How to Talk Back to Your Insurance Company: Insurance Claims Information
By Ray Bourhis

The insurance industry is an extremely complex business. Policies are written in confusing and incomprehensible language. Misrepresentations concerning coverage are common and claims handling practices vary widely.

Whether an insured will recover for a legitimate claim at all, and if so, the amount to be paid, depend largely on the consumer's own knowledge of his or her rights and responsibilities.

The following questions and answers represent areas of common concern and importance to claimants. For specific information regarding particular policies you should consult an attorney specializing in this field.

I. General Considerations

Q. In dealing with insurance companies or their representatives, are there any general rules which a claimant or policyholder should follow?

A. 1. Do your homework before talking to the company. Obtain and read the applicable policies first, including the declarations and endorsements. Pay particular attention to the coverage, exclusion, limits, deductible and amendments sections, and to correspondence with the company or agent.

2. Do not speak to any claims representative or insurance company until you have read and understood all applicable policy provisions relating to your particular claim.

3. Always take detailed notes of conversations with insurance representatives. Record the date, time, name, position and telephone number of the person with whom you are speaking, and the substance of each conversation. Keep these notes in a file and save them.

4. Confirm in writing all important conversations with insurance company representatives. This is to avoid the possibility of later disagreement as to what was said. Be polite and factually accurate. Never exaggerate. Keep copies of all correspondence.

5. Never give a tape recorded statement or statement under oath without being certain beforehand that you fully understand your legal rights.

Q. In reading and interpreting insurance policies, what are some of the rules which California courts have developed to protect policyholders?

A. 1. Any vagueness, uncertainty or ambiguity in the policy must be interpreted in favor of the policyholder and against the insurance carrier (because the carrier wrote the policy);

2. Insurance contracts must be interpreted in light of the reasonable expectations of the policyholder;

3. "Coverage" sections must be interpreted broadly, while "exclusions" must be read narrowly;

4. Phrases or words not defined within the policy will be given any reasonable interpretation which favors coverage; and

5. Certain words (such as "disability") are to be defined by the courts, not by the insurance policy. If the policy attempts a narrower definition than the court permits, it will not be given legal effect.

Q. What are some specific claims handling requirements which apply to insurance companies under the California Insurance Code?

A. It is unlawful for an insurance company to:

1. Deny a claim without thoroughly investigating the foundation for its denial.
   
   
2. Delay payment of benefits - even if payment is eventually made.
   
   
3. Make deceptive representations to the insured or claimant.
   
   
4. Compel a claimant to accept an unreasonably small settlement of a claim in order to take advantage of a claimant's financial need.
   
   
5. Falsely accuse an insured of trying to defraud the insurance company in order to reduce the value of the claim.
   
   
6. Unreasonably seize upon a minor flaw or omission in the insured's claims form as a basis to refuse a claim.

Q. What does "insurance bad faith" mean?

A. Bad faith is unreasonable conduct by an insurance carrier, such as:

1. The unreasonable denial of an insurance claim that should have been paid; or
   
   
2. The unreasonable failure to defend a policyholder who has been sued under a policy; or
   
   
3. The unreasonable failure to protect the assets of a policyholder who has been sued.

Q. If one asks for a certain type of coverage from an insurance company or agent, and then discovers that coverage was not provided when a claim is made, who is responsible?

A. If the agent or the insurance company negligently misrepresented coverage, they are responsible. Denial of a claim under such circumstances may or may not constitute bad faith depending on all the facts. This problem is common, and illustrates the need to keep good notes and files of conversations with insurance companies and agents.

Q. Where an insurance company has engaged in bad faith conduct and, as a result, has caused substantial additional loss or damage to the claimant, can they still be liable for bad faith even if they make payment on the original claim?

A. Yes. The bad faith conduct is separate from the original claim.

Q. If an insurance company engages in bad faith conduct, what damages can the insured or claimant recover?

A. In many states, the policyholder can recover:

1.The policy benefits themselves;

2. All additional financial loss caused by the loss of benefits;

3. General damages;

4. Attorneys' fees (in some cases); and

5. Exemplary damages if the company acted with malice, fraud or oppression in conscious disregard of the rights of the claimant.

Q. Does the wrongful failure to defend or to pay a claim for its insured necessarily constitute bad faith by the insurer?

A. This depends on whether or not the conduct of the insurer was "reasonable." The insurer must give at least as much consideration to the financial interests of its insured as it does to its own. While it cannot be said that every breach of the duty to defend or indemnify constitutes bad faith, in many cases it does.

II. Health, Life and Disability Policies

Q. What are your rights if your health insurance or group health insurance is canceled?

A. This is one of the most complicated and controversial subjects in insurance law today. Generally, under California law an insurer may cancel the policy provided that the cancellation is not done in violation of its policy terms, in bad faith or for some improper purpose. Unless specific notice requirements are met the cancellation is illegal.

If an entire group is canceled, the insurer must offer a "conversion" policy to its insureds. This rule is mandated by statute. However, conversion policies seldom offer similar coverage as the prior policies. Often premiums are doubled or tripled with coverage being cut as much as 80% or 90%. In many cases, the conversion offering by the insurance carrier may be illusory and therefore not a valid offer at all. In such situations, the provisions or intent of the conversion statute may have been violated giving rise to a claim.

Many people are canceled at a time when they are currently receiving treatment for an illness contracted while they were insured. This illness would be excluded or would make them uninsurable with a new insurance carrier. In the context of these cancellations California law requires the continuation of certain benefits which vested or took place under the old policy. This is a complicated subject which should be handled with utmost care.

Q. What are some other common areas of dispute involving health insurance?

A. The fine print in many insurance policies contains language allowing the carrier to pay only "usual and customary charges." However, carriers often make this determination unfairly and inaccurately. Additionally, many insurance policies provide coverage limits such as a $1 million or $100,000.00 lifetime maximum benefit. In choosing an insurer, particular attention should be paid to this aspect. Additionally, some of the HMOs, which are increasingly popular, provide exclusions or limits for particular diseases or conditions. All issues such as these require careful scrutiny, both before choosing a health insurer and at the time of a claim.

Q. What is contestibility?

A. Contestibility is a very important issue which arises in the context of both life and disability insurance policies. This is a particularly critical issue in the context of life insurance because by the time the issue arises the insured is deceased.

Most life policies provide a contestibility period of two years. This means that if the insured dies within two years of the issuance of the policy, the carrier may "contest" its obligation to pay if they can claim that any material misstatement was made on the application. These are very difficult situations because often the only witnesses to the application process were a self-interested agent who may have earned a 30 or 40% first-year commission and the policyholder who is now deceased. If the conduct of the insurer or their agent was wrongful then the benefits must be paid; if their conduct was also unreasonable, then a bad faith claim may also be made.

Q. Is a policyholder bound by all definitions contained in a policy?

A. In many cases insurance policies will attempt to define terms in the policy. However, these definitions may not be valid under California law. For example, some disability policies define total disability as the inability to engage in any gainful occupation whatsoever. In contrast, California courts have ruled that in spite of this stated definition, total disability must be defined in California as not being able to engage in one's usual and customary occupation. These are two very different standards and it is difficult for the insured to know whether the definitions used in a particular policy are enforceable in California. This issue again stresses the importance of knowing one's legal rights before dealing with the insurance company.

Q. What are some common principles applying to exclusions in health policies?

A. 1. The exclusion must be clear and unambiguous, written in language that a lay person can understand, and placed appropriately within the policy.

2. If the exclusion was not part of the original policy but added later and if it reduces coverage, than at least 45 days written notice of the change must be given to the insured.

3. The exclusion will be construed narrowly (whereas the coverage will be construed broadly). For example, many policies exclude "cosmetic surgery" but do not give a definition of "cosmetic." In such a situation, surgery for the removal of breast implants that has been recommended by a physician for health reasons should be covered. In addition to the above, please see Question 9 on vesting. This situation would arise when an insurance company seeks to reduce its coverage or re-define terms by giving 45 days written notice of the change.

Q. What remedies are available for bad faith in the context of life, health and disability policies?

A. Many life, health and disability plans are obtained through employers or unions. In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA) which preempted state law in certain areas. In these situations, a person's only remedy for bad faith conduct by insurance companies is restricted to the very narrow provisions of the ERISA laws.

However, the issue of whether or not an employer's providing of these insurance benefits constitutes an ERISA plan is usually a question of fact, not just a question of law.

If you are a victim of bad faith or fraudulant insurance practices, or have a question regarding your insurance claim denial, please click here to submit a question through our online form.

To submit by FAX or postal mail click here.
To submit by email click here.
To contact us by telephone please call 800.264.2082.