Life insurance is a very common benefit offered in the workplace, but one with dangerous pitfalls. Obviously, it is important as the applicant wishes to assist loved ones with expenses that are left after passing away.  However, rescission is one pitfall that can be used to reject the claim, and leave loved ones bewildered and angry. In fact, rescission can be used as a tool for post-claim underwriting to save the insurer advance underwriting expense.

Most of these life insurance plans through an employer fall under ERISA. Rescission is not in ERISA, but it is in Alabama law. When ERISA does not specifically address an issue, courts will look to state law for guidance. Rescission is governed by Ala. Code § 27-14-7 (1975). This code section allows an insurance company to rescind coverage based on a misrepresentation, omission, concealment of fact or incorrect statement.  However, the facts involved must be material to the company's acceptance of the application and risk.  Also the insurer must determine that it would not have issued the policy at all or it would have charged higher premiums if the truth were made known.  Thus, even an innocent misrepresentation, mistake, or mere lack or recall can be grounds for rescission.

Rescission can be a shock to the loved ones left behind, especially when the cause of death has nothing to do with the alleged innocent misrepresentations.  In some instances, it becomes obvious that the insurance company is using post-claims underwriting to reject paying legitimate insurance claims. This tactic only adds to the grief of beneficiaries.  It is unfair and in bad faith in some circumstances.

Post-claim underwriting typically happens when low-cost insurance is offered, and the company only asks a few medical questions to provide the coverage. Often the applicant never sees the application at the time of the questions. It is often completed by the agent and over the telephone.  The agent may ask just a few questions but each with a long list of medical conditions as part of the question. The questions may be asked at the same rapid speed as disclaimers or side effects for drug company ads in some television commercials.  The question may be something like “in the past 7 years have you been diagnosed, treated, tested positive for, or been given medical advice by member of the medical profession for …” and then a litany of conditions are noted at warp speed.

The applicant may have only heard one or two conditions and may think the conditions are all related to one condition. Or the applicant may not answer the question at all and instead ask a question back such as “you said cardiovascular conditions, and I take medication for blood pressure, but it is controlled. Does that matter?” The agent may then continue and say “okay if it's controlled and we are going to say no” and carry-on.  If the applicant does not interrupt, the answer is left answered “no” even if there are other unrelated conditions in that list.

Even if the applicant furnishes a list of all medications and treating providers, the “no” answer of the agent may be taken as that of the applicant. It is easy to see how the questions are designed in advance to create a defense to payment of a life insurance claim. In many instances, that is nothing short of post-claims underwriting. There is a reason for this.

In  Alfa Life Ins. Corp. v. Lewis, 910 So. 2d 757 (Ala. 2005) the court reviewed a rescission case where the decedent denied she had a diagnosis of congestive heart failure. However, the decedent had no knowledge of the diagnosis, so the trial court found a question of fact for trial. On appeal however, the Alabama Supreme Court held that the statute does not require knowledge by the decedent. The insurance company only needs to establish a misrepresentation or mistake in the application that was material as to whether the policy would be issued or not. It reversed the trial court.

That of course holds individuals to a medical professional standard to know, understand and recall all of their diagnoses or treatment, even if different language was used to explain that to them. That is flatly unfair as there is insufficient notice of this to applicants that they may not have life insurance if there was any failure to understand or recall any diagnosis. This points to a need to change the statute given the Alabama Supreme Court's interpretation. It also gives carte blanche to insurance companies to use rescission as post-claim underwriting.

As a note of caution to insurers, the Alabama Supreme Court in Duren v. Northwestern Nat'l Life Ins. Co., 581 So. 2d 810, 814 (Ala. 1991) in discussing two prior Alabama precedents, Bankers Life Casualty Co. v. Long, 345 So. 2d 1321 (Ala. 1977) and Inglish v. United Servs. Gen'l Life Co., 394 So. 2d 960 (Ala. Civ. App. 1980) warned that “an application containing sufficient indications to put an insurer on notice of an applicant's health problems or false answers might preclude the insurer from rescinding its contract if it disregarded that notice and did not make reasonable inquiries to confirm or refute those indications … .”

For now, applicants should list every medical provider who has treated them over the time frame requested.  That is true even if there was no medication provided or further treatment. Every medication they have taken also should be noted and the pharmacy where filled. Finally, an applicant should review the application carefully when received and dispute any information that is not correct. If the application is not received it should be demanded before further premiums are paid.

As to beneficiaries faced with a rescission response to a claim, they should request the application and the recorded conversation and review it. There may not have been a clear “no” response or it may be confusing. There may be a case counsel can assist with.