Underwriting under
the Microscope:
A View from the Courtroom
September 11, 2014
Midwestern Underwriting
Conference
Presented by
Charles J. Vinicombe
Drinker Biddle & Reath LLP
Philadelphia, PA
Life Insurance Clients
2
A View From The Courtroom
Lawsuit process
How judges and juries view life insurance
underwriting
Fraud against life insurers litigated in lawsuits
Underwriting issues “under the microscope” in the
courtroom
3
General Considerations
> Vast majority of life insurance policies never become
subject of lawsuits
> When they do, underwriting issues often take center
stage
> Quality of underwriting factor in company decisions in
lawsuits
4
Focus of Judges And Juries
on Underwriting Issues
> Was underwriting thorough?
> Were any “red flags” overlooked?
> Were right follow-up questions asked?
> Did underwriting follow company guidelines?
> Were representations on application reasonably
believable?
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Lawsuit Process
>
Life insurance company and policy owner engage in process
called discovery
> Discovery goal – learn all relevant facts about the policy
dispute
>
Life insurance company required to turn over the complete
underwriting file – underwriting materials, notes and emails
> Assigned underwriter may have to
to
testify at deposition
>
After discovery process completed,
may proceed to trial
case
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Trial Process
> Can be tried before a judge (called a bench trial)
> Can be tried before a jury (group of 6-12 people from
community where lawsuit pending)
> Assigned underwriter may have to testify at trial
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Some Observations
> There are certain areas where there may
be fraud
> Detecting fraud during underwriting can:
> Prevent bad business
> Avoid cost to company for future
lawsuits
> Avoid company paying millions of
dollars on bad policies
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Can You Rely On The Application?
> Underwriter generally entitled to rely on
representations in application
> General Star Indem. Co. v. Duffy, 191 F.3d 55 (1st Cir.
1999) (“An insurer is entitled to rely on the
representations of an insured”)
> Fla. Stat. § 627.404(3) (“An insurer shall be entitled to
rely upon all statements, declarations, and
representations made by an applicant . . .”)
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Does the Insurer Have a Duty to Investigate
Application Representations?
> Some courts have imposed a duty, depending on the
circumstances, to investigate
> Other courts have held an insurer has the right to rely
upon the accuracy of information in the application,
with no duty to make additional inquiry
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Financial Underwriting – Duty to Investigate
> PHL Variable Ins. Co. v. Jolly, 800 F. Supp. 2d 1205 (N.D.
Ga. 2011):
> Insured represented that primary portion of his billion
dollar net worth consisted of over $600 million in uncut
emeralds from a sunken Spanish galleon that he had
found in the Gulf of Mexico
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Financial Underwriting – Duty to Investigate
>
In ruling against life insurance company, Court criticized company for
accepting Jolly’s representations of wealth “despite several ‘red flags’”
>
Company had records indicating insured was employed as cemetery
worker and in a “telephone capacity”
>
Court criticized company for never attempting to “verify in any manner”
either the genuineness or accuracy of the emerald appraisal, the claimed
inventory of the emeralds or the individual authenticity of any other
document
>
Court criticized company for not checking Jolly’s criminal history
representation – insured had been convicted of check fraud
>
Court criticized company because inspection report listed net worth
nearly $200,000,000.00 higher than represented eight months later on
application
12
> Foster v. United of Omaha Life Ins. Co., No. 08-1170,
2010 WL 3834047 (W.D. La. Sept. 24, 2010)
> Court held that insurer waived its right to rescind
policy based on medical misrepresentations contained
in application due to its failure to adequately
investigate statements made within application
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Medical Underwriting – Duty to Investigate
> A reasonable insurance company would have inquired
further; insurer’s failure to conduct “even the most
cursory of a follow up investigation or genuine inquiry in
the face of the MIB ‘code’” constituted a waiver of its
right to rescind the policy based on possible inaccurate
answers contained in the application
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Medical Underwriting – No Duty to Investigate
> The Lincoln Nat’l Life Ins. Co. v. Wilmington Trust Co.
and Jay L’Archevesque, C.A. No. 08-74 (D.R.I. October
4, 2012)
> Insurer sought to invalidate life insurance policy in
which applicant failed to disclose medical records
indicating he was suffering from Alzheimer’s
> Trust argued that insurer should have known of
misrepresentations due to inaccuracies in medical
information provided during underwriting
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Medical Underwriting – No Duty to Investigate
> Judge held that insurer was entitled to invalidate the
policy
> “While [the policy owner] tries to hide behind the fact
that these omissions and misrepresentations may have
been discoverable . . . There can be no question that
putative insureds should not be rewarded for
successfully hiding the ball that way”
> “[T]he Court can see no benefit or policy justification
in allowing insureds to lie on their life insurance
applications in a game of ‘catch me if you can’”
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Medical Underwriting – No Duty to Investigate
> Reliastar Life Ins. Co. v. Laschkewistch, No. 5:13-CV-
210, 2014 WL 2211033 (E.D. N.C. May 28, 2014) –
court held insurer was entitled to rely on insured’s
representations
> Court admitted that, had insurer requested and
reviewed insured’s doctors’ records, it would have
discovered fraud
> Nevertheless, insurer was under “no obligation to dig
deeper” after it conducted minimal investigation
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No Duty to Investigate
> Hartford Life and Acc. Ins. Co. v. Nittolo, 955 F. Supp.
331 (D.N.J. 1997)
> Insured’s lawyer invited judge to what he called
“Realityville” – a place where people might make
misrepresentations to an insurance company, but
misrepresentations are normal
> In ruling in favor of insurance company and finding
misrepresentations in application, judge rejected
lawyer’s invitation to “Realityville”
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No Duty to Investigate
> “In Realityville, the argument goes, people usually
certify and sign important documents without reading
them, and professionals like insurance agents and
nurses who have a duty to get things right manage to
get everything wrong”
> “In Realityville, people don't know their own incomes
and when they give an estimate, it may be inflated by
two or three times and still be correct”
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No Duty to Investigate
> “It seems that in Realityville, people are unable
to take responsibility for their mistakes and they
blame their problems upon whomever crosses
their path”
> “The court declines the invitation to this bizarre
place. Unfortunately for [the insured’s]
position, the law of Realityville does not
apply. The law of New Jersey governs this case
and compels judgment in favor of . . . Hartford”
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Financial Underwriting –
Questioning the Underwriting Process
> Jury found that insurance company was victim of fraud
>
Jury ruled: insurance company had to pay multi-million dollar
death benefit
>
Some jury comments:
>
Juror needed to show more financial information to get a car
loan than insurance company required for multi-million
dollar policy
>
Another juror unfavorably compared underwriting process to
much more vigorous requirements to obtain a home
mortgage
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Medical Underwriting
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Medical Underwriting
>
Possible underwriting issues:
>
Incomplete answers
>
Incomplete medical records
>
Medical conditions/medical treatments/medications
identified in medical records not disclosed in application
> Lack of follow-up on medical providers identified in
provided records
>
Conditions/treatments/medications
disclosed in prior trial applications
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Types Of Financial Fraud
> Inflated values of hard to verify assets
> Inflated real estate values
> Phony third party verification of net worth
> Forged signatures
> Misrepresentations about other existing
insurance
> Misrepresentations concerning the purpose of
the insurance
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Secondary Market for Life Insurance
>
In-Force Life Settlements: $35 Billion
>
Increased investment in the secondary market starting around 2004
led to “manufactured” policies as policy demand outstripped supply
>
According to the American Council of Life Insurers, “the detection
and suppression of STOLI policies lacking insurable interest has been
especially important in adjusting secondary market activities to
realistic levels”
>
Although the secondary market significantly shrank with the
economic decline, the Life Insurance Settlement Association is
predicting new growth due to increasing demand by public and
private pension funds re-entering the secondary market
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Example of Financial Fraud
> $20 million life insurance policies on 79 year old
insured
> Application representations:
> insured had net worth of $46.4 million
> no discussions about possibly selling policy on
secondary market
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Example of Financial Fraud
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Example of Financial Fraud
> Consequences for producer who committed
“egregious fraud:”
> Sentenced to 3 years felony probation for
“False Impersonation”
> Ordered to pay restitution of $128,405.07 to
life insurance company – return of
commissions
> Ordered to reimburse investigative
costs to state Dept. of Insurance
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Inflated Real Estate Values
> Example:
> Insured represented having total
assets and net worth of
$10,300,000.00
> Discovery revealed insured did not
own any real estate, but had used
a wealthy relative’s address as her
own
> Insured resided with her son in a
low income housing project
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Phony Third Party
Verification Of Net Worth
> Accountant listed as verifying insured’s assets on
inspection report
> Accountant did not exist
> What we found:
> Address for “accountant” was an empty lot
> Calls to listed “accountant’s” phone number
would ring forever
31
Phony Third Party
Verification of Net Worth
>
Accountant verifying insured’s assets listed on inspection report
existed, but was not an accountant
>
What we found:
>
Checked accountancy board website in state and no such
accountant listed
> Called phone number for accountant listed in report
>
Person answered and identified himself by same name
>
Person denied he was an accountant
>
Person denied ever conducting a review of insured’s finances
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Misrepresentations About
Other Existing Insurance
>
Application – Please list amounts of all in force life insurance on
your life, including any policies that have been sold
>
Possible situations:
>
Insured fails to disclose existing insurance
>
Insured understates amount of existing insurance
>
Insured states multiple applications submitted and will
accept “best offer” then accepts multiple offers
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