bullock v. Life Ins. Co. of Miss., 872 So. 2d 658 (Miss. 2004) once again upheld an insurer’s right to rescind coverage based solely on the insurer’s post-claim investigation. Here the insured signed an application for credit life and disability insurance to protect a loan. She represented she was not disabled and was actively engaged in full time employment. The insurer issued the coverage and conducted no pre-issue investigation. The insured later sought benefits, alleging that she fell and injured her left foot and right hand. The insurer then learned that tha plaintiff owned coverage with several other insurers and had filed claims for disability benefits alleging losses that predated her purchase of the defendant’s coverage. Her physician affirmed that her total disability predated application with the defendant. The trial court granted the defendant’s motion for summary judgment, permitting the insurer to rescind for material misrepresentations and the Mississippi Supreme Court affirmed. Like Gordon, there was no evidence of any pre-issue investigation. Nor did the court in either decision mention the Lewis case. Has the Mississippi Supreme Court sub silentio overruled Lewis and Hollins?

[66] Lewis, 637 So. 2d at 189.

[67] Id. at 188-89.

[68] Id. at 189.

[69] Id. It isn’t clear from Lewis how much investigation by the insurer will be sufficient to support a later rescission based on the insured’s misrepresentations contained in the application. In Stanford v. Veterans Life Ins. Co., Civ. A.1:91CV271-D-D, 1994 WL 1890816 (N.D. Miss. Oct. 24, 1994) the insured completed an application for life insurance as well as providing the insurer with the name and address of his treating physician and signed a release authorizing healthcare providers to disclose his physical and mental records. Id. at *1. The court noted that the insurer “conducted a cursory investigation which involved simply running a check with the Medical Information Bureau and reviewing the application. No thorough investigation was undertaken...until after [the insured’s] death.” Id. The insurer then learned the insured had, at the time of application, been under treatment for alcoholism, substance abuse and acute pancreatitis. Id. at *1 n.4. The district court rejected the recission, citing Lewis. “The court is of the opinion that this type of cursory investigation is exactly the type of investigation condemned in Lewis...Veterans Life’s simplified investigative procedure will not suffice.” Id. at *2. Finally, the district court placed in issue what is the insurer’s affirmative obligation to investigate an applicant’s health. “[A] clear statement of Mississippi law as to the investigative requirements at the time of the application would certainly be beneficial to everyone involved in the future.” Id. at *3. Unfortunately, to date, the Mississippi Appellate and Supreme Courts have failed to do so.

[70] Several court decisions have simply stated without any discussion or analysis that the practice of post-claim underwriting is illegal. Greer v. Burkhardt, 58 F.3d 1070, 1074 (5th Cir. 1995) (citing Lewis); Moore v. Westfield Cos., No. E-91-11, 1992 WL 113778 at *6 (Ohio Ct. App., May 29, 1992): Hatch v. State Farm Fire & Cas. Co., 842 P.2d 1089, 1097-98 (Wyo. 1992). The court in Eichenseer v. Reserve Life Ins. Co., 894 F.2d 1414 (5th Cir. 1990) also stated post-claim underwriting is illegal. There, however, the court cited Reserve Life Ins. Co. v. McGee, 444 So. 2d 803 (Miss. 1983). McGee involved a situation where the insurer did have sufficient information at application time to know that further inquiry into the insured’s health status was necessary.

[71] 674 So. 2d 21 (Ala. 1995).

[72] Id. at 23.

[73] Tingle v. Pacific Mut. Ins. Co., 837 F. Supp. 191, 193 (W.D. La. 1993). Underwriting is critical to the determination of an applicant’s risk. Employees’ Benefit Assoc. v. Grissett, 732 So. 2d 968, 978 (Ala. 1998). See also William Barker, et al., Is an Insurer a Fiduciary to It’s Insureds? 25 Tort & Ins. L.J. 1, 7-8 (1989).

[74] Tingle, 837 F. Supp. at 193.

[75] “Insurance companies are entitled to candid and truthful answers.” Sweat v. Prudential Ins. Co., 744 So. 2d 949, 951 (Ala. Ct. App. 1999) (quoting Liberty Nat’l. Life Ins. Co. v. Hale, 230 So. 2d 526 (Ala. 1996)).

[76] Bageanis v. Am. Bankers Life Assur. Co., 783 F. Supp. 1141, 1146 (N.D. Ill. 1992); Old Southern Life Ins. Co. v. Spann, 472 So. 2d 987, 989-90 (Ala. 1985).

[77] Kloutas v. Life Ins. Co. of Va., 35 F. Supp. 2d 616, 623 (N.D. Ill. 1998); Lunardi v. Great-West Life Assur. Co., 44 Cal. Rptr. 2d 56, 66 (Ct. App. 1995); Chase v. William Penn Life Ins. Co., 552 N.Y.S.2d 772 (App. Div. 1990); Jackson v. Nat’l Life Ins. Co. v. Receconi, 827 P.2d 118, 127 (N.M. 1992); Norwick v. United Security Life Co., 152 N.W.2d 439, 441 (S.D. 1967); U.S. Life Credit Life Ins. Co. v. McAfree, 630 P.2d 450, 455 (Wash. Ct. App. 1983).

However, the insured’s responsibilities to the insurer are not seen as equal. The insurer’s obligations to the insured are considered to be unconditional and independent of the insured’s performance under the insurance policy. Gruenberg v. Aetna Ins. Co., 510 P.2d 1032, 1040 (Cal. 1973). A number of courts have rejected the insurer’s argument that the insured’s reverse bad-faith bars his lawsuit against the insurer for bad-faith. Kransco v. Am. Empire Ins. Co., 2 P.3d 1, 12 (Cal. 2000); Johnson v. Farm Bureau Mut. Ins. Corp., 533 N.W.2d 203, 208 (Ia. 1995); Tokles & Son, Inc. v. Midwestern Indem. Co., 605 N.E.2d 963. 945 (Ohio 1992).

The California Supreme Court’s decision in Kransco is the leading case in this regard. There, the court limited an insured’s responsibilities to its insurer. The insurer who had breached the covenant of good faith and fair dealing by failing to settle a third-party action within policy limits raised the insured’s comparative bad faith as an affirmative defense, arguing that the insured’s litigation misconduct contributed to the amount of the verdict in excess of the policy limits. The California Supreme Court held that an insured’s comparative bad faith may not be asserted as an affirmative defense in this situation. The court decided that an insurer is not entitled to apportion fault to the insured. A policyholder’s action for bad faith against the insurer is a tort, but the insurer’s action for bad-faith against the insured is only for breach of contract. The unequal bargaining power between the insurer and insured supports this distinction. Id. at 9. The court explained:

To be sure, the “duty of good faith and fair dealing in an insurance policy is a two-way street, running from the insured to his insurer as well as vice versa.” But the scope of the insured’s duty of good faith and fair dealing, and the remedies available to the insurer for a breach of the duty, are fundamentally and conceptually distinct from the insurer’s reciprocal duty, and the remedies available to the insured for breach of that duty under the insurance policy. As this court has explained, it is an insurer’s breach of the covenant of good faith that is governed by tort principles, at least as it concerns the availability of tort damages. In contrast, an insured’s breach of the covenant is not a tort. An insurer’s tort liability is predicated upon special factors inapplicable to the insured.

Id. at 9 (citations omitted). It appears that Kransco applies to first-party insurance as well. Hale v. Provident Life & Acc. Ins. Co., Nos. A092548, A092833, 2003 WL 1510463 at *26 (C.D. Cal. March 25, 2003).

[78] Casey v. Old Line Life Ins. Co., 996 F. Supp. 939, 944 (N.D. Cal. 1998); Commercial Life Ins. v. Lone Star Life Ins., 727 F. Supp. 467, 471 (N.D. Ill. 1989); Nat’l Blvd. Bank v. Georgetown Life Ins., 472 N.E.2d 80, 89 (Ill. App. Ct. 1984); Overfield v. Am. Underwriters Life Ins. Co., 614 N.W.2d 814, 820 (S.D. 2000). An insurer has the right to know all the applicant knows regarding his health and medical history. Lunardi v. Great West Life Assur. Co., 44 Cal. Rptr. 2d 56, 57 (Ct. App. 1995); Jackson Nat’l Life Ins. Co. v. Recoconi, 827 P.2d 188, 126 (N.M. 1992).

[79] By signing the application, the insured represents that he has reviewed the application, understands the questions and that the responses to the questions are true and correct. Barciak v. United of Omaha Life Ins. Co., 777 F. Supp. 839, 844 (D. Colo. 1991); Mut. Life Ins. Co. v. Boston, 114 A.2d 856, 861 (N.J. 1955). The insurer, for underwriting purposes, has the right to know everything that the applicant knows about the risks assumed. Kirsh v. UNUM Life Ins. Co. of Am., No. B152445, 2002 WL 1293016 at *4 (Cal. App. June 12, 2002).

[80] Kioutas v. Life Ins. Co. of Va., 35 F. Supp. 2d 616, 623 (N.D. Ill. 1998); Gasaway v. Northwestern Life Ins. Co., 820 F. Supp. 1241, 1247 (D. Hawaii, 1993), aff’d, 26 F.3d 957 (9th Cir. 1994); Mut. Benefit Life Ins. Co. v. Morley, 722 F. Supp. 1048, 1054 (S.D.N.Y 1989); Mattox v. Western Fid. Ins. Co., 694 F. Supp. 210, 216 (N.D. Miss. 1988); Brandt v. Time Life Ins. Co., 704 N.E.2d 843, 846 (Ill. App. Ct. 1998); Ledley v. William Penn Life Ins. Co., 651 A.2d 92, 97 (N.J. 1995); Marshall v. Universal Life Ins. Co., 831 P.2d 651, 653 (Okla. Ct. App. 1991); Am. Nat’l Ins. Co. v. Naverrete, 758 S.W.2d 805, 808 (Tex. App. 1988). Justofin v. Metrop. Life Ins. Co., 372 F.3d 517, 526 (3d Cir. 2004); Chau v. RCA Ins. Croup, No. 0692 Jan Term 2003, 010761, 2004 WL 594064 at *2 (Pa. Com. Pl. Mar.23, 2004). But cf. Blain v. Prudential Ins. Co., 366 F. Supp. 859 (D.D.C. 1973) (court prevented an insurer from rescinding coverage even though an insured misrepresented his health on the application where the insured had disclosed the name and address of his doctor but the insurer made no effort to contact the doctor).

[81] Johnson v. Sun Life Assur. Co. of Canada, 2000 WL 33225469 (M.D. La. 2000) at *9; Morris v. Paul Revere Life Ins. Co., 135 Cal. Rptr. 2d 718, 723 (Ct. App. 2003); Caserotti v. State Farm Ins. Co., 791 S.W.2d 561, 566 (Tex. App. 1990). An insurer may challenge claims that are fairly debatable. Clearwater v. State Farm Mut. Auto Ins. Co., 792 P.2d 719, 722 (Ariz. 1990) (en banc). However, an insurer must also deal fairly and give equal consideration to the insured. Rawlings v. Apodaca, 726 P.2d 565, 572-73 (Ariz. 1986).

[82] Gasaway v. Northwestern Mut. Life Ins. Co., 820 F. Supp. 1241, 1248 (D. Haw. 1993), aff’d, 26 F.3d 957 (9th Cir. 1994); Rawlings, 726 P.2d at 571; Abdelsamed v. N.Y. Life Ins. Co., 857 P.2d 421, 430 (Colo. Ct. App. 1992).

[83] Fernandez v. Bankers Nat’l Life Ins. Co., 906 F.2d 599, 566 (11th Cir. 1990); Bageanis v. Am. Bankers Life Assur. Co., 783 F. Supp. 1141, 1146 (N.D. Ill. 1992).

[84] Goddard v. Protective Life Corp., 82 F. Supp. 2d 545, 551 (E.D. Va. 2002); Cullen v. Valley Forge Life Ins. Co., 589 S.E.2d 423, 428 (N.C. Ct. App. 2003). Ordinary rules of contract interpretation apply to insurance policies. Rosen v. State Farm Gen. Ins. Co., 70 P.3d 351, 353 (Cal. 2003). “Insurance is a contractual arrangement under which an insurer contracts with the insured to pay money upon the fortuitous happening of a stipulated contingency.” Harnett & Lesnick, supra note 1 at 1-3.

[85] Goddard, 82 F. Supp.2d at 551.

[86] Id. G. P. Enters. v. Jackson Nat’l Life, 509 N.W.2d 780, 784 (Mich. Ct. App. 1993). An insurance application is merely an offer for a contract by an applicant. Hayes v. Durham Life Ins. Co., 96 S.E.2d 109, 111 (Va. 1957). The application does not become an enforceable contract until the application is accepted and the policy placed in effect by the insurer. Connelly v. Prudential Ins. Co., 610 F.2d 1215, 1218-19 (4th Cir. 1979).

[87] New England Life Ins. Co. v. Signorello, 119 F. Supp. 2d 1052, 1059 (N.D. Cal. 2000). An insurer’s rescinding coverage is a complete defense to a lawsuit filed by the insured, Bageanis v. Am. Bankers Life Assur. Co., 783 F. Supp. 1141, 1145 (N.D. Ill. 1992), because a rescinded policy is viewed as never having existed. Cedars v. Sinai Med. Ctr. v. Mid-West Nat’l Life Ins. Co., CV-98-9708-RAP, 2003 WL 1617779 at *7 (C. D. Cal. Feb. 2, 2000).

[88] Rosen v. State Farm Gen. Ins. Co., 70 P.3d 351, 353 (Cal. 2003). After all, an insurance policy is a contract. Cranfill v. Aetna Life Ins. Co., 49 P.3d 703, 706 (Okla. 2002); Principal Life Ins. Co. v. Summit Well Service, Inc., 57 P.3d 1257, 1261 (Wyo. 2002).

[89] Casey v. Old Line Ins. Co., 996 F. Supp. 939, 948 (N.D. Cal. 1998) (specific questions asked on the application establish materiality as a matter of law); Norgan v. Am. Way Life Ins. Co., 469 N.W.2d 23, 26 (Mich. Ct. App. 1991). Rescission is intended to place the parties in the same position they occupied prior to the issuance of coverage. Thus, an insurer must also refund the entire premium paid by the insured.

Insurers often will, during the eligibility investigation, make payments, especially for disability insurance claims. What happens when, after making a number of payments, the insurer determines the policy should be rescinded? Courts have held that any prior claim payments made by the insurer prior to rescinding coverage may be used to offset the amount to be refunded. Borden v. Paul Revere Life Ins. Co., 935 F.2d 370, 379 (1st Cir. 1991); Robinson v. State Farm Mut. Auto Ins. Co., 45 P.3d 829, 836-37 (Idaho, 2002); Am. Standard Ins. Co. v. Durham, 403 N.E.2d 879, 881 (Ind. Ct. App. 1980). As stated in Borden:

We think it is good law that, when an insurer has paid a claim to an insured under a policy which is subsequently rescinded . . . and the monies paid are in excess of the premiums received, the insurer has a right of offset; hence, return of the premiums is not a condition precedent to rescission.. . . . A contrary rule – requiring an insurer which has already overpaid a scalawag insured to throw good money after bad in order to set aside a policy obtained by the insured’s deceit – would make no sense.

935 F.2d at 379 (citations omitted).

State statutes also require the insurer, before rescission can be considered, to attach to the policy a copy of the insured’s application. This allows the insured to review the answers contained to application questions and make any necessary changes. Horowitz v. Fed. Kemper Life Assur. Co., 57 F.3d 300, 305 (3d Cir. 1995).

The Employee Retirement Income and Security Act of 1974, 29 U.S.C. §§ 1001-1191(c) (2004) (ERISA) governs essentially all private employer-sponsored insurance plans. There is no specific ERISA section permitting an insurer to rescind coverage. However, federal common law, which controls ERISA cases, permits such a remedy when the insured obtains coverage through material misrepresentations or omissions contained in the application. Provident Life & Accid. Ins. Co. v. Sharpless, 364 F.3d 634, 639-42 (5th Cir. 2004); Shipley v. Ark. Blue Cross & Blue Shield, 333 F.3d 898, 902-03 (8th Cir. 2003) and cases cited therein.

However, if questions are not asked, then the applicant can assume the information not sought is immaterial to the insurer’s evaluation of the risk. Stipcich v. Metro. Life Ins. Co., 277 U.S. 311, 316 (1928); U.S. Life Credit Life Ins. Co. v. McAfree, 630 P.2d 450, 453 (Wash. Ct. App. 1981).

[90] Mann v. N.Y. Life Ins. & Annuity Corp., 222 F. Supp. 2d 1151, 1154 (D. Ariz. 2002); Golden Rule Ins. Co. v. Lease, 755 F. Supp. 948, 951 (D. Colo. 1991); State Reserve Life Ins. Co. v. Ives, 535 S.W.2d 400, 405 (Tex. App. 1976).

[91] Capital Life & Acc. Ins. Co. v. Phelps, 66 S.W.3d 678, 680 (Ark. Ct. App. 2002); Story v. Safeco Life Ins. Co., 40 P.3d 1112, 1116 (Or. Ct. App. 2002); Mass. Mut. Life Ins. Co. v. Thompson, 460 S.E. 2d 719, 720 (W. Va. 1995).

[92] Wesley v. Union Nat’l Life, 919 F. Supp. 232, 235 (S.D. Miss. 1995); Mass. Mut. Life Ins. Co. v. Nicholson, 775 F. Supp. 954, 959 (N.D. Miss. 1991); Am. Pepper Supply Co. v. Fed. Ins. Co., 72 P.3d 1284, 1288-89 (Ariz. Ct. App. 2003); Lanham v. Blue Cross & Blue Shield of S.C., Inc., 563 S.E. 2d 331, 334 (S.C. 2002); Justofin v. Metro. Life Ins. Co., 372 F.3d 517, 521 (3d Cir. 2004); Martin v. Mike Lovasz Agency, No. 2002-L-173, 2004 WL 457298 at *2 (Ohio Ct. App. Mar. 12, 2004). As stated in Martin, “(c)lear and convincing evidence is that degree of proof which is more than a mere preponderance, but does not rise to the level of certainty required beyond a reasonable doubt in the criminal context.” Id. at *2.

[93] Kioutes v. Life Ins. Co. of Va., 35 F. Supp. 2d 616, 623 (N.D. Ill. 1998). “When the disease has already revealed itself before the policy is purchased the insured effectively deceives the insurance company by purchasing a policy in silence knowing that he will become disabled or die.” Estate of Doe v. Paul Revere Ins. Group, 948 P.2d 1103, 1116, n.22 (Haw. 1997). When, however, the application requests information according to the insured’s “knowledge and belief”, then the inquiry changes from whether the insured’s responses are true to whether the insured, based on his own knowledge, believed them to be true. William Penn Life Ins. Co. v. Sands, 912 F.2d 1359, 1362 (11th Cir. 1990).

[94] Justofin v. Metro. Life Ins. Co., 372 F.3d 517, 522 (3d Cir. 2004); Hayes v. Jackson Nat’l Life Ins. Co., 105 F.3d 583, 588-89 (10th Cir. 1997); Methodist Med. Ctr. of Ill. v. Am. Med. Sec., 38 F.3d 316, 320 (7th Cir. 1994); Kioutes v. Life Ins. Co. of Va., 35 F. Supp. 2d 616, 623 (N.D. Ill. 1998). Even an opinion or prediction can be a misrepresentation to the extent that it is a misstatement of the facts underlying it. John Hancock Mut. Life Ins. Co. v. Weisman, 27 F.3d 500, 504 (10th Cir. 1994). The insurer must ask appropriate questions on the application before an insured can be charged with failing to disclose material information. Krauss v. Manhattan Life Ins. Co., 700 F.2d 870, 873 (2d Cir. 1983); US Life Credit Life Ins. Co. v. McAfee, 630 P.2d 450, 453 (Wash. Ct. App.1981).

[95] Methodist Med. Ctr., 38 F.3d at 319; Brown v. JMIC Life Ins. Co., 474 S.E. 2d 645, 646 (Ga. Ct. App. 1996).

[96] White v. Cont’l Gen. Ins. Co., 831 F. Supp. 1545, 1554 (D. Wyo. 1993). When determining materiality, the court must look at the underwriting standards of the particular insurer. It is not relevant that another insurer might have accepted the risk. Clark v. John Hancock Mut. Life Ins. Co., 447 N.W.2d 783, 785 (Mich. Ct. App. 1989). “The question is what effect truthful answers would have had upon the particular insurer, not some ‘average reasonable’ insurer.” Matilla v. Farmers New World Life Ins., 970 F. Supp. 223, 226 (N.D. Cal. 1997). Materiality is subjective and determined from each insurer’s point of view. Kirsh v. Unum Life Ins. Co., No. B152445, 2002 WL 1293016 at *5 (Cal. Ct. App. June 12, 2002).

[97] Mut. Benefit Life Ins. Co. v. JMR Elec. Corp., 848 F.2d 30, 34 (2d Cir. 1988) (per curiam); Mims v. Old Line Life Ins. Co., 46 F. Supp. 2d 1251, 1256 (M.D. Fla. 1999); Dorsey v. Mut. of Omaha Ins. Co., 991 F. Supp. 868, 874 (E.D. Mich. 1998); Am. Franklin Life Ins. Co., v. Galati, 776 F. Supp. 1054, 1060 (E.D. Pa. 1991). Materiality is determined by the “probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries.” New England Life Ins. Co. v. Signorello, 119 F. Supp. 2d 1052, 1059 (N.D. Cal. 2000) (quoting Cal. Ins. Code § 334).

Even if coverage, under different terms, would have been issued had the insured truthfully answered the application (i.e. higher premiums for smokers than non-smokers), rescinding coverage for misrepresentation is still appropriate. As stated in Mut. Benefit Life Ins. Co.:

A contrary result would reward the practice of misrepresenting facts critical to the underwriter’s task because the unscrupulous applicant would have everything to gain and nothing to lose from making material misrepresentations in his application for insurance. Such a claimant could rest assured not only that he may demand full coverage should he survive the contestability period, but that even in the event of a contested claim, he would be entitled to the coverage that he might have contracted for had the necessary information been accurately disclosed at the outset.

845 F.2d at 34.

There was, until recently, authority in Michigan to the effect that a misrepresentation is not considered to be material under state law (Mich. Comp. Laws § 500:L2218) if the insurer would have still written the contract, albeit at a higher premium, had the true facts been disclosed. “[T]he courts of this State have not focused on whether the insurer would have been entitled to charge an increased premium but for the misrepresentation. Instead, the inquiry has been limited to whether the insurer would have rejected the application altogether had the true facts been known.” Zulcosky v. Farm Bureau Life Ins. Co., 520 N.W.2d 366, 368 (Mich. Ct. App. 1994).

Federal courts, interpreting Michigan law, held otherwise. A district court in Kaji v. Prudential Ins. Co. of Am., No., 94-73782, 1996 WL 426535 (E.D. Mich. Jan. 31, 1996) held in favor of the insurer on the exact same issue, deciding that the Michigan Supreme Court would so hold. Id. at *3-4. Similarly, in United of Omaha Life Ins. Co. v. Rex Roto Corp., 126 F.3d 785 (6th Cir. 1997) the court directly addressed the question whether an insurer that would have issued a policy, knowing the true medical history of an applicant, but charged a higher premium, could still rescind coverage for material misrepresentation? The court answered in the affirmative.

Finally, following the above federal court decisions, the Michigan Supreme Court specifically overruled Zulcosky in Oade v. Jackson Nat’l Life Ins. Co., 632 N.W.2d 126 (Mich. 2001), stating “[T]he proper materiality question...is whether ‘the’ contract issued, at the specific premium rate agreed upon, would have been issued notwithstanding the misrepresented facts.” Id. at 131.

Arizona, under Ariz. Rev. Stat. § 20-1109 (2004), requires that an insurer, in order to rescind, must establish that the policy would not have been issued; the policy would not have been issued in as large amount or the particular risk that caused the loss would have been excluded. If, however, the policy would have been rated or a larger premium charged, this is not a basis for rescinding coverage. Mann v. N.Y. Life Ins. & Annuity Corp., 222 F. Supp. 2d 1151, 1155 (D. Ariz. 2002).

[98] Wohlman v. Paul Revere Life Ins. Co., 980 F.2d 283, 286 (5th Cir. 1992). “An exception to the materiality rule applies in cases where the applicant does not disclose medical treatment relating to minor illnesses....” Justofin v. Metro. Life Ins. Co., 372 F.3d 517, 524 (3d Cir. 2004).

[99] Schneider v. Minn. Mut. Life Ins. Co., 806 P.2d 1032, 1036 (Mont. 1991).

[100] Meyer v. Blue Cross & Blue Shield of Minn., 500 N.W.2d 150, 152-53 (Minn. Ct. App. 1993) (jury not required to accept an underwriter’s testimony, even if uncontradicted, if other evidence challenges this opinion); Schneider, 806 P.2d at 1036.

[101] Marshall v. Universal Life Ins. Co., 831 P.2d 651, 653 (Okla. App. 1991) (fact that insurer sets forth in the application specific questions can be sufficient to establish materiality as a matter of law); Shipley v. Ark. Blue Cross & Blue Shield, 333 F.3d 898, 905-06 (8th Cir. 2003); Fernandez v. Bankers Nat’l Life Ins. Co., 906 F.2d 559, 566 (11th Cir. 1990); Casey v. Old Line Life Ins. Co., 996 F. Supp. 939, 948 (N.D. Cal. 1998); Mut. Ben. Life Ins. Co. v. Morley, 722 F. Supp. 1048, 1052 (S.D.N.Y. 1989). In California, some courts hold that a false answer to a specific application question is material as matter of law. Others hold that the issue of materiality depends not only on the questions asked in the application, but also whether the insurer would have acted differently had the correct information been disclosed. Matilla v. Farmers New World Life Ins., 960 F. Supp. 223, 226 (N.D. Cal. 1997).

[102] Clark v. John Hancock Mut. Life Ins. Co., 447 N.W.2d 783, 784-85 (Mich. Ct. App. 1989); Dickens v. Conseco Med. Ins. Co., 119 S.W.3d 905, 909 (Tex. App. 2003) (fact that other insurance companies may not have found the insured’s medical history significant is irrelevant). See also Kioutes v. Life Ins. Co. of Va., 35 F. Supp. 2d 616, 625 (N.D. Ill. 1998); Casey, 996 F. Supp. at 948. An underwriter, however, can only establish the materiality of a misrepresentation, not the existence of a misrepresentation. Methodist Med. Ctr. v. Am. Med. Sec., 38 F.3d 316, 320 (7th Cir. 1994); Thompson v. Cont’l W. Life Ins. Co., No,. 94 C 0337, 1996 WL 41529 at *4 (N.D. Ill. Feb. 1, 1996).

[103] Mann v. N.Y. Life Ins. & Annuity Corp., 222 F. Supp. 2d 1151, 1155 (D. Ariz. 2002); Mut. Ben. Life Ins. Co. v. Morley, 722 F. Supp. 1048, 1051 (S.D.N.Y. 1989); Friedman v. Prudential Life Ins. Co., 589 F. Supp. 1017, 1027 (S.D.N.Y. 1984); Shapiro v. Allstate Life Ins. Co., 609 N.Y.S.2d 323, 324 (App. Div. 1994). However, the fact that an insurer does not have specific underwriting criteria may prevent summary judgment in its favor. Friedman v. Prudential Life Ins. Co. of Am., 589 F. Supp. 1017, 1027 (S.D. N.Y. 1984); Richison v. Boatman’s Ark., Inc., 981 S.W.2d 112, 116 (Ark. Ct. App. 1998). Conclusory statements by insurance company underwriters, unsupported by documentary evidence, are insufficient to establish materiality as a matter of law. Dougherty v. Monumental Life Ins. Co., No. Civ. A. 02-1608, 2003 WL 21954790, at *6 (E.D. La. June 12, 2003); Capital Life & Accid. Ins. Co. v. Phelps, 66 S.W.3d 678, 682 (Ark. Ct. App. 2002); Curanovic v. N.Y. Cent. Mut. Fire Ins. Co., 762 N.Y.S. 2d 148, 151 (App. Div. 2003); Schneider v. Minn. Mut. Life Ins. Co., 806 P.2d 1032, 1036 (Mont. 1991).

[104] Jones v. N.Y. Life & Annuity Corp., 61 F.3d 799, 802 (10th Cir. 1995). An insurer cannot rescind coverage if the true facts are known or it had sufficient notice that statements made by the insured were false or further investigation was necessary. Stephens v. Guardian Life Ins. Co., 742 F.2d 1329, 1333 (11th Cir. 1984). Similarly, an insurer on notice of a health condition is bound by what a reasonable investigation would have disclosed. Cox v. Am. Pioneer Life Ins. Co., 626 So. 2d 243, 246 (Fla. Dist. Ct. App. 1993).

[105] N.Y. Life Ins. Co. v. Strudel, 243 F.2d 90, 93 (5th Cir. 1957).

[106] Stephens v. Guardian Life Ins. Co., 742 F.2d 1329, 1333 (11th Cir. 1984); Cox v. Am. Pioneer Life Ins. Co., 626 So. 2d 243, 246 (Fla. Dist. Ct. App. 1993); Story v. Safeco Life Ins. Co., 40 P.3d 1112, 1117 (Or. Ct. App. 2002). If the material is located in the insurer’s files, the insurer will be held to have knowledge of such information, even if it was not actually read or reviewed by the insurer’s employees. Trawick v. Manhattan Life Ins. Co., 447 F.2d 1293, 1296 (5th Cir. 1971); Cullen v. Valley Forge Life Ins. Co., 589 S.E.2d 423, 428 (N.C. Ct. App. 2003). This includes an insured’s prior claim history. LeMaster v. USAA Life Ins. Co., 922 F. Supp. 581, 586 (M.D. Fla. 1996).

[107] Duren v. Northwestern Nat’l Life Ins. Co., 581 So. 2d 810, 814 (Ala. 1991).

[108] John Hancock Mut. Life Ins., Co. v. Weisman, 27 F.3d 500, 505 (10th Cir. 1994); Justofin v. Metro. Life Ins. Co., 372 F.3d 517, 525 (3d Cir. 2004).

[109] Duren, 581 So. 2d at 816. A statement that the applicant had consulted a general practitioner for headaches was not sufficient to require the insurer to investigate the applicant’s health history. Barciak v. United of Omaha Life Ins. Co., 777 F. Supp. 839, 844 (D. Colo. 1991).

[110] N.Y. Life Ins. Co. v. Strudel, 243 F.2d 90, 93-94 (5th Cir. 1957). The fact that an insurer had the capacity to uncover the true facts in and of itself does not allow an insured to argue that his misrepresentations are no longer relevant. Gasaway v. Northwestern Mut. Life Ins. Co., 820 F. Supp. 1241, 1246 (D. Haw. 1993). To hold otherwise:

would enable a liar who falsies facts peculiarly within his knowledge to subject an insurance company to an unconscionable squeeze play: if the company makes independent checks he would claim that it isn’t “relying” and thus the policy is not voidable even for flagrant, intentional misstatements which the company must then find at its own peril – the only alternative for the company would be to indicate 100% faith and reliance by making no investigation whatever, at the risk of having a court later determine that inconsistencies in the application...should have caused them to make at least such an inquiry as a prudent man would have made. . . .The law is not that tender toward those who fail in their responsibility to exercise the necessary good faith in their dealing with others.

Strudel, 243 F.2d at 93-94.

[111] Strudel, 243 F.2d or 93; LeMaster v. USAA Life Ins. Co., 922 F. Supp. 581, 588 (M.D. Fla. 1996); Fireman’s Fund Am. Ins. Co. v. Escobedo, 145 Cal. Rptr. 785, 790-91 (Ct. App. 1978); Golden v. Northwestern Mut. Life Ins. Co., 551 A.2d 1009, 1014 (N.J. Super. Ct. App. Div. 1988).

[112] 40 P.3d 1112 (Or. Ct. App. 2002).

[113] See also Vertex Assur., Inc. v. John Hancock Sav. & Loan, 816 F.2d 1296, 1305 (9th Cir. 1987) (negligence not enough); Twin City Bank v. Verex Assur., Inc., 733 F. Supp. 67, 71 (E.D. Ark. 1990) (negligence not enough); Friedman v. Prudential Life Ins. Co., 589 F. Supp. 1017, 1024 (S.D.N.Y. 1994) (negligence not enough).

[114] Methodist Med. Ctr. v. Am. Med. Sec., 38 F.3d 316, 320 (7th Cir. 1994); John Hancock Mut. Life Ins. Co. v. Weisman, 27 F.3d 500, 504 (10th Cir. 1994); Fakhouri v. Banner Life Ins. Co., 157 F. Supp. 2d 751, 757 (E.D. Mich. 2001); White v. Cont’l Gen. Ins. Co., 831 F. Supp. 1545, 1554 (D. Wyo. 1993); Golden Rule Ins. Co. v. Schwartz, 751 N.E.2d 123, 128 (Ill. App. Ct. 2000); aff’d. in part and rev’d in part, 786 N.E.2d 1010 (Ill. 2003); Legal v. Am. Community Mut. Ins. Co., 506 N.W.2d 530, 531 (Mich. Ct. App. 1993); Ledley v. William Penn Life Ins. Co., 651 A.2d 92, 95 (N.J. 1995); Curanovic v. N.Y. Cent. Mut. Fire Ins. Co., 762 N.Y.S. 2d 148, 150 (App. Div. 2003).

[115] “[S]ome states have altered the common law rule to require proof of fraudulent intent or bad faith in addition to materiality to rescind an insurance policy based on misrepresentation...” (citations omitted). Shipley v. Ark. Blue Cross & Blue Shield, 333 F.3d 898, 703 (8th Cir. 2003). See, e.g. Kelah v. Am. Community Mut. Ins. Co., 646 N.E.2d 518, 519 (Ohio Ct. App. 1994); Lanham v. Blue Cross & Blue Shield of S.C., Inc., 563 S.E. 2d 331, 334-35 (S.C. 2002); Security Southwest Life Ins. Co. v. Gomez, 768 S.W.2d 505, 507-08 (Tex. App. 989).

Several state statutes require that when an application contains false statements that the insurer, in order to rescind coverage, must establish either the insured’s intent to deceive or that the falsity materially affected the risk accepted by the insurer. See La. Rev. Stat. § 22:619 (2004); Me. Rev. Stat. Ann. tit. 20 § 2411 (West 2004); Okla. Stat. Ann. tit. 36 § 3609 (West 2004); S.C. Code Ann. § 38-71-40 (Law. Co-op. 2002). However, the courts of each of these states have interpreted their respective statutes to require the insurer to prove the insured’s intent to deceive in addition to materiality. For Louisiana, see Dougherty v. Monumental Life Ins. Co., No. Civ. A. 02-1608, 2003 WL 21954790 at *5 (E.D. La. June 12, 2003); Coleman v. Occidental Life Ins. Co., 418 So. 2d 645, 646 (La. 1982); Johnson v. Occidental Life Ins. Co., 368 So. 2d 1032, 1036 (La. 1979); Laird v. Globe Life & Acc. Ins. Co., 508 So. 2d 1107, 1108 (La. App. 1987). For Maine, see Marchiori v. Am. Republic Ins. Co., 662 A.2d 932, 934 (Me. 1995); Oklahoma, see Hays v. Jackson Nat’l Life Ins. Co., 105 F.3d 583, 588 (10th Cir. 1997). For South Carolina see Lanham v. Blue Cross & Blue Shield of S.C., Inc, 563 S.E. 2d 331, 334-35 (S.C. 2002).

However, in Illinois, the state’s supreme court rejected a plaintiff’s argument that the word “or” in its misrepresentation statute should be interpreted to read “and.” Campbell v. Prudential Ins. Co., 155 N.E.2d 9, 10-11 (Ill. 1958).

Two other states, Massachusetts and Minnesota, require a life insurer to establish a willful misrepresentation by the insured if it issues a life insurance policy without first conducting a medical examination of the insured. See Mass. Gen. Laws ch. 175, § 124 (2004); Minn. Stat. § 61 A 11 (2004). Torres v. Fid. & Guar. Life Ins., 611 N.E.2d 733, 734-35 (Mass. Ct. App. 1993); Ellis v. Great-West Life Assur. Co., 43 F.3d 382, 385-87 (8th Cir. 1994); St. Cloud Nat’l Bank & Trust Co. v. Woodman of the World, 451 N.W.2d 75, 79 (Minn. Ct. App. 1990). These statutes require an examination by a physician and not just a nurse. Robinson v. Prudential Ins. Co., 776 N.E.2d 458, 459 (Mass. Ct. App. 2002); St. Cloud Nat’l Bank & Trust Co., 451 N.W.2d at 79. The Massachusetts Supreme Court made clear that this statute establishes a higher burden of proof on a life insurer that issues coverage without conducting a medical examination of the applicant. Protective Life Ins. Co. v. Sullivan, 682 N.E.2d 624, 630 (Mass. 1997); Robinson, 776 N.E.2d at 463-64. An insurer falling within this statute is not entitled to summary judgment on the issue of an insured’s false, fraudulent or misleading conduct. Robinson, 776 N.E.2d at 463-64.

[116] Wohlman v. Paul Revere Life Ins. Co., 980 F.2d 283, 285 (5th Cir. 1992); Mann v. N.Y. Life Ins. & Annuity Corp., 222 F. Supp. 2d 1151, 1154 (D. Ariz. 2002); City Nat’l Bank v. Jackson Nat’l Life Ins., 804 P.2d 463, 466 (Okla. Ct. App. 1990); Lanham v. Blue Cross & Blue Shield of S.C., Inc., 563 So. 2d 331, 334-35 (S.C. 2002).

Texas also requires an insurer to rescind coverage within 90 days from the discovery of the falsity of the representations on the application. Tex. Ins. Code Ann. § 21.17 (Vernon 1981). See Paramount Nat’l Life Ins. Co. v. Williams, 772 S.W.2d 255, 265 (Tex. App. 1989).

[117] Wohlman, 980 F.2d at 286. Justofin v. Metro. Life Ins. Co, No. CIV.A.01-6266, 2002 WL 31375779 at *3 (E.D. Pa. Oct. 22, 2002), rev’d on other grounds, 372 F.3d 517 (3d Cir. 2004). No fraud or bad faith is necessary – just knowledge of the material misrepresentation in order to rescind under ERISA. Shipley v. Ark. Blue Cross & Blue Shield, 333 F.3d 898, 903 (8th Cir. 2003).

[118] Kansas, Kan. Stat. Ann. § 40-418 (2000) (life) and § 40-2205 (2000) (accident & sickness); Missouri, Mo. Rev. Stat. § 376.580 (1991) (life) and § 376.800 (1991) (health and accident); Oklahoma Okla. Stat. tit. 36, § 2515 (1999) (applicable to limited stock life, accident and health insurers only); Rhode Island, R.I. Gen. Laws, § 27-4-10 (1988) (life insurance only); Arkansas, Ark. Stat. Ann. § 23-79-107 (1987); possibly Nebraska, Neb. Rev. Stat. § 44-710.14 (1989) (accident & sickness) and South Carolina for credit insurance, S.C. Rev. Stat. tit. 37-4-207 (1999). For a more detailed discussion of the laws related to the requirement of a causal relationship between a misrepresentation and an insurer’s ability to rescind coverage see C. Edgar Sentell, The Misrepresentation Defense in Life and Disability Insurance Cases: The Issue of Causation, 52 Fed’n Def. & Corp. Couns. Q. 277 (2001), Kathryn H. Vratil & Stacy M. Andreas, The Misrepresentation Defense In Causal Relation States: A Primer, 26 Tort & Ins. L. J. 832 (1991); C. Edgar Sentell, Misrepresentation in the Life and Disability Insurance Application: The Issue of Causation, 41 Fed’n. Ins. & Corp.Couns. Q. 407 (1991).

[119] LeBus v. Northwestern Mut. Life Ins. Co., 55 F.3d 1374, 1375 (8th Cir. 1995); Preferred Risk Life Ins. Co. v. Sanders, 421 So. 2d 566, 570 (Fla. Dist Ct. App. 1982); Ledley v. William Penn Life Ins. Co., 651 A.2d 92, 96 (N.J. 1995); Marshall v. Universal Life Ins. Co., 831 P.2d 651, 653 (Okla. Ct. App. 1991).

[120] Shipley v. Ark. Blue Cross & Blue Shield, 333 F.3d 898, 904 (8th 2003); Ellis v. Great-West Life Assur. Co., 43 F.3d 382, 388 (8th Cir. 1994); Kioutas v. Life Ins. Co. of Va., 35 F. Supp. 2d 616, 623 (N.D. Ill. 1998).

[121] LeBus, 55 F.3d at 1378; Casey v. Old Line Life Ins. Co., 996 F. Supp. 939, 949 (N.D. Cal. 1998); Friedman v. Prudential Life Ins. Co., 589 F. Supp. 1017, 1022 (S.D.N.Y 1984); Nat’l Blvd. Bank v. Georgetown Life Ins., 472 N.E.2d 80, 89 (Ill. App. Ct. 1984).

[122] Ledley v. William Penn Life Ins. Co., 651 A.2d 92, 96 (N.J. 1995); Chase v. William Penn Life Ins. Co., 552 N.Y.S.2d 772 (App. Div. 1990).

[123] Ledley, 651 A.2d at 96; Formosa v. Equitable Life Assur. Soc., 398 A.2d 1301, 1305 (N.J. Super. Ct. App. Div. 1979). For example, in Arizona, under Ariz. Rev. Stat. § 20-1109 (2004), when an insurer asks objective questions it is not necessary to establish an insured’s actual fraud or intent to deceive in order to rescind. However, when an insurer asks only for an expression of opinion, actual fraud must be established. Mann v. N.Y. Life Ins. & Annuity Corp., 222 F. Supp. 2d, 1151, 1154 (D. Ariz. 2002).

[124] Berkshire Life Ins. Co. v. Owens, 910 F Supp. 132, 134 (S.D.N.Y. 1996). See also Norgan v. Am. Way Life Ins. Co., 469 N.W.2d 23 (Mich. Ct. App. 1991) where the insured represented on the application that he was “actively at work and . . . able to perform the normal duties of a person that is your same age and sex.” Id. at 25. In fact, the insured suffered from lung cancer and had retired years earlier as the result of a stroke. The insurer rescinded coverage once it learned of these conditions after the insured died and a claim had been filed. The court disagreed, ruling this eligibility provision in the application was ambiguous and not capable of a common meaning. The insured could not have understood what conditions were necessary for his eligibility for insurance. Similarly, in Lentz v. Prudential Ins. Co. of Am., 520 P.2d 769 (Mont. 1974) the insured suffered from a number of serious health problems, but his doctor decided not to inform him. His doctor felt such knowledge would only frighten Mr. Lentz and worsen his conditions. Mr.Lentz purchased a vehicle and credit life insurance, representing on this insurance application that he was in “good health.” He later died and the insurer rescinded coverage once it learned about his true medical history on the basis that the insured materially misrepresented his health on the application. The trial and Montana Supreme Courts disagreed, holding that Mr. Lentz’s representations were not false because he, objectively and subjectively, believed he was in good health and that his representations were based on his “knowledge and belief.” Id. at 772.

[125] Casey v. Old Line Life Ins. Co., 996 F. Supp. 939, 949 (N.D. Cal. 1998); Berkshire Life Ins. Co. v. Owens, 910 F. Supp. 132, 134 (S.D.N.Y. 1996); Nat’l Standard Life Ins. Co. v. Permeiter, 204 So. 2d 206, 207 (Fla. 1967). The failure to disclose a latent medical condition which the insured had no knowledge of will not support an insured’s rescinding coverage. City Nat’l Bank v. Jackson Nat’l Life Ins. Co., 804 P.2d 463, 466 (Okla. Ct. App. 1990). An applicant is not held to a doctor’s understanding of a medical condition’s importance. Kirsh v. UNUM Life Ins. Co. of Am., No. B152445, 2002 WL 129706 at *5 (Cal. Ct. App., June 12, 2002). Nor must an applicant volunteer information where no application question plainly and directly “requires such information to be disclosed.” Vella v. Equitable Life Assur. Soc., 887 F.2d 388, 393 (2d Cir. 1989).

[126] Skinner v. Aetna Life Ins. Co., 804 F.2d 148, 149-51 (C.A.D.C. 1986); Mims v. Old Line Life Ins. Co., 46 F. Supp. 2d 1251, 1256 (M.D. Fla. 1999). In Skinner, the court rejected the insured’s argument that when he applied for insurance he actually believed that he had not received treatment for any sickness or disease and that he was in good health. If accepted, according to the court, then any statement made based on the insured’s knowledge and belief would be considered so subjective that it could never be false as a matter of law.

The fallacy of [the insured’s] argument is reflected in his attempt to equate “knowledge and belief with understanding and belief.” . . . [A] court may properly find a statement false as a matter of law, however sincerely it may be believed. To conclude otherwise would be to place insurance companies at the mercy of those capable of the most invincible self-deception . . .

804 F.2d at 751. Accord. Shipley v. Ark. Blue Cross & Blue Shield, 333 F.3d 898, 905 (8th Cir. 2003); Golden Rule Ins. Co. v. Schwartz, 786 N.E.2d 1010, 1017 (Ill. 2003).

[127] Friez v. Nat’l Old Line Ins. Co., 703 F.2d 1093, 1095 (9th Cir. 1983); Berkshire Life Ins. Co. v. Owens, 910 F. Supp. 132, 134 (S.D.N.Y 1996).

[128] Nat’l Old Line Ins. Co. v. People, 506 S.W.2d 128, 131-32 (Ark. 1974) (Byrd, J. concurring); Capital Life & Acc. Ins. Co. v. Phelps, 66 S.W.3d 678, 681 (Ark. Ct. App. 2002); Bronx Savings Bank v. Weigardt, 136 N.E.2d 845, 850 (N.Y. 1956); Norwick v. United Sec. Life Co., 152 N.W.2d 439, 443 (S.D. 1967); Sec. Southwest Life Ins. Co. v. Gomez, 768 S.W.2d 505, 508 (Tex. App. 1989).

[129] Ford Life Ins. Co. v. Samples, 641 S.W.2d 708, 709 (Ark. 1982). “Good health” does not mean “perfect health.” Great Am. Reserve Ins. Co. v. Britton, 406 S.W.2d 901, 905 (Tex. 1966). Nor does an applicant fail to qualify under such a standard if he suffers from “slight or periodic ailments or disorders.” Farmers & Bankers Life Ins. Co. v. Baxley, 215 P.2d 941, 945 (Okla. 1949), “Minor and temporary indispositions are those which are ‘easily forgotten.’ On the other hand, the insured must disclose ‘substantial or appreciable disorders’ which affect his or her good health.” Kirsh v. UNUM Life Ins. Co., No. B 152445, 2002 WL 1293016 at *5 (Cal. Ct. App. June 12, 2002).

Courts have found the following medical conditions to be serious enough so that the insured will not be considered to be in “good health”: United Ins. Co. of Am. v. Stanley, 289 S.E.2d 407, 409 (S.C. 1982) (coronary artery disease and arteriosclerotic cardiovascular disease); Am. Pioneer Life Ins. Co. v. Turman, 495 S.W.2d 868, 873 (Ark. 1973) (stomach cancer); Broyles v. Ford Life Ins. Co., 594 S.W.2d 691, 693 (Tenn. 1980) (chronic lymphatic leukemia); Laird v. Globe Life & Acc. Ins. Co., 503 So. 2d 1107, 1109 (La. Ct. App. 1987) (alcohol abuse); Southern Sec. Life Ins. Co. v. Fuller, No. 75-289, 1976 WL 53 at *2, (Ark. March 8, 1976) (liver cirrhosis); Laird 503 So. 2d at 1109 (liver cirrhosis); Simonson v. Mich. Life Ins. Co., 194 N.W.2d 446, 450 (Mich. Ct. App. 1971) (stroke).

Courts have not been consistent on the issue of whether individuals with diabetes and/or high blood pressure may still be in “good or sound health.” Several decisions have held that individuals with these conditions may still be in good health. Mattox v. Western Fid. Ins. Co., 694 F. Supp. 210, 215 (N.D. Miss. 1988); Simonson, 194 N.W.2d at 449. Other decisions here held such an individual is not in “good health.” Knysak v. Shelter Life Ins. Co., 652 N.E.2d 832, 837 (Ill. App. Ct. 1995). Courts also acknowledge that insulin dependent diabetes is more serious than non-insulin dependent diabetes. Golden v. Northwestern Mut. Life Ins. Co., 551 A.2d 1009, 1017 (N.J. Super. Ct. App. Div. 1988). Diabetes will be considered to be material, especially when the application specifically asks about this condition. Matircheck v. John Alden Life Ins. Co., 93 F.3d 96, 102 (3d Cir. 1996).

[130] Bakewell v. Mo. State Employee’s Retirement, 706 S.W.2d 268, 271 (Mo. Ct. App. 1986). “Good health” means “a state of health free from any disease or bodily infirmity of a substantial nature which affects the general health of the person and seriously or materially increases the risk to be assumed by the insurer.” United Sav. Life Ins. Co. v. Coulson, 560 S.W.2d 211, 215 (Tex. App. 1978). “Sound health” has been defined as “the applicant has no grave, important, or serious disease, and is free from any ailment that seriously affects the general soundness and healthfulness of the system.” United Ins. Co. of Am. v. Stanley, 289 S.E.2d 407, 409 (S.C. 1982). Actually, there is no material difference between the two terms. Union Life Ins. Co. v. Davis, 449 S.W.2d 192, 195 (Ark. 1970).

[131] “Good health” is a term of common usage and understanding. Blakewell v. Mo. State Employees’ Retirement, 706 S.W.2d 268, 271 (Mo. Ct. App. 1986). “[A] life insurance policy requiring an insured to be in ‘sound health’ or ‘good health’. . . was . . . a valid condition precedent to coverage.” Norgan v. Am. Way Life Ins. Co., 469 N.W.2d 23, 26 (Mich. Ct. App. 1991). This is no different than the terms “illness or disorder” and “diseases and disorder” being considered to be understandable by the layperson. Jackson v. Travelers Ins. Co., 113 F.3d 367, 370 (2d Cir. 1997). Any provision in an insurance policy is valid as long as it is clear, unambiguous and does not violate public policy. G.P. Enters. v. Jackson Nat’l Life, 509 N.W.2d 780, 783 (Mich. Ct. App. 1993).

[132] Swain v. Life Ins. Co. of La., 537 So. 2d 1297, 1300 (La. Ct. App. 1989).

[133] The absence of an express definition of a policy term does not, in and of itself, render the word ambiguous. Cranfill v. Aetna Life Ins. Co., 49 P.3d 703, 706 (Okla. 2002).

[134] Swain, 537 So. 2d at 1301 (insurer must establish by clear and convincing evidence that the insured was not in sound health).

[135] Waxse v. Reserve Life Ins. Co., 809 P.2d 533, 537 (Kan. 1991) (It is an insurer’s responsibility to ask specific questions to which it wants answers.)

[136] Bershire Life Ins. Co. v. Owens, 910 F. Supp. 132, 134 (S.D.N.Y. 1996); Simonson v. Mich. Life Ins. Co., 194 N.W.2d 446, 450 (Mich. Ct. App. 1971). For example, if specifically inquired about, hypertension is material, Randon v. CUNA Mut. Ins. Group, 793 P.2d 1324, 1326 (Nev. 1990), as is a concealed history of alcoholism. Claborn v. Wash. Nat’l Ins. Co., 910 P.2d 1046, 1050 (Okla. 1996). For example, in Kelch v. Am. Community Mut. Ins. Co., 646 N.E.2d 518 (Ohio Ct. App. 1994) the application specifically inquired whether the applicant used alcohol (2 drinks per week) or narcotics. He denied any narcotic use. Soon thereafter, he suffered a drug overdose. Upon learning of the insured’s prior alcohol and drug abuse, coverage was rescinded. The insured argued he was confused because he was in denial. The court disagreed. There was a misrepresentation to a specific question. Even the medical expert testified that although substance abusers don’t admit to the addiction, they do understand that they use the drug. There is a distinct difference between admitting that you use a substance and admitting that you abuse a substance.

[137] Le Bus v. Northwestern Mut. Life Ins. Co., 55 F.3d 1374, 1377 (8th Cir. 1995); Nat’l Standard Life Ins. Co. v. Permenter, 204 So. 2d 206, 207-08 (Fla. 1967) (Ervin, J., concurring); Ledley v. William Penn Life Ins. Co., 651 A.2d 92, 96 (N.J. 1995).

[138] Friedman v. Mut. Life Ins. Co. of N.Y., 21 A.2d 81, 84 (Pa. 1941); Justofin v. Metro. Life Ins. Co., No. CIV.A.01-6266, 2002 WL 31375779 at *3 (E.D. Pa. Oct. 22, 2002), rev’d on other grounds, 372 F.3d 517 (3d Cir. 2004).

[139] Wohlman v. Paul Revere Life Ins. Co., 980 F.2d 283, 286 (5th Cir. 1992); Mann v. N.Y. Life Ins. & Annuity Corp., 222 F. Supp. 2d 1151, 1154 (D. Ariz. 2002); Mims v. Old Line Life Ins. Co., 46 F. Supp. 2d 1251, 1256 (M.D. Fla. 1999); Kelch v. Am. Community Mut. Ins. Co., 646 N.E.2d 518, 520 (Ohio Ct. App. 1994).

[140] Casey v. Old Line Life Ins. Co., 996 F. Supp. 939, 949 (N.D. Cal. 1998); Berkshire Life Ins. Co. v. Owens, 910 F. Supp. 132, 134 (S.D. N.Y 1996); Ford Life Ins. Co. v. Samples, 641 S.W.2d 708, 709 (Ark. 1982); Lentz v. Prudential Ins. Co., 520 P.2d 769 (Mont. 1974); Formosa v. Equitable Life Assur. Soc., 398 A.2d 1301, 1305 (N.J. Super. Ct. App. Div.19797). However, the applicant “must be justified in the belief that he is free of symptoms which would cause reasonable apprehension of disease which would materially affect the risk.” Capital Life & Accid. Ins. Co. v. Phelps, 66 S.W.3d 678, 681 (Ark. Ct. App. 2002) (quoting Union Life Ins. Co. v. Davis, 449 S.W.2d 192, 195 (Ark. 1970)).

[141] Rosen v. State Farm Gen. Ins. Co., 70 P.3d 351, 354 (Cal. 2003). Whether a contract is ambiguous is a question of law for the court to determine. Principal Life Ins. Co. v. Summit Well Servs., Inc., 57 P.3d 1257, 1261 (Wyo. 2002). Ambiguities become questions of fact for a jury to determine. Klapp v. United Ins. Group Agency, Inc., 663 N.W.2d 447, 453-54 (Mich. 2003). Contractual ambiguities are construed against the drafter. This is the rule of contra proferentem, Norgan v. Am. Way Life Ins. Co., 469 N.W.2d 23, 26 (Mich. Ct. App. 1991); Folkman v. Quamme, 665 N.W.2d 857, 864 (Wis. 2003). This is especially true with insurance policies. “Insurers have the advantage over insureds because they draft the contract. Thus, courts construe ambiguities in coverage in favor of the insureds and narrowly construe exclusions against insurers.” Folkman, 665 N.W.2d at 865. See also Vella v. Equitable Life Assur. Soc., 887 F.2d 388, 392 (2d Cir. 1989); Ingalls v. Paul Revere Life Ins. Group, 561 N.W.2d 273, 278 (N.D. 1997); Am. Nat’l Ins. Co. v. Paul, 927 S.W.2d 289, 243 (Tex. App. 1996). However, an insurance policy is not ambiguous simply because each party presents a conflicting interpretation of the policy. Royal Maccabees Life Ins. Co. v. James, 134 S.W.3d 906, 913 (Tex. App. 2003); Summit Well Service, Inc., 57 P.3d at 1262. Ambiguity is found to exist only if both interpretations are objectively reasonable. London v. Berkshire Life Ins. Co., No. 00-CV-078, 2002 WL 31677037 at *2 (W.D.N.Y. Oct. 7, 2002). “If words or phrases in a policy are susceptible to more than one reasonable construction, they are ambiguous.” Crandall v. Society Ins., 676 N.W.2d 174, 176 (Wis. Ct. App. 2004).

[142] G.P. Enters. v. Jackson Nat’l Life, 509 N.W.2d 780, 783 (Mich. Ct. App. 1993).

[143]