Underwriting is Always Before a Policy Is Issued

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In California, a policy was effectively rescinded because the insured misrepresented facts material to the decision of the insurer to insure or not insure regardless of claims of post loss underwriting.

The remedy of rescission was originally created by the ecclesiastical courts of ancient England who were charged with reaching fair results rather than giving a money judgment. As courts of equity, they voided contracts that were obtained by mistake, misrepresentation, concealment or fraud. In the United States the equitable remedy of rescission is still available and the state and federal courts sit as either a court of law or a court of equity.

In California the ancient equitable remedy was codified, in part, as follows: California Insurance Code §331 provides: “Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance.”

Insurance Code §359 provides: If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false.

Rescission has nothing to do with claims other than as a consideration during a claims investigation. Underwriting is a decision making process based upon information submitted to the insurer by the proposed insured. When the proposed insured lies to obtain the insurance, the insurer may seek equity from the court and have the contract declared void from its inception. To do otherwise would be unfair and allow a fraud to profit from wrongful conduct.

Rescission is an important equitable remedy hoary with age. It should not be limited by claims of bad faith. When an insurer learns it was deceived into insuring someone it would not have insured, it should be able to legitimately exercise the rights provided to parties to an insurance contract by the California Insurance Code, without fear of a tort action.

Rescission is not, as some members of the plaintiffs’ bar would have courts believe, post loss underwriting. Since underwriting is a decision-making process where the underwriter takes information from a proposed insured in an application for insurance and, using that information, to make a reasoned decision whether to agree to insure the applicant. Underwriting is only done after a loss when considering a request to renew. As you read in the following determine if any underwriting was done by the insurer after the loss.

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In Nieto v. Blue Shield of California Life & Health Ins. Co., 181 Cal.App.4th 60, 103 Cal.Rptr.3d 906 (Cal. App. 2010) the California Court of Appeal noted that Plaintiff and appellant Julie Nieto failed to disclose information about her medical condition and treatment on a health insurance application she submitted to defendant and respondent Blue Shield of California Life & Health Insurance Company (Blue Shield). She filed an action against Blue Shield after it rescinded her insurance policy.

The trial court granted Blue Shield’s motion for summary judgment, ruling that it was entitled to rescission as a matter of law in view of the undisputed evidence that appellant made material misrepresentations and omissions regarding her medical history.

The undisputed evidence established that the information appellant provided to Blue Shield was false and, contrary to appellant’s assertions, Blue Shield had no statutory duty to show that appellant’s application had been physically attached to the insurance policy nor to conduct further inquiries during the underwriting process to ascertain the truthfulness of appellant’s representations before it issued the policy.

Approximately two months after a November 2008 hearing, the trial court issued an order granting summary judgment. It determined the undisputed evidence satisfied the elements of fraud or deceit justifying Blue Shield’s rescission of the policy. More specifically, it found the undisputed evidence showed that appellant’s application contained a number of material false representations and omissions concerning appellant’s medical history; appellant was either aware the representations were false or exhibited a reckless disregard for the truth; appellant made the representations with the intent of inducing Blue Shield’s reliance thereon; Blue Shield relied on the information in the application; and Blue Shield was harmed by issuing the policy. Given this undisputed evidence, the trial court further determined that the Insurance Code gave Blue Shield the right to rescind the policy.

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The record before the court supported the conclusion of the trial court that Blue Shield adequately pleaded the issue of fraud in its answer, asserting as affirmative defenses upon which Blue Shield relied and did not discover the falsity thereof until the time of rescission. Even if Blue Shield had not pleaded the issue of appellant’s fraud as an affirmative defense an affirmative defense may be raised for the first time in a summary judgment motion absent a showing of prejudice.

Because Nieto had sufficient notice of and an opportunity to respond to Blue Shield’s motion asserting that her fraud justified rescission of the policy, she suffered no prejudice by responding to the motion on the merits.

The undisputed evidence established that Nieto made material misrepresentations and omissions on the application regarding her medical condition and treatment. Nieto responded negatively to the inquiries in the “Medical History” portion of the application, when in fact appellant had suffered from chronic back problems throughout 2005 and previously. Nieto represented that her last doctor’s visit had occurred three years earlier, when in fact she had seen and received significant treatment from Dr. Nation in February 2005, and she had seen Dr. Rockenmacher at least 17 times between February and May 2005, including the day she signed the application. Finally, Nieto represented that she had not taken or been directed to take any prescription medications in the past year, when in fact she had filled at least 10 prescriptions for four different medications and had received two steroid injections as well as an oral steroid.

The undisputed evidence further established that Nieto’s misrepresentations and omissions were material to Blue Shield’s decision to insure her. According to Blue Shield Life’s underwriting guidelines, the medical conditions reflected in Nieto’s medical and pharmacy records, if disclosed on her Application, would have rendered Nieto ineligible for enrollment in any Blue Shield Life IFP product. Although the trier of fact is not required to believe the “post mortem” testimony of an insurer’s agents that insurance would have been refused had the true facts been disclosed. Nieto asserted that her declaration, in which she averred that she did not intend to defraud Blue Shield, created a triable issue as to whether she misrepresented or omitted material facts.

The Court of Appeal noted, in response, that the rule in insurance cases is that a material misrepresentation or concealment in an insurance application, whether intentional or unintentional, entitles the insurer to rescind the insurance policy ab initio.1 Moreover, the rule is codified in the Insurance Code so that any material misrepresentation or the failure, whether intentional or unintentional, to provide requested information permits rescission of the policy by the injured party. Accordingly, evidence showing that Nieto lacked any intent to defraud failed to create a triable issue of fact.

Nieto’s application contained material misrepresentations and omissions concerning her medical history and conditions, medications taken, and recent physician visits. Had she accurately and completely disclosed these matters, she would have been denied coverage. Based on the undisputed facts, Blue Shield Life was entitled to rescind Nieto’s policy.

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Barry Zalma, Esq., CFE, is available at http://www.zalma.com and zalma@zalma.com

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