Material Misrepresentation on Application Sufficient to Rescind Disability Coverage

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ERISA Policy May be Rescinded

Plaintiff Bradley McKinney applied for and obtained a disability insurance policy with Plaintiff and counterclaim Defendant, Provident Life Accident & Insurance Company (“Provident Life”). He made claim under the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1001 et seq. McKinney subsequently filed a claim for disability benefits under the policy, but Provident Life rejected his claim on the ground that McKinney made material misrepresentations in his application for the policy. Provident Life sued under ERISA seeking rescission of the insurance policy, and McKinney counterclaimed seeking an order directing Provident Life to pay him all benefits due under the policy.

In Provident Life & Accident Insurance Company v. Bradley D. McKinney, No. 3:19-CV-1325 (SVN), United States District Court, D. Connecticut (September 9, 2022) the USDC resolved the Dispute.
FACTUAL BACKGROUND

The parties agree on the following basic facts:

    McKinney’s employer, Anderson Tax LLC, maintained a Supplemental Individual Disability Insurance Plan.
    Relevant here, the plan permitted eligible employees to apply for a combination of three types of coverages: long-term disability benefits, which Defendant refers to as “Guaranteed Standard Issue,” and which the Court will refer to as “basic disability benefits”; catastrophic disability coverage (“catastrophic coverage”); and an option to convert the basic disability benefits into long-term care coverage (“long-term care coverage”).
    An employee could apply for any individual or combination of these coverages on the same form.

McKinney applied for supplemental insurance through the plan. In completing the application, McKinney answered various questions about his medical history and agreed that his answers were “true and complete and correctly recorded to the best of [his] knowledge and belief. In September of that year, Provident Life issued him an insurance policy providing all three coverages.  The policy provided that “[o]missions and misstatements in the application could cause an otherwise valid claim to be denied or [the policy] to be rescinded.”

In August of 2018, McKinney filed a claim for basic disability benefits related to a neurocognitive disorder. He first began experiencing symptoms of “confusion, severe fatigue, loss of memory, challenges with thinking, analyzing, [and] lack of concentration” in February of 2016.

Provident Life’s claims specialist investigated McKinney’s claim, obtained certain medical records, and consulted with the underwriters. Thereafter, Provident Life denied McKinney’s claim and notified him that it was rescinding its policy on the ground that McKinney had materially misrepresented his medical history when applying for the insurance. McKinney filed an appeal, and, after obtaining more of his medical records, Provident Life concluded that it had properly rescinded the policy.

McKinney untruthfully represented his medical history on the application for insurance coverage in two ways.

1    in answering questions 6 and 8, he represented that he had not received diagnosis or treatment from a physician for memory loss, confusion, or speech disruption in the five years preceding his application.
2    in answering question 3(a), he represented that he had not missed one or more days of work or been admitted to a medical facility due to sickness or injury in the 180 days preceding his application. Upon reviewing McKinney’s medical records, Provident Life concluded that his answers to those questions were untruthful and that its denial of his claim and rescission of his policy were proper.

ERISA

The parties do not dispute that a plan fiduciary may obtain equitable rescission of an ERISA-governed insurance policy that is procured through the material misstatements or omissions of the insured.
Rescission Due to Material Misrepresentation

Under the federal common law that has developed pursuant to ERISA an insurer can rescind a policy where the insured knowingly made a material misrepresentation in an application for an ERISA-governed insurance policy. Thus, Provident Life will be entitled to summary judgment if it demonstrates that there is no genuine dispute that (1) McKinney made a misrepresentation, (2) knowingly and (3) that was material to its decision to issue the insurance policy.
DISCUSSION

As noted, Provident Life rejected McKinney’s claim for basic disability benefits and subsequent appeal on the ground that he untruthfully represented his medical history on the application for insurance coverage. Provident Life identified two of McKinney’s responses that were allegedly untrue, warranting rescission of the policy.

The Court found no genuine dispute of fact that McKinney made material misrepresentations in responding to questions 6 and 8 of his application for supplemental insurance coverage. McKinney contended that the “primary condition” for which he was treated during the 2016 hospitalization was cancer related to the mass on his chest, and that his confusion and speech disruption were merely symptoms of that cancer. McKinney also contended, however, that any misrepresentations in his responses to questions 6 and 8 were innocent because “he was not aware that he had been diagnosed with or treated for memory loss, confusion or speech issues.

The Court concludes that any ignorance on McKinney’s part that he had been treated for confusion and speech disruption during his 2016 hospitalization was not innocent. Indeed, when questioned in the course of his claim for benefits, he acknowledged that he was first diagnosed with these problems in February of 2016. The idea that he did not know about them when he applied for the insurance policy in 2017, therefore, strains credulity.

The USDC concluded that there was no genuine dispute that McKinney’s untrue answers to questions 6 and 8 were material to Provident Life’s issuance of the policy. Courts have repeatedly explained that certain information requested by the insurer and provided by the applicant for insurance coverage is presumptively material. [Mt. Airy Ins. Co., 928 F.Supp. at 176 (citations omitted). Accord Paul Revere Life Ins. Co. v. Pastena, 52 Conn.App. 318, 323, cert. denied, 248 Conn. 917 (1999); Continental Cas. Co. v. Bank of S.E. Conn., No. 2:91CV326 (PCD), 1995 WL 871829, at *1 (D. Conn. June 22, 1995).]

McKinney’s knowing misrepresentations were material to Provident Life’s issuance of the policy. Accordingly, McKinney was well informed that his answers to questions 6 and 8 would become part of the insurance policy he received and thus were material to Provident Life’s issuance of the policy. The application’s particular inquiry into the applicant’s prior treatment for memory loss, confusion, or speech disruption renders those questions presumptively material.
USDC May Not Rewrite the Policy

It is not the role of the Court to rewrite the terms of the insurance agreement to conform to the newly disclosed facts. Given the strong weight of authority establishing the materiality of an applicant’s prior medical history subject to specific inquiry, as well as the fact that McKinney’s answers were incorporated into the policy issued, the Court concluded that his knowing misrepresentations to questions 6 and 8 were material. Thus, Provident Life was entitled to rescission of the insurance policy as a matter of law.
ZALMA OPINION

This is a classic case of  “I didn’t know the gun was loaded” defense when a person intentionally shoots another. In this case McKinney knew the true facts of his condition both during and after his cancer treatment and lied on the application he submitted for ERISA Disability insurance. He claimed the lie was innocent but the evidence reviewed by the USDC established he was neither innocent nor ignorant, he just lied. Therefore, the court affirmed Provident’s rescission of the ERISA policy.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].

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