In this case, our client was confined to a psychiatric facility due to schizophrenia. The cost of specialized facility care for a loved one is staggering and can overwhelm families. Fortunately, our client had purchased long-term care insurance from MassMutual and dutifully paid premiums for 14 years before her condition progressed to the point where she could no longer live independently and needed round-the-clock care for her own safety. MassMutual promised to pay a monthly benefit to cover the cost facility confinement.
After receiving her claim for benefits, however, MassMutual, through its third- party administrator, LifeCare Assurance Company, sued Ms. Chang in federal court, claiming that 14 years earlier, she had not completed her policy application correctly, and therefore, that her policy should be rescinded.
We investigated MassMutual’s conduct and determined that it smacked of bad faith and “postclaims underwriting” to try to avoid paying approximately $4 million in policy benefits. Postclaims underwriting refers to the practice of an insurer improperly avoiding liability by seeking to rescind coverage based on misrepresentations in the application in spite of the fact that a reasonable investigation during the underwriting process would have resulted in non-issuance of the policy at the outset. It is fundamentally recognized within the industry that in absence of conducting a reasonable investigation at the time of underwriting, carriers cannot seek to rescind coverage based on the results of a more thorough investigation conducted after submission of a claim. Indeed, California law specifically precludes an insurer from seeking to rescind coverage based on misrepresentation where information obtained by the insurer prior to issuance of coverage suggests an insured’s application responses “could not reasonably be relied upon.” (DiPasqua v. Cal. Western States Life Ins. Co. (1951) 106 Cal.App.2d 281, 284.) In such an instance, carriers have a “duty of further inquiry” before issuing coverage. (Id.) They cannot sit back, issue coverage, only to raise application misstatements after a claim gets submitted. The practice of postclaims underwriting is unfair, biased, unreasonable, and not consistent with the requirement that the insurer must consider the interests of the insured as equal to its own. In Hailey v. California Physicians’ Service (2007) 188 Cal.App.4th 452, 465, the court explained this unlawful practice as follows:
“Underwriting is a label commonly applied to the process, fundamental to the concept of insurance, of deciding which risks to insure and which to reject in order to spread losses over risks in an economically feasible way. In essence, postclaims underwriting occurs when an insurer waits until a claim has been filed to obtain information and make underwriting decisions which should have been made when the application for insurance was made, not after the policy was issued. In other words, the insurer does not assess an insured’s eligibility for insurance, according to the risk he presents, until after insurance has been purchased and a claim has been made. Although the insurer may ask an applicant for some underwriting information before it issues the policy, it will not follow up on that information until after a significant claim arises. Only after a claim has arisen will the insurer examine the application and request additional information to see whether the applicant could have been excluded from coverage.
“The insurer controls when the underwriting occurs… If the insured is not an acceptable risk, the application should be denied up front, not after the policy is issued.”
We obtained a dismissal of MassMutual’s federal court lawsuit. We further brought a bad faith action against MassMutual in state court in San Francisco in order to secure Ms. Chang’s future benefits and other damages. The San Francisco Superior Court agreed with our analysis, ruling that MassMutual could not seek to rescind coverage, had to pay benefits, and that we had gathered sufficient evidence to support an award of punitive damages against MassMutual: “There is a triable dispute as to whether MassMutual acted maliciously or oppressively within the meaning of Civil Code Section 3294. When viewing the facts most favorably to the Plaintiff, MassMutual issued a policy which it had significant doubts about, decided not to conduct an investigation, and only long after the contestability period had expired, it chose to conduct the very investigation it could have before, after it had received a claim by Ms. Chang.” (Click here for Court Order.) We successfully obtained a settlement for Ms. Chang for a confidential sum on the first day of trial.