Although the New York DFS’s January 27 Circular Letter may present certain challenges to insurers in conducting contestable claims investigations, two recent federal court decisions — in Tran v. Kansas City Life Ins. Co., Case No. 2-15-cv-09963-ODW, 2017 U.S. Dist. LEXIS 1697 (Jan. 5, 2017 C.D. Cal.) and Gary v. USAA Life Insurance Co., Case No. PWG-15-1998, 2017 U.S. Dist. LEXIS 5889 (Jan. 17, 2017 D. Md.) — reaffirm several important legal principles governing the conduct of claims investigations and the denial of claims based upon material misrepresentations.
In both cases, federal courts entered summary judgment for insurers and dismissed complaints by claimants seeking to recover death benefits after the insurers denied the claims based on material misrepresentations. The fact patterns in these cases were similar: (i) the insureds failed to disclose relevant medical information during the application process, (ii) the insureds died within the contestable period, (iii) the contestable investigations revealed medical misrepresentations, (iv) the insurers denied the death claims, and (v) the beneficiaries sued the insurers and asserted various claims challenging the underwriting of the policies and the insurers’ claims investigations and denials.
In Tran, the court held that the insurer properly denied the claim where the insured failed to disclose diagnoses of diabetes and high blood pressure in the policy application. The court found that the non-disclosure constituted a material misrepresentation as a matter of law and entered summary judgment for the insurer. In an attempt to get around the clear misrepresentation, the beneficiary argued that the insurer waived its right to rely upon the undisclosed medical conditions as a basis for denying the claim by failing to adequately investigate the insured’s medicals during underwriting. The court rejected this argument and held that an insurer has no independent duty during underwriting to investigate the accuracy of the insured’s representations and, instead, the insurer has the right to rely upon the accuracy of application answers. The beneficiary also argued that the insurer engaged in illegal post-claim underwriting during the claims investigation by denying the claim based upon medical records obtained for the first time during the claims process. The court also rejected this argument, holding that the insurer had the right to engage in the “standard procedure” of collecting such records during a contestable claims investigation and that “life insurers in California, unlike health insurers, may engage in post-claim underwriting during the policy’s contestable period.”
The court in Gary reached the same result in granting an insurer’s summary judgment motion. The policy application in that case included a medical questionnaire that was completed based upon a telephonic interview of the insured. The insured failed to disclose an echocardiogram in response to an application question on diagnostic tests. Following the insured’s death, the insurer obtained the insured’s medical records and learned about abnormal echocardiogram results and denied the claim. In an attempt to get around this material misrepresentation, the beneficiary argued that the representation was not made in an application that was part of the policy. The court rejected this argument, holding that the representation made during the interview was recorded in a medical questionnaire that was part of the application. In response to the argument that the insured did not have the chance to review the questionnaire answers for accuracy before the policy was issued, the court held that (i) the insured had confirmed the accuracy of her answers in a voice recorded signature during the interview, which expedited the processing of the application, and (ii) the insured had the full opportunity during the 20-day free look period to review the application answers for accuracy upon receipt of the policy.
The beneficiary also argued, as in Tran, that the insurer had waived its right to rely upon the misrepresentation in denying the claim because the insurer had a duty to order the insured’s medical records during the underwriting process based upon the disclosure of a heart murmur condition during the application process. The court rejected this argument, holding that the insurer had no reason to order medical records based upon a benign murmur.