Opportunistic Rescission: When Do Insurers Waive their Right to Rescind an Insurance Policy?

All too often, we see insurance companies deny insurance claims by attempting to opportunistically rescind insurance policies. This practice has become more prevalent in recent years as insurers look for ways to deny insurance claims.

Anyone who has purchased a disability, life or health insurance policy is likely familiar with the significant paperwork involved in the insurance application process. The paperwork includes policy notices, policy applications, supplemental policy applications, personal history questionnaires, policy warnings, medical examination documents, etc. These will include numerous and detailed questions relevant (and often not so relevant) to the risk being insured. An insurance agent or broker will ask questions on the policy application and often additional questions not on the application. Only after the applicant has answered countless questions, will the insurance company decide whether to issue the policy. Many applicants do not appreciate why insurance companies go to such great lengths before issuing a policy. The answer: they want to evaluate the risk that the applicant poses to them. If there exists too much risk of a payout under the policy, they will not underwrite that risk by issuing a policy. Throughout the application process, like the claims process, insurers often have a duty to investigate the information contained on the application. The failure to engage in such an investigation may result in the insurer being precluded under the law from later rescinding a policy that it decided to issue.

When insureds file claims under their policies, insurers often first look to determine if they can rescind the policy, asserting that the policy should be considered null and void as if it was never issued in the first place. As we explained in a previous blog article, rescission legally renders the contract as if it never existed and releases both parties from their obligations under the contract. An insurance company is often allowed to rescind a contract when there is a material misrepresentation on the insurance application. Many times, the omission was an honest mistake or it was excused by the broker or agent as immaterial. Regardless of the purposefulness of the omission, the insurance company may still have the right to rescind the contract.

There are exceptions however. One involves the insurer’s duty to investigate the information on the application at the time the application is submitted and its duty to investigate the possible basis for rescission when handling the claim. If there is an implication that the application was not completely accurate, and the insurer fails to investigate, then the insurer may have waived the right to rescind the policy. For example, the applicant fails to state that she had seen a doctor in the last five years, yet the application reveals she is on several prescription medications. Or, the evidence may arise from an outside source. For example, the insured may submit a claim for a treatment which strongly implies that the applicant had a non-disclosed pre-existing condition at the time the application was submitted. Insurance companies have a duty to explore such information or they may lose the right to rescind the policy. As one court stated, an insurance company “may not blindly ignore evidence of misrepresentation, collect premiums, and then opportunistically rescind once a claim is filed.” Star Insurance Co. v. Sunwest Metals, Inc., 691 F.App’x 358, 360 (9th Cir. 2017). The issue is not just whether the insurer had actual knowledge of the material misrepresentation, but also whether the insurer could have or would have obtained the information if it had exercised reasonable diligence in investigating the claim.

In DuBeck v. California Physicians’ Service, 234 Cal.App.4th 1254 (2015), the California Court of Appeal addressed an insurance company’s failure to diligently investigate an application. Bonnie DuBeck submitted an application for health insurance to California Physicians’ Service, doing business as Blue Shield of California. In her application, she failed to disclose that she had recently visited a doctor to have a lump in her breast examined. DuBeck’s application was approved. Five days after Blue Shield issued the policy, DuBeck underwent breast cancer surgery. She submitted bills for her treatments to Blue Cross. Blue Cross became suspicious that, given the timing of the billings, the condition had arisen before DuBeck’s enrollment. “Yet by its own admission Blue Shield neither commenced an investigation nor obtained records confirming the date of appellant’s first breast cancer-related procedure for another year.” Id. at 1268. By the time Blue Cross had started its investigation, DuBeck had been diagnosed with leukemia. During that time, DuBeck submitted various bills to Blue Cross, some of which Blue Cross refused to pay. Ultimately, Blue Cross cancelled the policy. Of note is that Blue Cross did not rescind the policy – it only cancelled the policy. Two years after Blue Cross canceled the policy, DuBeck sued Blue Cross to force payment of the unpaid medical bills.

In the trial court, Blue Cross moved for summary judgment. It argued that it had the right to rescind the insurance contract because DuBeck had lied on the application. The trial court granted Blue Cross’s motion. DuBeck appealed.

The court of appeals reversed the trial court on several different grounds. One of those grounds was that Blue Cross failed to properly and promptly investigate the information in the application once it received information putting it on notice that DuBeck had omitted information from her application, thus waiving its right to rescind the policy. As the court of appeals explained:

By ignoring information that would have resolved the truthfulness of the representations in appellant’s application at an early stage and determining at that time whether to continue as her insurer, Blue Shield allowed appellant to incur substantial medical expenses and dissuaded her from investigating the availability of government assistance. Blue Shield’s lack of diligence in the early months of the policy and the apparent prejudice to appellant provide a second and independent basis for rejecting its claimed right to rescind. Id.

Insurance companies have an affirmative duty to investigate the applications submitted to them. If they have failed to do so, then they may lose the right to rescind a contract that was less than complete. Insurers will still often attempt to rescind a policy, sometimes years after they had evidence that something was amiss. Determining whether an insurance company can properly rescind a policy is a difficult task for most insureds. McKennon Law Group PC has extensive experience determining whether an insurer can deny your life, health or disability insurance claim by rescinding your policy. Some of the issues we examine: was there actually a misrepresentation? Was the misrepresentation innocent or intentional? Was it material and how can the insurer prove it was material? What did the agent/broker know or say in the application process? Was there some information in the claim file that should have led the insurer to suspect a material misrepresentation? We expertly determine and often are able to successfully challenge an insurer’s attempted rescission. If you have a denied life, health or disability insurance claim that is the subject of an attempted rescission, call us for a free consultation.

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