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An ERISA policy can be voided
IN Provident Life & Accident Insurance Company v. Bradley D. Mckinney, No. 3:19-CV-1325 (SVN), United States District Court, D. Connecticut (September 9, 2022), the USDC was called upon to determine whether an insurer may terminate an ERISA policy.
Bradley McKinney applied for and received disability insurance with Provident Life Accident & Insurance Company (“Provident Life”). McKinney subsequently filed a claim for disability benefits under the policy, but Provident Life denied his claim because McKinney made material misstatements in his application for the policy. Provident Life sued to seek rescission of the policy, and McKinney countered that he sought an order requiring Provident Life to pay him all benefits under the policy.
McKinney’s employer, Anderson Tax LLC, had supplemental individual disability insurance. McKinney applied for supplemental insurance through the plan. When completing the application, McKinney answered various questions about his medical history and agreed that his answers were “true and complete and accurately recorded to the best of [his] knowledge and faith.” In September of that year, Provident Life issued him a policy that provides all three available disability coverages. The policy stipulated that “[o]assignment and inaccuracies in the application can lead to an otherwise valid claim being denied or [the policy] to be repealed.”
McKinney filed a claim for basic disability benefits related to a neurocognitive disorder. His application form stated that he first began experiencing symptoms of “confusion, severe fatigue, memory loss, challenges thinking, analyzing, [and] lack of concentration.” Provident Life’s claims adjuster investigated McKinney’s claim, obtained certain medical records, and consulted with the insurer. Subsequently, Provident Life denied McKinney’s claim and notified him that it was canceling its policy because McKinney had materially misrepresented his medical history when he applied for the policy.
In answering questions 6 and 8 of the application, McKinney stated that he had not been diagnosed or treated by a physician for memory loss, confusion, or speech disorder in the five years prior to his application. Second, in his answer to question 3(a), he claimed that he had not missed one or more days of work or been admitted to a health care facility due to illness or injury in the 180 days preceding his application. After reviewing McKinney’s medical records, Provident Life concluded that his answers to these questions were untrue and that its denial of his claim and cancellation of his policy were correct.
The parties do not dispute that a plan administrator may obtain “cheap rescission of an ERISA-regulated policy procured through material misstatements or omissions by the insured.” [Shipley v. Ark. Blue Cross & Blue Shield, 333 F.3d 898, 902 (8th Cir. 2003).] An ERISA plan fiduciary’s right to fair termination is well established in federal common law.
Termination for Material Misrepresentation
Under the federal common law developed pursuant to ERISA, an insurer may rescind a policy where the insured knowingly made a material misrepresentation in an application for an ERISA-regulated policy.
In initially rejecting its claim, Provident Life explained that McKinney untruthfully answered questions 6 and 8, which related to previous treatment for memory loss, confusion or speech disorder within the relevant time frame. In denying McKinney’s appeal of the original denial, Provident Life stated that McKinney also untruthfully answered Question 3(a), which related to time off work due to illness or injury occurring within the relevant time frame.
The court concluded that there was no genuine dispute of fact that McKinney made material misrepresentations in answering questions 6 and 8 of his application for supplemental insurance. There was no dispute that McKinney’s answers to these questions were untruthful. He was admittedly treated for confusion and slurred speech within five years of his application for supplemental insurance, rendering his contrary answers to questions 6 and 8 untrue.
The court concluded that McKinney’s claims of ignorance that he had been treated for confusion and slurred speech during his 2016 hospitalization were not innocent. A misrepresentation is innocent when the applicant does not know that the information he is providing is false and when such ignorance was reasonable.
The court concluded that McKinney’s ignorance of the facts of his 2016 hospitalization was not reasonable. Several people, including McKinney’s partner, reported that McKinney experienced confusion and slurred speech during the hospital stay. When questioned during his claim for benefits, he admitted that he was first diagnosed with these issues in February 2016. The idea that he did not know about them when he applied for the policy in 2017 therefore strains credulity. Additionally, McKinney had medical records from which he could have determined that his answers to questions 6 and 8 were false, and he had a duty to use reasonable care to ensure that he answered those questions correctly.
The court also concluded that there is no genuine dispute that McKinney’s false answers to questions 6 and 8 were material to Provident Life’s issuance of the policy. In the case of life or health insurance, a misrepresentation of the applicant’s past medical history is generally material to the risk as a matter of law, and, when knowingly made, will defeat the insured’s recovery.
Importantly, when McKinney signed the application for insurance coverage, he agreed that he understood that his answers to the questions would “become part of [his] application and any policies issued for it.” The application form, including questions 6 and 8, were clearly intended to limit coverage, so the application’s particular examination of the applicant’s past treatment for memory loss, confusion, or speech disorder makes those questions presumptively material.
Given the strong weight of authority establishing the materiality of an applicant’s past medical history subject to special inquiry, as well as the fact that McKinney’s response was incorporated into the issued policy, the Court concludes that his knowledge of the misrepresentations of questions 6 and 8 were essential. Provident Life thus has the right to cancel the insurance according to law.
Finally, extensive authority establishes the materiality of McKinney’s misrepresentation on Question 3(a), as with Questions 6 and 8, McKinney’s answer to Question 3(a) became part of the policy and is therefore presumptively material. Moreover, McKinney’s misrepresentation is logically material to a reasonable insurer’s decision to insure that claimant or the determination of the premium. Furthermore, Provident Life’s insurer unequivocally stated that if it had known that McKinney was taking a PTO day to attend a lumbar puncture regarding his neurosyphilis condition, it would not have even issued basic disability insurance to McKinney.
The court is entitled to rely on an insurer’s insurer’s representation regarding the materiality of a misrepresentation.
To the extent that the underwriting guidelines and the underwriter’s representation appear to differ as to the outcome of that investigation, the court need not decide.
Repeal of the current policy is justified by law.
Since the Middle Ages when courts of justice were ruled by priests who were charged with providing justice – justice – with regard to disputes rather than damages. Rescission of a contract entered into as a result of material misrepresentation, concealment of material facts or fraud requires the trial court to order the return of the premium to the insured and the return of the policy to the insurer. It would then declare that the policy never existed. The USDC, acting as a fair court, did what was only available to it: it declared the policy void due to material and intentional misrepresentations by the insured.
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Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and firstname.lastname@example.org. Subscribe and receive videos limited to Excellence in Claims Handling subscribers at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.
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