Underwriting is always before a policy is issued

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In California, a policy was effectively voided because the insured misrepresented facts that were material to the insurer’s decision to insure or not to insure regardless of post-loss coverage claims.

The penitentiary was originally created by the ecclesiastical courts of ancient England which were charged with reaching just results rather than giving a monetary judgment. As courts of equity, they voided contracts 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 either as courts or courts of equity.

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

The Insurance Code §359 stipulates: If a representation is false on an essential point, whether positive or promissory, the injured party has the right to cancel the contract from the time the representation becomes false.

Cancellation has nothing to do with a claim other than as consideration during a claims investigation. Underwriting is a decision-making process based on information provided to the insurer by the proposed insured. When the proposed insured lies to obtain the policy, the insurer can seek justice from the court and have the contract voided from its inception. To do otherwise would be unfair and allow a fraud to profit from wrongful conduct.

Termination is an important equitable remedy with age. It should not be limited by claims of bad faith. When an insurer learns that it has been defrauded into insuring someone it should not have insured, it should be able to legitimately exercise the rights afforded to parties to an insurance contract under the California Insurance Code, without fear of a tort action.

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

IN Nieto v. Blue Shield of California Life & Health Ins. Co., 181 Cal.App.4th 60, 103 Cal.Rptr.3d 906 (Cal. App. 2010) 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 filed she to Defendant and Defendant Blue Shield of California Life & Health Insurance Company (Blue Shield). She sued Blue Shield after it canceled her policy.

The district court granted Blue Shield’s motion for summary judgment, ruling that it was entitled to relief as a matter of law in light 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 contention, Blue Shield had no statutory obligation to show that appellant’s application had been physically attached to the policy or to conduct further investigations during the underwriting process to ascertain the veracity of the appellant’s representations before the issued policy.

About two months after a hearing in November 2008, the court issued an order granting summary judgment. It determined that the undisputed evidence met the elements of fraud or deceit that justified Blue Shield’s rescission of the policy. Specifically, it found that the undisputed evidence showed that appellant’s application contained a number of material misrepresentations and omissions regarding appellant’s medical history; the appellant was either aware that the representations were false or displayed a reckless disregard for the truth; appellant made the representations with the intention of inducing Blue Shield’s reliance on them; Blue Shield relied on the information in the application; and Blue Shield was harmed by issuing the policy. In light of this undisputed evidence, the court further held that the insurance code entitled Blue Shield to rescind the policy.

The record before the court supported the court’s finding that Blue Shield adequately pleaded the issue of fraud in its answer, asserting as affirmative defenses that Blue Shield relied on and did not discover the falsity thereof until the time of revocation. Even if Blue Shield had not raised 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 without prejudice.

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

The undisputed evidence showed that Nieto made material misrepresentations and omissions in the application regarding her medical condition and treatment. Nieto responded negatively to the requests in the “Medical History” section of the application, when in fact the appellant had suffered from chronic back problems throughout 2005 and earlier. Nieto pointed out that her last medical 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 met Dr. Rockenmacher at least 17 times between February and May 2005, including the day she signed the application. Finally, Nieto pointed out 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 and one oral steroid.

The undisputed evidence further showed 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 in her application, would have made Nieto eligible for enrollment in any Blue Shield Life IFP product. Although the trier of fact is not bound to believe the “post mortem” testimony of an insurer’s agents that insurance would have been denied had the true facts been disclosed. Nieto argued that her declaration, in which she claimed 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 error or omission in an insurance application, whether intentional or unintentional, entitles the insurer to cancel the policy. ab initio.1 In addition, the rule is codified in the Insurance Code so that any material misrepresentation or failure, whether intentional or unintentional, to provide requested information allows the injured party to rescind the policy. Accordingly, evidence showing that Nieto had no intent to defraud could create a triable issue of fact.

Nieto’s application contained material misrepresentations and omissions regarding her medical history and condition, medications taken and recent medical appointments. Had she properly and fully disclosed these matters, she would have been denied coverage. Based on the undisputed facts, Blue Shield Life was entitled to cancel Nieto’s policy.

(c) 2023 Barry Zalma & ClaimSchool, Inc.

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