There has been a lot of focus lately about insurance. Particularly, there has been  focus on post-claim underwriting (Ellen Roseman addresses the post-claims underwriting and the banks, Canadian Capitalist’s guest writer addressed post-claims underwriting in discussing mortgage vs. life insurance, and Four Pillars wrote  an editorial about post-claims underwriting). This raises a much larger issue of when and why do insurance companies deny coverage and what you, as a smart consumer, can do to attempt to avoid this.

First, let’s take a step back. An insurance company actually does not make money selling insurance. It is a loss leader.  Instead, insurance companies make money by investing your policy money and the more they keep, the more likely an insurance company will keep Wall Street happy. Thus, its business model relies on keeping your money.

To this end, there are two primary ways that an insurance company can deny you coverage on policies that are not in default for non-payment. The first is fraud by the policy-holder. This is pretty self-explanatory.

The other, murky, way to deny insurance coverage, subject to countless lawsuits, is the intersection between pre-existing conditions and post-claims underwriting.

PRE-EXISTING CONDITION

Under the “limitations, exclusions and non-waivers” section of a typical policy, there are paragraphs of exclusions if you suffered from a pre-existing condition which was not disclosed in your insurance application and which you were aware of or should have been aware of before the commencement of the policy.

In plain English, was there some condition that the insurance company you did not disclosure which would have either resulted in them increasing your premiums or denying you coverage altogether?

What happens if you have a pre-existing condition and you make a claim? If you disclosed your pre-existing condition, you may be denied coverage on that particular condition for a period of time. If you did not disclose the pre-existing condition and the insurance company believes you should have reasonably known or disclosed the pre-existing condition then your coverage may be denied.

Of course, pre-existing condition has been abused by certain members of the industry as a blanket means of denying coverage.

How do you attempt to avoid being caught in pre-existing condition trap? Some pre-existing condition denials occur simply because the policy-holder has not seen the doctor for a while and the insurance company is reviewing older documentation. The gap between the last medical visit and the commencement date of the policy could have incumbated a lot of medical conditions not disclosed. For policy holders who are more high risk, insurance companies do require a physical now as part of its due diligence.

But for what appears on paper to be less risky policy-holders, the insurance company may forgo this altogether (this was the case during good times but this may have changed) and by doing this really placed the risk onto you that you have a clean bill of health since your last visit. The moral of the story being get a physical as part of the process of obtaining insurance (if you are not required to already).

The second practical step is be honest and forthcoming and do it in writing. If an insurance company has on file a medical disclosure which may or may not be part of your medical records, it is more difficult to deny coverage.

POST-CLAIM UNDERWRITING

Post-claim underwriting is a denial of coverage based on a pre-existing condition on steroids. In essence, the insurance company does little to no due diligence before offering you coverage and, at the time of a claim, begins to determine whether you are actually eligible to be covered at all according to the risk the policy-holder provides, giving it, with 20/20 hindsight, potential carte blanche to deny coverage.

If you live in the United States, some good news. In 2007 and 2008, 38 States and the District of Columbia passed laws limiting post-claim underwriting. In an important 2008 decision of Hailey v. the California Physicians’ Services, the California Court of Appeal ruled that it is the insurance companies duty: “to make reasonable efforts to ensure the subscriber’s application is accurate and complete as part of the Pre-contract Underwriting Process.” (emphasis is my own).

In other words, unless you make reasonable investigation before the policy is signed, barring fraudulent misrepresentation, it will be more difficult for insurance companies to use post-claim underwriting as a means to deny coverage.

If you live in Canada (land of the lumbering consumer protection laws- see the laughable do not call list as Exhibit A), I understand that only the Province of Alberta has taken some legislative action on this front (anyone care to help?). So, the one thing you can do as a pro-active consumer, is lobby for a change in the laws to prohibit or restrict post-claim underwriting. Insurance is a provincial jurisdiction so write your elected representative provincially.

In the meantime, how do you know if you are part of a post-claim underwriting insurance policy? A few things to watch for:

1. Medical portion of your application is vague to non-existent;
2. No medical exam no matter how much risk you may pose; and
3. Very quick turn-around between application and when policy is issued.

Ask about the process and if all three pop up, you may want to walk away.

The truth is that an  insurance companies, if it wanted to, could employ a phanlax of claims adjusters and lawyers to help deny coverage. However, if you believe in third part insurance, this should not mean you should not take pro-active steps to help ensure you are covered when you need it. Good luck.