After the United States Supreme Court defanged the tort system in Campbell v State Farm Insurance Company by limiting punitive damages to ten times actual damages, insurance companies almost uniformly reverted to their business methods employed prior to the advent of theories of recovery involving bad faith breach of contract. The primary method of boosting insurance company financial performance has almost always been by increasing the cash reserves the companies invest, such that in the modern era, most insurance companies make more money from their investments than they do their sales of new policies.
One of the ways insurance companies increase their cash reserves, and thus the size of their investments and the resulting investment profits is to refuse to pay claims to policyholders. Insurance companies accomplish this by tightening their claims investigation procedures and excluding claims, in whole or in part, on ever more detailed guidelines for claims payment. This method has several permutations. One method is to never actually deny the claim, but rather to put up so many requirements to qualify for payment, usually manifested in ever more clever paper work technicalities, that the policyholder eventually in exhaustion gives up. Another method is to do post claim underwriting.
Post claim underwriting is manifested in “investigations” of the claim that start with the initial application, if the application is still within the time it can be contested, and sometimes even if it is not, and look for any flaw or mis-statement. The initial application is often as much authored by the commission seeking (and sometimes commission hungry) insurance sales person as it is by the prospective insured or policyholder. The application questions are usually detailed and often use technical medical or other terms.
Most insureds and policy purchasers assume that the insurance company obtained a release of medical records from them for some purpose and that erroneous medical history answers will be corrected by a review of the medical records supposedly obtained. While this might or might not be true, a few months or a few years later when the major claim is being “investigated,” many companies often revisit the original decision to accept the policy, called “underwriting,” and determine if there were any errors in the application that could be characterized as wrong or fraudulent.
Companies that engage in this sort of retrospective underwriting analysis assume the insured or policy purchaser lied and assume the selling agent just faithfully took down their answers to the questions, even though the insurers know fully that the agents often have to explain the questions and help decide what the answer should be.
In a binding arbitration in California, Bates v Health Net, Inc., BC321432, [hat tip to Lisa Girion, Los Angeles Times, otherwise, no one would have known and to TerraX’s editor, Terry Hull, or I would not have known] the arbitrator wrote a lengthy report of the testimony about post-claim underwriting that led to policy rescission (cancellation). Health Net wanted out of the policy as soon as Ms. Bates developed breast cancer and $125,000 in medical bills. The arbitrator awarded Ms. Bates $9 million, some substantial part of that in bad faith punitive damages. Thus, this Award was doubly rare, a large award in arbitration to a consumer, and, a report on the practice of post-claim underwriting, which is typically illegal or typically unfair, or both.
The Award is presently on the LA Times website, the link is in bold above, and is an excellent explanation of the post-claim underwriting methodology. The only thing missing is the one thing only a Grand Jury could probably get a handle on, and that is the cold blooded actuarial data the insurance company likely used to determine whether post-claim underwriting denials would be cost effective in preserving or increasing reserves and profits. You can bet that even though this Award laid it out in cookie cutter clarity, there will be no hearings by the enforcement division of any Insurance Commissioner in any state. That makes Campbell v State Farm all the more effective to protect insurance company financial statements.
