Insurance Companies in California are in an extremely competitive field. They are constantly competing for business. One way to attract consumers is to simplify the process by streamlining the application process. They are approving consumers with only the information contained in the application. Insurance Companies are weighing their duty to investigate a consumer's background before issuing coverage against the time, resources, and money involved. Insurance Companies are resorting to Post-Claim Underwriting. The results have been disastrous. California has been rocked by a wave of cases highlighting the calamitous effect of Post-Claim Underwriting.

For example: suppose that like millions of Californians, you have purchased an individual health plan. You seek out a reputable insurance company and apply. Your application is immediately approved; you pay your premiums on time, and schedule annual check-ups. Now imagine that months, even years later, you have been diagnosed with a form of brain cancer. Thinking that you have adequately protected yourself from the "what ifs" in life, you turn to your Health Insurance Company for assistance in your time of need. That is the first time you submit a big claim to your Health Insurance Company. However, coverage is denied and your policy is retroactively rescinded because you made a material misrepresentation regarding your health on your policy application. Health Insurance Company claims that the headaches you complained about months before you applied for policy should have been listed on your application. Had that headache been listed, you would have been denied coverage because of the future cancer. Absurd? Not really, this scenario it is more common than you think!

Michael Norris knows all too well the world of Post-Claims Underwriting. Mr. Norris enrolled his son Kyle, 4 at the time, in a Blue Cross Insurance plan in December 2004. On June 13, 2005, Kyle underwent a pre-approved surgery to remove a mass of tissue at the back of his throat that could restrict breathing (adenoidectomy). Blue Cross approved the surgery to be conducted at Cedars-Sinai Medical Center; Blue Cross rescinded Kyle's health insurance and has refused to pay $15,000 in medical bills. Blue Cross claims that Mr. Norris failed to disclose his son's earaches and speech impediment on the enrollment form.

Even more devastating, four months after her first son, Jack, was born, Jessica Bath received a letter from Blue Shield saying she and Jack were no longer covered. Jack was born with a hole in his heart. Mrs. Bath was counting on Blue Shield to pay for a scheduled surgery to repair it. Suddenly, both she and Jack were uninsured. Blue Shield claimed that it was cancelling her policy because she had a medical condition, which she failed to disclose when she applied for the insurance. Mrs. Bath's medical condition had nothing to with her son's heart problem.

However, the problems with Post-Claims Underwriting are not limited to health insurance.

I. UNDERWRITING PRACTICE, GENERALLY

"Underwriting" is the process, fundamental to insurance, of deciding which risks to insure and which to reject in order to spread losses over risks in an economically feasible way. 1 Insurance underwriters evaluate the risk and exposures of the prospective clients. They decide how much coverage an applicant should receive, how much they should pay for it, or whether to even accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The function of the underwriter is to acquire or to "write" business that will make the insurance company money, and to protect the company's book of business from risks that they feel will make a loss. In simple terms, it is the process of issuing insurance policies.

Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether the company should accept the risk. The underwriters can either decline the risk, or may decide to provide a quotation in which the premiums have been loaded, or in which various exclusions have been stipulated, which restrict the circumstances under which a claim would be paid. Depending on the type of insurance product (line of business) insurance companies use automated underwriting systems to encode these rules, and reduce the amount of manual work in processing quotations and policy issuance. This is especially the case for certain simpler life or personal lines (auto, homeowners) insurance. For more complex risk (for example industrial or commercial property or casualty, engineering or marine insurance), individual, case by case underwriting is usually required to evaluate the risk.

Typically, the underwriting is conducted prior to the issuance of the policy. However, that is not always the case.

II. WHAT IS POST-CLAIM UNDERWRITING

Due to the large number of policies that an Insurance Company is typically asked to sell, Insurance Companies are usually not able to undertake an independent investigation of a prospective insured before issuing a policy. Post-Claims Underwriting is the process that has been described as Insurance Companies asking an applicant for information and issuing a policy based on the responses without undertaking any independent investigation of the applicant's history. A claim is subsequently submitted, and only then does the Insurance Company investigate the policyholder's prior history by requesting additional information to see whether the policyholder actually qualified for coverage at the time it was purchased. Should it be determined the policyholder made a material misrepresentation; coverage is cancelled retroactively.

This investigation was done, not at the time of issuance of the coverage, but after the policy had been issued, after substantial premiums had been collected, and after a claim for benefits had been submitted by the policyholder. In other words, it was not performed when the applicant completed and submitted a detailed history questionnaire and before the coverage was placed.

III. CAN A POLICY BE CANCELLED IF POST-CLAIM UNDERWRITING IS UTILIZED?

Generally, the duty to provide insurance is strictly a matter of contract law. 2 Absent an agreed or implied contractual provision, there is no duty to insure. 3 An application for insurance is an offer that, like any other offer, does not become a contract until accepted by the insurance company. No insurance company can be required to provide insurance coverage to every applicant who seeks coverage. The power of acceptance lies with the insurance company, and without its acceptance, no valid contract exists. 4 Once insurance is issued, however, there are in place specific rules governing an insurer's ability to cancel coverage should it discover false answers in the application.

California law routinely recognizes that , in order to justify a rescission (i.e. cancellation) of an insurance policy on the basis of a "material misrepresentation" or "material concealment," the insurance company must prove that the prospective applicant had an "actual intent to deceive" when he/she applied for coverage. The California Supreme Court found that if an applicant for insurance had "…no present knowledge of the facts sought, or failed to appreciate the significance of information related to him, his incorrect or incomplete responses would not constitute grounds for rescission." 5 This is still the law in California.

Section 1389.3 of the Health & Safety Code of California, was specifically put on the statutory books to prohibit Post-Claims Underwriting:

Post-Claims Underwriting prohibited:

No health care service plan shall engage in the practice of Post-Claims Underwriting. For purposes of this section, "Post-Claims Underwriting" means the rescinding, canceling, or limiting of a plan contract due to the plan's failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the plan contract. This section shall not limit a plan's remedies upon a showing of willful misrepresentation."

A misrepresentation in an insurance application is an untrue statement or fact. Incomplete answers or a failure to disclose material information on an application for insurance may also constitute a misrepresentation. However, a misrepresentation alone is not by itself grounds for denial of coverage. The "materiality" of the misrepresentation must be established.

The question of materiality is determined by the extent the false answer influenced the Insurance Companies to assume the risk of coverage. Generally, if the Insurance Companies with knowledge of the true facts would not have issued a policy or would have issued one under different terms from that which it did issue, the test of materiality has been satisfied. When a misrepresentation is material, it deprives the Insurance Companies of its freedom of choice in determining whether to accept the risk. If the information given by the applicant is false, but the insurance company would have issued the same policy regardless, then it is not material. Consequently, the question of materiality is determined at the time the policy was issued.

Materiality often is a question of fact but, in the appropriate situation, may become a question of law. In most cases, the proof offered by the Insurance Companies consists of testimony or affidavits by company underwriting personnel or the medical director as to what the company would have done had it had all the facts, supplemented, in some cases, by portions of the company's underwriting manual.

The third element is that, at the time the policy was issued, the Insurance Companies reasonably relied on the representation made by the applicant. An insurance company cannot avoid liability on a policy if it can be shown the Insurance Companies did not actually rely on the applicant's misrepresentation. This failure of reliance can be established if the Insurance Companies had actual knowledge of the true facts, or at least a sufficient indication that would have put a prudent person on notice. This may preclude the Insurance Companies from rescinding its contract if it disregarded that notice and did not make reasonable inquiries to confirm or refute those indications.

Similarly, when an applicant gives sufficient information to alert an insurance company to his particular medical condition or history, the Insurance Companies then becomes obligated to make such further inquiry as is reasonable under the circumstances in order to ascertain the facts surrounding the information given. The question of what constitutes "sufficient indications" is ordinarily one for the trier of fact.

The mere fact that the Insurance Companies conducts an independent investigation does not, by itself, indicate a lack of reliance. This is true unless the investigation discloses facts sufficient to expose the falsity of the representations of the applicant or facts that are of such a nature as to place upon the Insurance Companies the duty of further inquiry, but the Insurance Companies decides to issue the policy anyway.

Many courts hold that a material misrepresentation alone, even if innocent, voids the contract. Some state statutes and courts require that an Insurance Companies seeking to avoid a policy based on misrepresentation also show fraud by the applicant. Intent to deceive may involve either the policyholder's knowledge of the falsity of the statement and its materiality to the risk or circumstances in which the policyholder must have known the statement to be material to the risk. Several states have statutes that require that the facts misrepresented must contribute to the actual loss. In these states, the law imposes a far greater burden on Insurance Companies than that imposed at common law.

Questions on the application also raise the issue of ambiguity. An answer to an ambiguous question will not support a misrepresentation defense when a person could reasonably interpret a question as the applicant did. Ambiguities must be interpreted against the Insurance Companies.

When the Insurance Companies asks clear and unambiguous questions, the duty rests with the policyholder to furnish truthful, accurate and complete responses in order to allow the Insurance Companies to adequately evaluate any risks revealed. Questions that request specific information regarding medical history and that do not call for the applicant to interpret technical medical terminology but rather are written in everyday language that a layperson should be able to understand have been held to be clear and unambiguous.

The duty of the Insurance Company to a policyholder is especially important when the Insurance Companies rescinds coverage. In this situation, the policyholder is not merely at the mercy of the Insurance Companies to be treated fairly in the processing of a single claim, but must rely on the Health Insurance Companies' good faith for the continued existence of any coverage. Forfeiture of an insurance policy is strongly disfavored, especially when the event that gives rise to the Insurance Companies' liability has already occurred. Not only is the policyholder prevented from recovering on the claim at issue, but also, such as when health insurance is involved, may be precluded from obtaining other coverage. Courts attempt to prevent Insurance Companies from taking advantage and failing to honor the reasonable expectations of policyholders and intended beneficiaries.

Those challenging the practice of Post-Claim Underwriting in take the position that any misrepresentations contained in the application are excused because the Insurance Companies is fully capable of obtaining whatever facts it needs before it decides to issue coverage. If a policyholder is not an acceptable risk, the application should be denied immediately, not after the policy is issued. The burden of investigating and ascertaining the facts affecting the applicant's insurability should fall on the Insurance Companies. The Insurance Companies should not be allowed to deny benefits to the policyholder or beneficiary because of information, which if it had been more careful to investigate, the Insurance Company could have obtained before issuing the policy. The Insurance Company that refuses to investigate until after a claim is filed runs the risk that it has policyholder someone when it otherwise would not have.

Congress passed 42 U.S.C. § 1983 and other civil rights statutes to give citizens the power to sue the government when it violated their constitutional or federal statutory rights. Since many victims of constitutional violations cannot afford to bring civil suits, Congress created fee-shifting statutes to encourage litigants to go to court to enforce their civil rights. Under the Civil Rights Attorney's Fees Award Act of 1976 (42 U.S.C. § 1988), courts have the power to award reasonable attorney's fees to the prevailing party in any action to enforce a provision of various civil rights statutes, including Section 1983. However, fee awards are not guaranteed because district courts have considerable discretion in deciding the key issues of prevailing party, entitlement to fees, and the size of the attorney's fee award. Consequently, attorneys should become familiar with the definition of "prevailing party" in their jurisdiction in order to determine if a final decision in their favor is required for a successful fee application.

Generally, a "prevailing" party under § 1988 is one who obtains actual relief on the merits of his claim or comparable relief through a consent decree or settlement. Farrar v. Hobby, 506 U.S. 103, 111-12, 113 S. Ct. 566, 121 L. Ed. 2d 494 (1992). A party is not a prevailing party absent a judicially sanctioned change in the legal relationship of the parties and the relief granted must modify the non-prevailing party's behavior in a way that directly benefits the prevailing party at the time of the judgment or settlement. Id. However, the determination of what constitutes a "relief" or a "benefit" can prove difficult, as successful civil rights plaintiffs often secure important social benefits regardless of the form of relief actually obtained.

In Sole v. Wyner, 551 U.S. 74; 127 S. Ct. 2188; 167 L. Ed. 2d 1069 (2007), a case considering Section 1983, plaintiff sought to construct an antiwar protest at a Florida State Park consisting of nude individuals assembled into a peace sign. The state informed plaintiff that her display would be lawful only if the participants complied with Florida's "Bathing Suit Rule," which required patrons of state parks to wear, at a minimum, a thong and, if female, a bikini top. As a result, plaintiff sought injunctive relief against the manager of the state park, alleging that the park's regulation violated the First Amendment. The district court entered a preliminary injunction that prevented the park from interfering with plaintiff's planned protest, if the display was screened off to shield citizens who did not wish to see the display.

After the display took place on Valentine's Day, plaintiff sought a permanent injunction that would allow her to conduct a similar protest the following year. Although plaintiff lost her claim for a permanent injunction, the district court determined that she was the prevailing party as to the preliminary injunction and awarded attorney's fees and costs under 42 U.S.C. § 1988. The Eleventh Circuit Court of Appeals affirmed, concluding that the preliminary injunction constituted a substantive decision on the merits of the case (whether the state could arrest the nude peace symbol participants) and that the district court's award of the injunction was not a mistake of law.

However, the Supreme Court held that the plaintiff was not eligible for an award of fees under Section 1988 after failing to obtain a permanent injunction. In a unanimous decision, the Supreme Court stated, "the eventual ruling on the merits for defendants, after both sides considered the case fit for final adjudication, superseded the preliminary ruling." Sole, 551 U.S. at 84-85. Plaintiff "gained no enduring change in the legal relationship between herself and the state officials she sued." Id. at 85. As a result, plaintiff was not a prevailing party, "for her initial victory was ephemeral. A plaintiff who secures a preliminary injunction, then loses on the merits as the case plays out and judgment is entered against her, has won a battle but lost the war." Id. at 86. However, the Court's ruling was very narrow and stated only that "a plaintiff who gains a preliminary injunction does not qualify for an award of counsel fees under § 1988(b) if the merits of the case are ultimately decided against her." Id. In so holding, the Court expressed no view on whether a party who obtained a preliminary injunction could obtain fees in the absence of a final decision.

Interpreting Sole, The Ninth Circuit has held that with regard to an award of attorney fees, prevailing party status does not attend achievement of a preliminary injunction that is reversed, dissolved or otherwise undone by the final decision in the same case. Ctr. for Biological Diversity v. Marina Point Dev. Co., 535 F.3d 1026, 1037 (9th Cir. Cal. 2008); City of Los Angeles v. County of Kern, 2007 U.S. Dist. LEXIS 81696 (C.D. Cal. Oct. 25, 2007). However, such holdings are largely dependent on the facts of the case.

In Carbonell v. INS, 429 F.3d 894, 895 (9th Cir. 2005), attorney's fees were awarded under the Equal Access to Justice Act where plaintiff contended that he qualified as a prevailing party because he had obtained a court order incorporating a voluntary stipulation which awarded him a substantial portion of the relief he sought. In awarding fees, the court recognized that a litigant can "prevail" for awarding attorney's fees because of judicial action other than a judgment on the merits or a consent decree, provided that such action has sufficient "judicial imprimatur," or judicial approval. Id. at 899. Although other jurisdictions outside of the Ninth Circuit have continued to require that a party does not prevail unless it obtains a judgment on the merits or a court ordered consent decree, the Carbonell decision was in accord with the First, Third, and Seventh circuits. See e.g., Doe v. Boston Pub. Schs, 358 F.3d 20, 30 (1st Cir. 2004) (holding that plaintiffs who achieve their desired result via private settlement may not, in the absence of a judicial imprimatur, be considered "prevailing parties"); John T. v. Del. County Intermediate Unit, 318 F.3d 545, 555 (3d Cir. 2003); T.D. v. LaGrange Sch. Dist. No. 102, 349 F.3d 469, 478 (7th Cir. 2003).

In light of the decision in Sole, attorneys should become familiar with the definition of "prevailing party" in their jurisdiction in order to determine if a final decision in their favor is required for a successful fee application.

Regardless of how minute or trivial an employer feels that an employee's discriminatory charge may be, employers are better off avoiding taking retaliatory action against the employee. Although employers are conscious of the many federal and state employment law rules that penalize companies from taking actions against their employees on the basis of race, sex, color, national origin, religion, age or disability, a more important issue that they may overlook is the extent that these laws also prohibit retaliation against employees who oppose unlawful discrimination or participate in an employment discrimination proceeding. These anti-retaliation laws were created to protect the employee regardless of whether the underlying allegation of discrimination is meritless and in some cases, regardless of whether the employee formally filed a charge against the employer.

Retaliation may occur when an employer takes some sort of adverse action against an employee because he or she engaged in an activity that is "protected," so long as it is based on a reasonable, good-faith belief that the objected-to practice violates anti-discrimination law and the manner of the opposition is reasonable. An "adverse action" as a kind of action that is taken to try to keep someone from opposing a discriminatory practice or from participating in an employment discrimination proceeding. One normally thinks that examples of such actions include termination, refusal to hire, denial of promotion, threats, or unjustified negative evaluations or references. However, the definition even extends to an employer's act of re-assigning the employee to perform different duties than they were previously assigned to perform.

Burlington Northern Santa Fe Railway Co. v. White, 548 U.S. 53; 126 S. Ct. 2405 (1996) warns employers against actions that could even possibly be perceived as retaliatory by broadening the definition of what constitutes retaliatory behavior. In White, Sheila White was the only woman working in the in the Maintenance of Way Department of the Burlington Northern Santa Fe Railroad's Tennessee Yard. Burlington Northern Santa Fe Railway Co. v. White, 548 U.S. at 55. After she objected and complained about harassing behavior by her supervisor, her job classification remained the same but she was re-assigned from her duties as a forklift operator to less desirable duties as a track laborer. Id. She was also suspended for thirty-seven days without pay, but was eventually reinstated and given full back pay. Id.

White filed suit in federal court against defendant Burlington Northern. Id. at 59. The lower court held that Burlington Northern was not guilty of sex discrimination but found her employer guilty of retaliatory discrimination in violation of Title VII of the Civil Rights Act of 1964 and awarded her damages of $43,000. Id. Defendant appealed the lower court's decision arguing that White had not suffered "adverse employment action," and therefore could not bring the suit, because she had not been fired, demoted, denied a promotion, or denied wages. Id. at 60. The Sixth Circuit Court of Appeals disagreed, finding that both the suspension without pay and the change of duties within the same job category were adverse employment actions despite the fact that she was eventually awarded back pay. Id.

The Supreme Court unanimously agreed that White suffered retaliatory discrimination when she was reassigned to less desirable duties and suspended without pay. Id. at 70. Even though the duties were within the same classification and she was eventually paid for the suspension, the court found that the action was sufficiently harsh to constitute retaliatory discrimination. Id. In a decision authored by Justice Stephen Breyer and joined by Chief Justice Roberts and six other justices, the Court set the standard for prevailing on a claim of retaliatory discrimination. They stated that to successfully prove retaliatory discrimination, "a plaintiff must show that a reasonable employee would have found the challenged action materially adverse, which in this context means it might have dissuaded a reasonable worker from making or supporting a charge of discrimination." Id. at 73.

The White case is an example of how the Supreme Court has once again taken a hard line, pro-employee stance against workplace retaliation. Accordingly, all employers must avoid retaliation complaints with extra care.