Postclaim Investigations: When They Become Postloss Underwriting
An insurer accused of engaging in postloss underwriting may respond that it is merely undertaking a reasonable investigation to determine whether the insured is eligible for coverage based on the actual facts rather than on the insured’s representations during the application process. After all, the insurer will argue, it is entitled to rely on the truthfulness of the insured’s answers to questions on the application without conducting an investigation at the time. See, e.g.,Gary Schuman, Post-Claim Underwriting: A Life & Health Insurer’s Right to Investigate or Bad Faith?, 45 Tort Trial & Ins. Prac. L.J. 697 (Spring/Summer 2010). Some courts have accepted this argument and held that an insurer does not engage in prohibited postloss underwriting simply because it investigates the accuracy of the insured’s representations after a claim has been submitted. See, e.g., Brandt v. Time Ins. Co., 302 Ill. App. 3d 159, 704 N.E.2d 843 (Ill. App. Ct. 1998).
However, as with much else in the law, the details matter. For example, in Brandt, the application specifically asked whether the insured suffered from diabetes, but the insured’s broker answered “no” even though he knew that the insured did in fact have diabetes. It is not too surprising, then, that the court held that the insurer was entitled to use the answer to this question as proof of misrepresentation in denying the insured’s subsequent claim and rescinding the policy.
Suppose, though, that the insurer had not asked the insured whether the insured had diabetes, or any other specific medical condition. Suppose, instead, that the application simply asked whether the insured was in good general health. In other words, suppose that the insurer did not underwrite the policy correctly or in a manner consistent with industry custom and practice and only investigated whether the insured was an acceptable risk after the claim was made. As one court noted, the quality of the insurer’s initial underwriting can make the difference between permissible “post claim eligibility investigation” and prohibited postloss underwriting:
'[T]he concept of ‘post-claim underwriting’ itself is nebulous, particularly because it is difficult to draw a distinction between post-claim eligibility investigation and post-claim underwriting.' (Northwestern Mut. Life Ins. Co. v. Babayan (3d Cir.2005) [sic] 430 F.3d 121.) This difficulty arises because postclaims investigation and postclaims underwriting involve a common activity: Research into a subscriber’s precontract health after a claim is made to determine whether to rescind the plan due to misrepresentations or omissions in the original application. The distinction between postclaims investigation and postclaims underwriting thus lies primarily in the quality of the underwriting process undertaken before the policy is issued.
Hailey v. Cal. Physicians’ Serv., 69 Cal. Rptr. 3d 789, 800 (Cal. Ct. App. 2007).
“Post-claim underwriting can occur when an insurance company fails to do an adequate underwriting until after a claim is submitted then denies the claim asserting that the insured is not entitled to coverage.” Banks v. Paul Revere Life Ins. Co., 31 F. Supp. 2d 82, 85 n.5 (D. Conn. 1998). The law is clear that an insurer’s underwriting obligation includes investigating and asking questions about the information that it believes is material to the risk:
The company that refuses to investigate until after a claim is filed runs the risk that it has insured someone whom it otherwise would not have. . . . [T]he company has no right to rescind the policy because there was information, not asked for on the application and not volunteered by the applicant, the knowledge of which would have caused the company to refuse to insure. If the company intends to rely exclusively on the application, it should ask questions tailored to elicit all the information that it needs.
Mattox v. W. Fid. Ins. Co., 694 F. Supp. 210, 216–17 (N.D. Miss. 1988).
An insurer also has a duty to investigate during the underwriting process when it has notice that the veracity of the information provided by the applicant may be questionable. Bajwa v. Metro. Life Ins. Co., 333 Ill. App. 3d 558, 580, 776 N.E.2d 609, 627 (Ill. App. Ct. 2002) (distinguishing Brandt). An insurer cannot ignore information that it obtains during underwriting and later claim that it was misled by the insured. Ins. Co. of North Am., Inc. v. U.S. Gypsum Co., Inc., 870 F.2d 148, 153–54 (4th Cir. 1989). An insurer that fails to ask questions about the policy’s subject matter during underwriting, which it later claims as misrepresentations and concealments, “by its own conduct evidence[s] its lack of interest, and therefore the [lack of] materiality.” Olson v. Standard Marine Ins. Co., 240 P.2d 379, 385 (Cal. Ct. App. 1952).
Consequently, notwithstanding insurers’ general position that it is permissible to determine the insured’s eligibility for coverage after a claim has been made, the insured can still argue in specific cases that the insurer failed to underwrite the risk properly in the first instance and is now attempting to “backfill” that lapse with impermissible postloss underwriting.
Insurers’ Underwriting and Claims Handling Policies: Relevant and Discoverable
In coverage litigation, insureds frequently request underwriting policies, procedures, manuals, and forms applicable to their claims, as well as policy applications, underwriting files, and claims files. Insureds typically argue that these materials are relevant because they may disclose the manner in which a disputed term or provision is customarily applied and understood by the insurer within its own organization and throughout the industry. See generally Glenfed Dev. Corp. v. Superior Court,62 Cal. Rptr. 2d 195, 198 (Cal. Ct. App. 1997); Bala City Line, LLC v. Ohio Sec. Ins. Co., 2017 WL 3443218, at *5 (E.D. Pa. Aug. 9, 2017). Underwriting and claims materials are particularly relevant when the insurer’s good or bad faith conduct in denying a claim is at issue. See, e.g., Jones v. Nationwide Ins. Co., No. 3:98-CV-2108, 2000 WL 1231402, at *4 (M.D. Pa. July 20, 2000); Reavis v. Metro. Prop. & Liab. Ins. Co., 117 F.R.D. 160, 164 (S.D. Cal. 1987) (“The tort of bad faith goes to the reasonableness of Metropolitan’s handling of Reavis’ claim. It is apparent that the claims files contain a detailed history of how Metropolitan processed and considered Reavis’ claim; under these circumstances, the documents are certainly relevant to the issues raised. . . .”).
Courts have also held that underwriting history may be considered in interpreting the meaning and application of policy terms and conditions. Thus, one court reviewed “the underwriting history of the [pollution] exclusionary clause” to determine whether it applied when analyzing whether the insured was an “active polluter” or not. U.S. Fid. & Guar. Co. v. Specialty Coatings Co., 180 Ill. App. 3d 378, 535 N.E.2d 1071, 1076–78 (Ill. App. Ct. 1989). The court found that the exclusion did not justify the insurer’s refusal to defend its insured on that basis. Other courts have come to the same conclusion. See, e.g., Joy Techs., Inc. v. Liberty Mut. Ins. Co., 421 S.E.2d 493, 498 (W.Va. 1992). By the same token, the Illinois Supreme Court examined the “historical background” of the absolute pollution exclusion to hold that it did not apply to carbon monoxide poisoning inside of a residence. Am. States Ins. Co. v. Koloms, 177 Ill. 2d 473, 687 N.E.2d 72, 82 (Ill. 1997).
When an insurer denies coverage for a claim or attempts to rescind a policy based on the insured’s alleged misrepresentations during the application process, the insurer’s underwriting and claims materials are relevant to the issue of postloss underwriting as well. The insured is entitled to discover whether the insurer performed an adequate investigation while it was underwriting the policy and if the insurer was aware of facts that may have cast doubt on the information provided in the application. The insurer’s underwriting materials may indicate what facts it considered material to the risk and whether the insurer should have asked for information relating to those facts during the underwriting process. Finally, the materials may specifically prohibit postloss underwriting and define it so that the insurer can determine whether its claims handlers are acting appropriately. All of the foregoing is relevant to the question of whether the insurer engaged in postloss underwriting as opposed to a (purportedly) legitimate inquiry into the insured’s eligibility for coverage.
On a final, somewhat related, note, insurers often object to requests for underwriting and claims materials, inter alia, on the bases that the requests are purportedly vague, overly broad, and unduly burdensome. Courts frown upon such boilerplate objections to discovery. As the court stated in Zagorski v. Allstate Insurance Co.:
When the objection is based on the grounds that the [discovery request] is overly broad, unduly burdensome, or harassing . . . it is the objecting party that has the obligation to offer an adequate defense to the grounds claimed.
Discovery is not a tactical game. . . . Stock objections and fractional disclosures render our discovery rules and procedures meaningless. . . . [A]sserting an objection followed by a litany of hollow grounds, without the intention or means to defend those grounds, is an abuse of the discovery process that may warrant sanctions.
2016 Ill. App. 5th 140056, ¶¶ 35–36, 39, 54 N.E.3d 296, 307–08 (Ill. App. Ct. 2016) (citations omitted). When postloss underwriting is a relevant issue, an insurer must offer an “adequate defense” in order for the court to conclude that the insurer is not merely engaging in a “tactical game” to deny an insured discovery.
Insureds should be aware of the possibility that an insurer has engaged in postloss underwriting when it denies coverage or attempts to rescind a policy based on the insured’s alleged misrepresentations when applying for insurance. Courts generally afford insureds the right to obtain underwriting and claims materials in discovery during litigation, and it is important for insureds to understand that insurers’ underwriting and claims materials are relevant to postloss underwriting. Insureds should be sure to ask for them in such cases.
Kenneth Anspach is a solo practitioner attorney in Chicago, Illinois. He is cochair of the Insurance Subcommittee of the Environmental & Energy Litigation Committee of the Section on Litigation, and is also cochair of the Environmental Subcommittee of the Insurance Coverage Litigation Committee of the Section.
Paul Walker-Bright is a partner in the law firm of Reed Smith LLP in Chicago, Illinois. He is cochair of the Property Subcommittee of the Insurance Coverage Litigation Committee of the Section on Litigation.