The practices of some California insurers have recently come under attack in lawsuits brought by private litigants and in administrative actions brought by state regulators. The practice involves the rescission of health insurance policies due to misrepresentations made in the policy application form.
The rescission of a policy is a cancellation of coverage ab initio-retroactive back to inception. Premiums that have been paid are returned to the insured when the notice of rescission is given. Such a cancellation is a harsh measure in that it usually occurs after the insured has already incurred claims. Consequently, it is a seldom used practice-it is primarily reserved for extreme cases of misrepresentation. Moreover, it typically only affects insurance that is purchased on an individual basis, as compared with group health insurance.
Most states, by statute, provide some general rules that are to be followed when rescinding a policy based upon the insured's misrepresentation. First, the completed application must have been attached to the policy when it is provided to the insured. Second, the insured's misrepresentation must be material to the risk or to the event upon which benefits become due and payable. Third, the insurer must provide notice to the insured of the misrepresentation (and the decision to rescind) within a reasonable time of discovering the misrepresentation-typically 90 days.
PROOF OF INTENT
Requiring proof of intent to deceive is still a minority position among the states-meaning that the courts of most states do not require such a finding in order to justify a rescission. Proving the insured's intent often is a very difficult burden. The insurer will often have to rely strictly on circumstantial evidence-the existence of circumstances which indicate that the statements must have been known by the insured to be false, or that they are of such a character as clearly to prove a conscious misrepresentation by the insured.
The test for materiality is whether the policy would have been denied if the information had been revealed on the application. Thus, the question is whether the misrepresentation was relevant to a risk covered by a policy or whether the condition that existed actually contributed to an event under which policy benefits were paid. This analysis is based upon the facts that existed at the time of the issuance of the policy rather than at the time that the benefits were accessed by the insured.
The statutes and case law which establish the basis for a rescission impose a heavy burden of proof on the insurer. Another complicating factor is that the insurer faces this dilemma many months, perhaps years, after the application has been taken from the insured. To the extent possible, the insurer must take on the difficult task of gathering evidence and circumstances showing that the statements in the application were false, were known to be false, and were relied upon by the insurer in issuing the coverage.
This column is written for informational purposes only and should not be construed as legal advice.