Field Underwriting, Delivery and Replacing Health Coverage
Underwriting begins before the insurer sees a file. The producer who sits across from the applicant decides what gets asked, how the answers are written down, what money changes hands, and what the applicant is told when the policy arrives. Each of those steps can protect the applicant and the insurer, and each can create a claim against the producer. The sections below follow an individual health or disability application from the first conversation to delivery, then compare an existing policy with a proposed replacement the way a careful producer must. Names, companies and dollar figures in the examples are invented.
What Field Underwriting Is For
Field underwriting is the producer’s preliminary risk evaluation. It has two purposes. The first is to avoid wasting an applicant’s time on a plan the insurer will decline, by matching the person to a product whose eligibility rules he or she plausibly meets. The second is to put complete, accurate facts in front of the home office underwriter, who never meets the applicant. The producer’s report, which most insurers require, carries what a form cannot: that the applicant works part time at a job the application calls “office,” that he mentioned a recent specialist visit, that two of the three people named as dependents live in another household.
Field underwriting is not a diagnosis, and it is not a decision. The producer does not tell an applicant that he will be accepted at standard rates, and does not screen out an applicant because the producer guesses the insurer will decline. The insurer decides. The producer’s job is to make sure the insurer decides on true information.
Gathering and Disclosing Information
The application is the main source of underwriting information, and it usually carries two things the applicant signs: the answers, and an authorization for the insurer to collect medical records and to check and report to the Medical Information Bureau. The producer explains both before asking for a signature. An applicant who does not understand that the authorization reaches pharmacy and physician records will be surprised when the insurer pends the file for an attending physician statement, and a surprised applicant is the one who complains to the Director.
Some information may not be demanded at all. A Michigan insurer that issues a health insurance policy may not require an insured, a dependent or an asymptomatic applicant to undergo genetic testing, or to disclose whether genetic testing was done or what it showed (MCL 500.3407b(1)). A producer who asks “Have you ever had genetic testing?” on an expense-incurred application is asking for something the insurer itself may not require. The same producer is still free to record medical history the applicant volunteers about his own diagnoses, because that is a different thing from testing.
Information flows the other way too. What the producer learns about an applicant’s health, finances and family is confidential. It is used to place the coverage and for nothing else, and the privacy notice the insurer gives the applicant explains what may be shared and with whom.
Taking the Application
What a Complete Application Looks Like
A producer completes an application the way a pilot runs a checklist, in the same order every time, because the errors that cause claims are errors of omission.
- Every question is answered. A blank is not a “no.” An underwriter reading a blank must either pend the file or assume the worst.
- The applicant’s own answers are written as given. If the applicant says “I take a pill for blood pressure,” the application says that, with the drug name and dose if asked, and does not say “none.” Michigan forbids anyone other than the applicant from altering a written life or disability application without the applicant’s written consent, except for insurer insertions made for administrative purposes and marked so they are not ascribed to the applicant (MCL 500.2216).
- The applicant reads, or is read, the completed form and signs it only after the entries are final. A signature on a blank or partly blank form moves every later error onto the producer.
- Other insurance is disclosed, because it affects eligibility, benefit limits and the insurer’s right to apportion a claim.
- Replacement is disclosed. If the new coverage will replace or change existing coverage, the application must say so, because that is what triggers the comparison described below.
- The producer’s report is accurate, including the unflattering parts.
Who Is Bound by the Answers
In a disability policy the applicant is bound by an application statement only if the application is included in the policy when it is issued, and an application is not included unless the policy specifically says it includes the application (MCL 500.2214(1)). That is why the entire-contract clause names the application. A disability policy delivered in Michigan must say that the policy, with its riders and endorsements, the application if the insurer specifies it, and attached papers, is the entire contract. It must also say that an insurance producer “does not have authority to change this policy or to waive any of its provisions” (MCL 500.3407). So a producer’s reassurance outside the document, such as “don’t worry about that waiting period, they never enforce it,” binds nobody. It can leave the producer liable for what the applicant relied on.
What happens when an answer turns out to be wrong depends on the kind of policy.
| Policy | What limits the insurer’s use of a misstatement | Source |
|---|---|---|
| Individual or family disability policy other than a health insurance policy, such as disability income | After the stated period from issue, the insurer may not use a misstatement, except a fraudulent one, to void the policy or deny a claim for a loss beginning after the period. A form may print 3 years, but for a Michigan policy of this kind the time limits must not exceed 2 years. | MCL 500.3408(1), (2) |
| Health insurance policy, meaning expense-incurred hospital, medical or surgical coverage | The insurer may not rescind coverage unless the individual, or a person seeking coverage on the individual’s behalf, committed fraud, or the individual made an intentional misrepresentation of material fact, and the insurer gave at least 30 days’ written notice before the rescission. | MCL 500.2213e(1) |
Both kinds of policy share one more limit: the falsity of a statement in the application bars recovery only if it materially affected the acceptance of the risk or the hazard the insurer assumed (MCL 500.2218). The two rules above protect different people at different times. The disability rule gives the insurer a window in which an ordinary, even innocent, material misstatement can unwind the policy; after the window, only fraud can. The health insurance rule has no such window, because it allows rescission only for fraud or intentional misrepresentation to begin with. The statute also says a person seeking coverage on an individual’s behalf does not include a producer for purposes of the fraud clause (MCL 500.2213e(1)(a)(i)). A false entry a producer put on the application without the applicant’s knowledge is therefore not counted as the applicant’s own fraud, which leaves the producer, not the applicant, exposed for it.
A rescission is a cancellation with retroactive effect. Cancelling prospectively, or retroactively only because premiums went unpaid, is not a rescission (MCL 500.2213e(2)).
Receipts and When Coverage Begins
A receipt is the producer’s written acknowledgment of the application and the premium. Its wording decides whether the applicant has any coverage while the insurer decides. The producer must read the receipt the insurer actually supplies. Three situations arise.
| Situation | Coverage during underwriting |
|---|---|
| No premium was collected with the application | None. Offer and consideration are not both in place. The insurer will usually require a statement of continued good health at delivery. |
| Binding receipt | Coverage on the terms applied for, from the date stated in the receipt, whatever later underwriting shows. |
| Conditional receipt | Coverage only if the insurer finds the applicant insurable as applied for, and often only under the conditions the receipt states. |
Some health receipts add a second condition: they cover accidental injury from the receipt date, but cover sickness only if it first appears after a date the receipt names, such as the date the policy is issued. That is a practice, not a rule, and it matters, so the producer reads the receipt aloud.
A Conditional Receipt Applied
Imani Reyes applies for an individual medical policy on March 1 and pays the $240 first monthly premium with a conditional receipt. On March 12 she is hospitalized for appendicitis. On March 20 the insurer approves her application at standard rates, effective March 1.
If the receipt says coverage begins on the date of application if the insurer would have issued the policy as applied for, the policy responds, because the application showed no condition that would have changed the decision. If the receipt covers sickness only when it first appears after the policy is issued, her appendicitis is not covered, because it appeared on March 12, eight days before the March 20 approval. The same facts produce opposite results because of one sentence in the receipt.
Now change one fact. Imani paid nothing on March 1 and promised to send a check. The appendicitis occurs on March 12. There was never an offer and consideration together, so there was no receipt coverage. Her policy, if issued, begins on its stated effective date, and the insurer may require a statement that no change in her health has occurred. She would have to sign that statement falsely to receive the policy, and a producer who watches her do it has made a serious problem for both of them.
Delivery
Delivery is a sales step with legal effects, and a producer who mails a policy and moves on has skipped half the job. At delivery:
- Compare the policy with the application. Benefit amount, elimination period, riders, effective date and the names of covered persons must match. If they do not, the producer returns the policy to the insurer. A producer does not fix the document.
- Collect any premium due and any statement of continued good health the insurer requires, and have the policyowner date and sign the delivery receipt. The date matters because several periods run from delivery.
- Explain the benefits, limits, waiting and elimination periods, exclusions and any rider or rating. An exclusion rider or an increased premium was a condition of issue, so the owner must understand it now rather than on the day of a claim.
- Point out the right to examine the policy. A Michigan disability policy that is not group or blanket carries a notice on its front page that the policyholder may cancel within 10 days after receiving it and receive a prompt refund. A policy returned to the insurer or to the agent who sold it is void from the beginning (MCL 500.3409(1)). The period is 30 days when the policy was sold through solicitation to a person eligible for Medicare (MCL 500.3409(2)).
- Explain renewability, how premiums can change, and the grace period.
The policyowner who is told these things at delivery, and signs to say so, can seldom later claim to have been misled about them.
Replacing Health Coverage
Replacement means ending or changing existing coverage and buying new coverage from the same or another insurer. Health replacement is riskier than most people think, because a new policy restarts clocks that the old one had finished running. The comparison has three parts, which a producer completes in writing before recommending any change.
| Compare | Questions |
|---|---|
| Benefits, limitations and exclusions | Are the covered services, benefit amounts, maximum periods, definitions of disability and renewability terms at least as good? What does the new policy exclude by name that the old one did not? |
| Underwriting requirements | Will the applicant still qualify? Has his or her health changed since the old policy was issued? Does the new premium reflect a higher attained age? |
| Time-based provisions | What new waiting periods, elimination periods, deductibles and out-of-pocket accumulations start over? Does a new period for challenging the application, or for treating preexisting conditions as covered, start over? |
A Disability Income Replacement
Priya Anand holds an individual disability income policy that is four years old. It pays $3,000 a month and costs $186 a month. A competing policy, also paying $3,000, costs $162. The saving is $24 a month, or $288 a year, or $576 over two years. Priya also saw an orthopedist about her back 18 months ago and takes medication for it.
The old policy’s period for challenging the application has already run. The new policy’s period starts at issue and, for a Michigan policy of this kind, may not exceed 2 years (MCL 500.3408(2)). During that window the insurer can use a material misstatement or omission about her back to void the policy or deny a claim, and the policy may also exclude the condition by name. If her back disables her inside the window, two years of benefits at $3,000 a month is $72,000 of coverage in doubt, against $576 of premium saved. The exposure is 125 times the saving. Even if she answers every question honestly, the producer cannot promise the insurer will accept the condition without a rider.
A Medical Expense Replacement
Bao Nguyen has an expense-incurred policy with a $3,000 annual deductible and 80/20 coinsurance. By late October he has satisfied $2,800 of the deductible. He replaces the policy on November 1 with a cheaper plan with the same design. In November and December he incurs $5,000 of covered charges. To keep the arithmetic simple, assume the charges fall inside the networks of both plans and no other limits apply.
| Old policy stays | New policy | |
|---|---|---|
| Deductible still owed | $200 | $3,000 |
| Insurer pays 80% of the rest | $3,840 | $1,600 |
| Bao pays | $1,160 | $3,400 |
The replacement costs him $2,240 on these two months of claims, because his accumulated deductible disappeared. A new policy that cannot exclude preexisting conditions, which Michigan forbids for a health insurance policy (MCL 500.3406ii(1)), still restarts deductible and out-of-pocket accumulators. That prohibition does not apply to several other coverages, including hospital confinement indemnity, disability income, accident only, long-term care, Medicare supplemental, limited benefit and stand-alone dental or vision (MCL 500.3406ii(2)(b)). Replacing one of those can still bring a preexisting condition exclusion back.
Medicare-Eligible Buyers
Michigan treats one replacement practice as an unfair or deceptive act. An insurer may not issue a disability policy or rider to a person eligible for Medicare that starts a new preexisting condition waiting period when it converts or replaces similar coverage with the same insurer or its affiliates. If the old period has not expired, the new policy may carry over only the remaining time (MCL 500.2011(2)). The same section bars a first-year commission on a disability policy sold to a Medicare-eligible person that is more than the commission paid in each of the next two renewal years (MCL 500.2011(1)), which removes the incentive to replace.
What a Producer May Not Say
A producer may not misrepresent the terms, benefits, advantages or conditions of a policy, or misrepresent for the purpose of inducing or tending to induce its lapse, exchange or surrender (MCL 500.2005(a), (f)). A producer also may not make an incomplete comparison of policies to induce a policyholder to lapse or surrender one and take out another (MCL 500.2064(2)). Presenting the $24 saving and leaving out the restarting contestable period can be an incomplete comparison. Providing the written comparison above to both the applicant and the insurer, and keeping a copy, is the producer’s protection.
Common Errors and Omissions Cases
Errors and omissions insurance exists because the same few mistakes recur. Each case below ends with who pays and why.
The medication left off. An applicant tells the producer about a daily heart medication. The producer, hoping to avoid a pended file, writes “no medications.” The applicant signs without reading. Eighteen months later a hospital claim reveals the omission. The insurer’s remedy depends on the policy. For a health insurance policy, rescission is allowed only for the applicant’s fraud or intentional misrepresentation, and the statute does not treat the producer’s act as the applicant’s (MCL 500.2213e(1)(a)(i)). An applicant who told the producer the truth neither committed fraud nor intentionally misrepresented anything. The producer and the producer’s E&O carrier carry the exposure for the false entry.
The promised waiver. A producer says the 12-month waiting period for maternity will be waived because the applicant is a longtime customer. The policy says otherwise and nothing was endorsed. The insurer owes nothing beyond the contract, because the producer has no authority to waive its provisions (MCL 500.3407). The applicant’s loss, the uncovered maternity benefit, is what a claim against the producer measures.
The late application. A producer holds a signed application and a check for two weeks before sending it in, and the applicant is injured in a car accident in the meantime. A receipt may bind the insurer from the application date, depending on its words. If it does not, the delay is the producer’s doing: premium is held in a fiduciary capacity and must be sent promptly. The producer is exposed for the lost coverage.
The mismatched policy. The application asked for a 90-day elimination period. The policy was issued with 180 days. The producer delivers it without comparing. The applicant becomes disabled and learns the difference at claim time. The contract the insurer issued controls the insurer’s liability, so the shortfall is a loss the producer caused by not checking at delivery and not returning the policy for correction.
The unnoticed other coverage. An applicant has two disability policies and tells the producer only about one. The omission is on the application. The insurer later reduces benefits or voids the excess under the other-insurance provisions the policy contains, which Michigan permits an insurer to include (MCL 500.3436 to 500.3440). The applicant bears the reduction. If the producer knew about the second policy and left it off, the producer shares the responsibility.
Lesson summary
- Field underwriting is a preliminary risk evaluation. The producer’s report gives the home office the facts the form cannot, and the producer does not decide acceptance.
- A Michigan insurer may not require genetic testing or disclosure of genetic testing from an applicant for a health insurance policy (MCL 500.3407b(1)).
- A producer has no authority to change a policy or waive its provisions (MCL 500.3407), so promises outside the contract bind no one.
- For non-health disability policies, a misstatement other than fraud cannot void the policy after the contestable period, which in Michigan may not exceed 2 years; a health insurance policy may be rescinded only for fraud or intentional misrepresentation, with 30 days’ written notice (MCL 500.3408(2); MCL 500.2213e(1)).
- The receipt’s wording decides coverage while the application is pending. Without a premium there is no receipt coverage.
- At delivery, compare the policy with the application, collect what is due, explain the exclusions and renewability, and point out the 10-day right to cancel (30 days when sold to a Medicare-eligible person) (MCL 500.3409).
- A replacement comparison covers benefits, underwriting and time-based provisions; new waiting periods, restarted accumulators and a new contestable period are the costs a lower premium hides.
- Misrepresenting a policy to induce a lapse, or making an incomplete comparison, is prohibited (MCL 500.2005(f); MCL 500.2064(2)).