The Duty of Insurance Companies to Deal With You in Good Faith
Post claim underwriting has been described as a practice whereby an insurance company waits until you submit a claim before investigating your health history and then asserts that no coverage exists. A few states, among them Mississippi, do not allow an insurance company to rescind a policy on the basis of information that the insurance company could have discovered during the initial underwriting process. For example, if you list a particular medical care provider on your insurance application and the insurance company fails to contact the provider to gather information, any adverse medical history contained in the provider’s reports may not be used to rescind your policy.
To succeed in a law suit against an insurance company based on an unfair claim denial that may have resulted from some form of post claim underwriting, you have one point in your favor. Courts and legislatures have accepted for many years that an insurance company has a special relationship with the insured (you) due to the nature of insurance contracts and the unequal bargaining position between you and the insurance company.
The economic dominance and superior ability of the insurance company to protect itself carries with it special obligations. In return for your timely payment of premiums, you rely on the insurance company’s promise to provide necessary protection when certain contingencies occur. When buying insurance you usually do not seek a commercial advantage but, instead, seek protection and security from financial loss. The purpose of insurance is defeated if an insurance company can refuse, without justification, to pay a valid claim.
The insurance company has a legal duty to you of good faith and fair dealing which means it must not impair your right to receive policy benefits and it must give as much consideration to your interests as to its own. When you under a life insurance policy die, or under a health insurance policy are hospitalized, or under a disability income policy become disabled, the insurance company must act promptly upon receiving the claim. Life, health and disability insurance companies have a contractual obligation through their policies to you, the insured, and your beneficiaries to pay a claim upon the happening of contingencies stated in their contracts.
This implied contractual obligation of good faith and fair dealing anticipates that the insurance company will diligently investigate the facts to determine whether your claim is valid, will fairly evaluate your claim, and will act promptly to settle your claim. When investigating your claim, the insurance company has a duty to search for evidence that supports your claim. If the insurance company seeks to discover only evidence that defeats your claim, it holds its own interests above yours and breaches the implied covenant of good faith and fair dealing. Check out the article on Post Claim Underwriting – Fixing the Odds Against You. This implied covenant is especially important because the insurance company has a superior bargaining position. Because of this, the insurance company has a special obligation to deal fairly with you. An insurance company that unreasonably delays or refuses to honor its obligations violates its implied covenant with you of good faith and fair dealing.
Good faith underwriting practice requires your insurance company to investigate your medical history before approving the policy – not after the policy is in force and a claim has been filed. This duty of your insurance company is especially important when the insurance company is attempting to rescind your policy. Then you are not merely at the mercy of your insurance company to be treated fairly in the processing of a single claim, but must rely on your insurance company’s good faith to continue your coverage.
To your advantage, rescission (cancellation) of an insurance policy is strongly disfavored by the courts, especially when the event that gives rise to the insurance company’s liability (your filed claim) has already occurred. Courts disapprove of insurance companies taking advantage of their superior position by failing to honor your reasonable expectations as an insured. If your insurance company is attempting to rescind your policy, you should seek legal advice. The insurance company already has its own staff of in-house attorneys.