When an insurance company rescinds a policy, it is doing more than simply canceling coverage. Rescission generally means the insurer is taking the position that the policy should be treated as though it never existed.
That can have significant consequences. A pending claim may be denied, future coverage may be canceled, and premiums paid under the policy may be refunded or offered for refund.
But an insurer’s decision to rescind a policy is not necessarily the final word. California law imposes requirements on rescission, and you should carefully examine the insurer’s reasons.
Why Do Insurance Companies Rescind Policies?
Rescission disputes often arise when an insurer alleges that an application contained inaccurate or incomplete information.
Under California Insurance Code Section 359, a false representation in an insurance application may support rescission if it concerns a material point. California law also permits rescission for material concealment in appropriate circumstances, even when the concealment is not intentional.
That means an insurer need not necessarily prove that the applicant deliberately tried to deceive the company. But it still must establish the legal grounds necessary to justify rescission.
What Makes Information “Material”?
Materiality is often one of the most important issues in a rescission dispute.
Under California Insurance Code Section 334, materiality generally turns on the probable and reasonable influence the information would have had on the insurer in evaluating the proposed insurance contract. In practical terms, the question may be whether truthful or complete information would have affected the insurer’s decision to issue the policy, accept the risk, or set the premium.
For disability or life insurance, disputed information may include medical history, diagnoses, treatment, medications, occupation, income, or other information requested during underwriting.
Importantly, the alleged misrepresentation need not necessarily relate to the loss that ultimately produces the claim. The central question is whether the information was material to the insurer’s original underwriting decision.
An Incorrect Answer Does Not Automatically Resolve the Case
An insurer’s discovery of an inaccurate answer on an application does not necessarily end the analysis.
The application should be reviewed carefully. What exactly did the insurer ask? Was the question clear? What did the applicant know at the time? Did the applicant provide additional information elsewhere? Did the insurer already have relevant information? Would the allegedly omitted information have actually affected underwriting?
California courts have recognized that an applicant’s knowledge, the wording of the questions, and the actual significance of the information can be relevant when determining whether rescission is justified.
The underwriting file can therefore be particularly important. It may reveal what information the insurer considered when issuing the policy and whether the information now cited as grounds for rescission would have changed the insurer’s decision.
Rescission Can Result in a Claim Denial
Rescission often becomes an issue only after the insured submits a significant claim.
Instead of simply disputing whether the particular claim is covered, the insurer may assert that the entire policy is invalid because of information provided—or allegedly omitted—when the policy was purchased.
This can turn a claim dispute into a fight over whether the insurance policy even existed in the first place.
Life Insurance Rescission
Life insurance claims can present especially difficult rescission issues because the dispute may arise after the insured has died. The beneficiary may suddenly have to address allegations about an application completed years earlier.
An insurer investigating a life insurance claim may compare the application with medical records and other information gathered during the investigation. If it identifies what it considers a material misrepresentation or omission, it may attempt to deny the death benefit and rescind the policy.
These cases require careful attention to the policy’s contestability provisions, the timing of the claim, the application questions, the insured’s medical history, and the insurer’s underwriting standards.
Can an Improper Rescission Constitute Insurance Bad Faith?
Potentially, depending on the circumstances.
Not every incorrect or disputed rescission amounts to insurance bad faith. But questions may arise about whether the insurer conducted a reasonable investigation, fairly considered information supporting coverage, properly interpreted the application and policy, and had a reasonable basis for its decision.
Employer-sponsored insurance governed by ERISA raises additional issues because federal law may govern the claim process and substantially affect the remedies available.
What Should You Do After Receiving a Rescission Notice?
Keep the rescission letter, policy, original application, amendments, premium records, claim forms, medical or financial information provided to the insurer, and communications with the insurer or the insurance agent.
Do not assume that the insurer’s characterization of an application answer is necessarily correct. The precise wording of the application, the information available at the time of completion, and the insurer’s underwriting records may all be important.
Deadlines also matter. Depending on the type of insurance, contractual limitation periods, administrative appeal requirements, or ERISA deadlines may affect your rights.
A Rescission Notice Is Not Necessarily the Last Word
The Law Office of Kevin M. Zietz represents individuals in California whose insurance benefits have been delayed, underpaid, disputed, or denied.
If an insurance company has attempted to rescind your policy due to an alleged application error, we can review the application, policy, underwriting history, claim file, and stated grounds for rescission to determine whether the insurer’s position is supported by the facts and applicable law.
If your insurance coverage has been rescinded or your claim has been denied because of an alleged misrepresentation or omission, contact the Law Office of Kevin M. Zietz to discuss your claim and the options that may be available.
