Eliminate Life-Health App Mishaps

The application for life or health insurance generally includes information about the health status and history of the customer. In most cases, the customer is the best source for this information, which the carrier will use to determine eligibility, rating, premium and more.

That means any misrepresentation could give the carrier grounds to rescind the policy or deny a claim in the future. In many cases, carriers only discover these misrepresentations after the loss—eliminating the necessary time it would take to correct them.

Customers often look to their agents to complete the insurance application as a convenience. It’s only when an insurer denies coverage for a claim or seeks to rescind the policy that the customer tends to sue the agent for malpractice, claiming the agent failed to disclose material information on the insurance application. Likewise, the agent could get caught in the middle if the carrier decides it cannot rescind or deny since the “misrepresentation” was not the fault of the policyholder.

Handling an application for life insurance properly can help you successfully avoid an E&O claim. Consider the following example: A customer seeks to purchase a $1-million life insurance policy from ABC Insurance Company. As part of the application process, the agent asks his customer to complete the insurance application in the agent’s office, taking special care to review each question. Upon completion, the agent requires the client to sign the document.

Three years later, the client dies. The insurer discovers, after the fact, that the customer failed to disclose a history of elevated liver function tests and an abnormal abdominal liver ultrasound. In fact, the client’s primary physician had referred him to a gastroenterologist. The insurer rescinds the policy due to the misrepresentations about the customer’s medical history and refunds the premium payments. Unhappy with this outcome, the customer’s beneficiaries sue the agent for malpractice.

But because the agent watched the client complete the application and the client physically signed the completed document, the agent is in a good position to adequately defend his actions during the lawsuit. If the agent also documented this process in the client file, little opportunity exists for an unfavorable outcome in the ensuing litigation.

In order to successfully defend such E&O suits, agents should consider following these best practices:

• Require the customer to personally complete and sign the application in the agent’s presence.
• Avoid making decisions about whether the customer should list a certain procedure, diagnosis, ailment or test.
• If the agent insists on completing the application personally, ask every question on the application, take down all responses, complete the entire application in the presence of the client and require a review and signature from the client.

Under no condition should agents allow a client to sign a blank application and leave it for the agent to complete at a later date, or pre-fill the application and ask the client to sign it without first reviewing it.

Finally, agents should independently document they have taken such action. If agents take these preventive steps up front, their counsel will be able to build a stronger defense in case of an E&O claim.

Alison VanDyke is an assistant vice president, claims and liability management with Swiss Re Corporate Solutions and handles claims against insurance professionals out of the office in Overland Park, Kansas.