A RUBIKS CUBE: Post Claims Underwriting & FS-627.409

Last Tuesday the state Insurance Consumer Advocate (ICA) dispatched a letter to Insurance Commissioner, Kevin McCarty, requesting an investigation of Universal Property & Casualty’s claim practices. Citing examples of claim denials due to material misrepresentations on the original application, the letter states:

In the three cases that have been handled in my office, the policyholders have had insurance coverage with Universal Property and Casualty Insurance Company (Universal) for at least 18 months and up to four years and have had their policies cancelled or rescinded as of the original policy’s effective date for misrepresentation after they filed a claim. All cases involved previous financial issues such as bankruptcy or a lien which occurred up to four years before the consumer applied for insurance coverage with Universal.

For a technical review read an article by David Thompson with FAIA. He provides both the background and real life examples of carriers, not just Universal, denying claims via the provisions of Fs-627.409-Representations in applications; warranties. He correctly warns agents and their clients to always make sure that applications are honestly and diligently completed.

The statute, of course, is clear–cancellations due to material misrepresentation “…either to the acceptance of the risk or to the hazard assumed…” are permissible. But, some are alleging that up-front underwriting during the 90 day “free look” period should have revealed any material misrepresentations and that waiting until a claim is filed, especially for financial matters seemingly unrelated to the claim, is unfair and perhaps illegal.

I’ve found many sides to this Rubik’s Cube–one colored by anecdotes that would lead many to believe there’s justification behind the ICA’s request of OIR. The other side(s), not so much!

For example, one agent had a client that was cancelled back to inception and their busted water pipe claim denied due to a post-claim credit report that revealed a prior lien. The publicly available lien was unrelated to the clients bills, but…was the result of a contested property tax suit filed by a group of beachfront property owners regarding leased properties they didn’t even own. Liens were filed, automatically, by the county against all the beachfront residents in the suit, including the agent. The lien amount was $400.

In another case a long-time insured got married and later had a property loss. The company learned the new spouse had a previous domestic abuse charge, one that was unknown to the insured. The policy was cancelled back to inception and the claim denied.

Another case involving a busted water pipe–during the Examination Under Oath (EUO) the policyholder volunteered they had once been charged BUT NOT CONVICTED of DUI. There was no suspicion or investigation of fraud with respect to the claim but, the policy was cancelled back to inception and the claim denied.

Universal has released an Important Agency Notification to its agents and they have their own side to the story.

First, the number of cases in play is miniscule–compared to its nearly 550,000 total policies, less than half of one percent have incorrect information on the application. The ICA reported only 10 complaints.

The question is this: is the additional premium for up-front underwriting born by half a million policyholders who have been careful and honest completing the application, worth paying claims for a handful of insured’s who were either careless in completing their applications or intentionally lied?

Keep in mind, the line for the insured’s signature is located directly below a statement warning that misrepresentations could result in their claim being denied!

Also, company representatives say Universal applies its policy consistently, to all claimants–even if the amount of the premium refund exceeds the policy’s costs, such as policy administration, agent commissions on prior policy terms, reinsurance, etc.

In one example the company refunded two years worth of premium in order to deny a $2,700 water claim–reinsurance costs alone can be half the premium. In this case, the policyholder had made two false assertions: one, there were no prior losses, and; two, no prior legal judgments.

Perhaps the biggest risk to the carrier, however, isn’t the known costs it might forfeit but, the higher likelihood of a lawsuit which might include unlimited damages for acting in bad faith.

Again, many sides to the Rubik’s Cube–all of which the OIR will need to carefully weigh to avoid increasing costs for the majority who diligently and honestly complete their insurance applications.

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