In the insurance industry, the words “post-claims underwriting” are considered words of bad faith. “Post claims underwriting” is the term used when an insurance company refuses to pay a covered claim because the insured is not within the category of a risk where a policy would have been issued in the first place. An insurer cannot go back into your file after a loss and then try to re-write the underwriting process and use that as the grounds to cancel or rescind the insurance policy. After all, the insurance company took on the risk of insuring in the event of a loss, and trying to find a way out of their obligation isn’t appropriate.
In property loss situations, the last thing an insured thinks of after a loss is whether their insurance carrier is going back into their underwriting and insurance application to see if the insurance company can now scrutinize the underwriting to find a way to not pay under the policy. However, in California it happens more often than you think. Although post-claims underwriting itself by its very definition is not allowed, insurers will go back into the underwriting file and insurance application to see if there is a way to not pay the claim. Under the case of Fireman’s Fund American Insurance Company v. Escobedo,1 the court has ruled that the insurer may rescind a policy retroactively for material misrepresentation or concealment in the application to avoid liability even on pending claims. It’s from this case that many insureds are shocked that the insurer has halted the claim adjusting and instead is sifting through the insurance application and requesting examinations under oath asking solely about what was represented when purchasing the insurance policy to the insurer and underwriters.
Although an insured may think that this behavior by an insurer is not just, it is allowed. If an insured makes a misrepresentation on the application that is material and would have affected the underwriters to not write the policy if they had known the truth, then the insurer may properly exercise its rights to rescind and extinguish its duties under the policy. A rescission renders the policy unenforceable.2
In this digital age, insurance applications are submitted online and often by brokers and agents who do not retain a copy of the insurance application itself. Odds are that more than half the time the insured has not even seen the application and is not advised as to all the questions on the application. The only way that an insured can avoid and minimize rescission issues post-loss that may arise is to meticulously review the insurance application and go over every question and answer truthfully before submission. Dealing with these issues after a loss has occurred and a state of panic has already set in from the loss itself can be devastating.
In a time that we trust our agents and brokers and glaze over insurance issues when purchased, insureds must be aware that rescission is allowed in certain circumstances. Post-claims underwriting is also not allowed so if an insurer begins investigation of underwriting and your insurance application after a loss, make sure a specialist is consulted to get a copy of your insurance application, underwriting documents and to protect your rights if the insurance policy is enforceable.