Material Misrepresentation About Prior Health Care Supports Rescission

Barry Zalma

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In Provident Life & Accident Insurance Company v. Bradley D. Mckinney, No. 3:19-CV-1325 (SVN), United States District Court, D. Connecticut (September 9, 2022) the USDC was called upon to determine if an insurer can rescind an ERISA policy.

FACTUAL BACKGROUND

Bradley McKinney applied for and obtained a disability insurance policy with Provident Life Accident & Insurance Company (“Provident Life”). McKinney subsequently filed a claim for disability benefits under the policy, but Provident Life rejected his claim on the ground that McKinney made material misrepresentations in his application for the policy. Provident Life sued seeking rescission of the insurance policy, and McKinney counterclaimed seeking an order directing Provident Life to pay him all benefits due under the policy.

McKinney’s employer, Anderson Tax LLC, maintained a Supplemental Individual Disability Insurance Plan. McKinney applied for supplemental insurance through the plan. In completing the application, McKinney answered various questions about his medical history and agreed that his answers were “true and complete and correctly recorded to the best of [his] knowledge and belief.” In September of that year, Provident Life issued him an insurance policy providing all three available disability coverages. The policy provided that “[o]missions and misstatements in the application could cause an otherwise valid claim to be denied or [the policy] to be rescinded.”

McKinney filed a claim for basic disability benefits related to a neurocognitive disorder. His claim form stated that he first began experiencing symptoms of “confusion, severe fatigue, loss of memory, challenges with thinking, analyzing, [and] lack of concentration.” Provident Life’s claims specialist investigated McKinney’s claim, obtained certain medical records, and consulted with the underwriters. Thereafter, Provident Life denied McKinney’s claim and notified him that it was rescinding its policy on the ground that McKinney had materially misrepresented his medical history when applying for the insurance.

In answering questions 6 and 8 of the application McKinney represented that he had not received diagnosis or treatment from a physician for memory loss, confusion, or speech disruption in the five years preceding his application. Second, in answering question 3(a), he represented that he had not missed one or more days of work or been admitted to a medical facility due to sickness or injury in the 180 days preceding his application. Upon reviewing McKinney’s medical records, Provident Life concluded that his answers to those questions were untruthful and that its denial of his claim and rescission of his policy were proper.

ERISA

The parties do not dispute that a plan fiduciary may obtain “equitable rescission of an ERISA-governed insurance policy that is procured through the material misstatements or omissions of the insured.” [Shipley v. Ark. Blue Cross & Blue Shield, 333 F.3d 898, 902 (8th Cir. 2003).] An ERISA plan fiduciary’s right to obtain equitable rescission is well grounded in federal common law.
Rescission Due to Material Misrepresentation

Under the federal common law that has developed pursuant to ERISA, an insurer can rescind a policy where the insured knowingly made a material misrepresentation in an application for an ERISA-governed insurance policy.

DISCUSSION

In initially rejecting his claim, Provident Life explained that McKinney untruthfully answered questions 6 and 8, which concerned prior treatment for memory loss, confusion, or speech disruption in the relevant time frame. In denying McKinney’s appeal of the original denial, Provident Life explained that McKinney also untruthfully answered question 3(a), which concerned time off work due to admission to sickness or injury in the relevant time frame.

The Court concluded that there was no genuine dispute of fact that McKinney made material misrepresentations in responding to questions 6 and 8 of his application for supplemental insurance coverage. There was no dispute that McKinney’s answers to those questions were untrue. He was certainly treated for confusion and speech disruption within five years of his application for supplemental insurance coverage, rendering his contrary responses to questions 6 and 8 untrue.

The Court concluded that McKinney’s claims of ignorance of the fact that he had been treated for confusion and speech disruption during his 2016 hospitalization was not innocent. A misrepresentation is innocent when the applicant does not know that the information he is providing is false, and when such ignorance was reasonable.

The court concluded that McKinney’s ignorance about the facts of his 2016 hospitalization was not reasonable. Multiple people including McKinney’s partner-reported that McKinney experienced confusion and speech disruption during that hospitalization. Indeed, when questioned in the course of his claim for benefits, he acknowledged that he was first diagnosed with these problems in February of 2016. The idea that he did not know about them when he applied for the insurance policy in 2017 therefore strains credulity. In addition, McKinney had medical records from which he could have determined that his answers to questions 6 and 8 were false, and he had an obligation to use reasonable diligence to ensure that he answered those questions correctly.

The court also concluded that there is no genuine dispute that McKinney’s untrue answers to questions 6 and 8 were material to Provident Life’s issuance of the policy. With respect to a life or health insurance policy, a misrepresentation regarding the applicant’s prior medical history is generally material to the risk as a matter of law, and, when knowingly made, will defeat recovery by the insured.

Importantly, in signing the application for insurance coverage, McKinney agreed that he understood his answers to the questions would “become part of [his] application and any policies issued on it.” The application form, including questions 6 and 8, were clearly intended to limit coverage, so the application’s particular inquiry into the applicant’s prior treatment for memory loss, confusion, or speech disruption renders those questions presumptively material.

Given the strong weight of authority establishing the materiality of an applicant’s prior medical history subject to specific inquiry, as well as the fact that McKinney’s answers were incorporated into the policy issued, the Court concludes that his knowing misrepresentations to questions 6 and 8 were material. Thus, Provident Life is entitled to rescission of the insurance policy as a matter of law.

Finally, ample authority establishes the materiality of McKinney’s misrepresentation as to question 3(a) as with questions 6 and 8, McKinney’s response to question 3(a) became part of the policy and is therefore presumptively material. In addition, McKinney’s misrepresentation is logically material to a reasonable insurance company’s decision whether to insure that applicant or determination of the premium. In addition, Provident Life’s underwriter unambiguously represented that had he known that McKinney took one PTO day to attend a lumbar puncture appointment regarding his neurosyphilis condition, he would not have issued even the basic disability benefits policy to McKinney.

The Court is entitled to rely on an insurer’s underwriter’s representation regarding the materiality of a misrepresentation.

To the extent the underwriting guidelines and the underwriter’s representation appear to differ as to the result of that investigation, the Court need not resolve.

Rescission of the current policy is justified as a matter of law.

ZALMA OPINION

Since Medieval times when courts of equity were ruled upon by priests who were charged with providing equity – fairness – with regard to disputes rather than money damages. Rescission of a contract entered into as a result of material misrepresentations, concealment of material facts or fraud, requires the court of equity to order the the premium returned to the insured and the policy returned to the insurer. It would then declare that the policy never existed. The USDC, acting as a court of equity, did what was only available to it: it declared the policy rescinded because of material and intentional misrepresentations by the insured.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected] and receive videos limited to subscribers of Excellence in Claims Handling at locals.com https://zalmaoninsurance.locals.com/subscribe.Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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