Court: Insurer Can Rescind Coverage For Falsified Application

July 18, 2003 ( - An employer-sponsored health plan administrator acted within its discretion when it rescinded the insurance of a plan participant who made material misrepresentations on his benefits application, an appeals court ruled.

>The US 8th Circuit Court of Appeals found an ERISA vacuum in addressing the availability of rescission by an insurer in response to misrepresentations in a health insurance application.   However, following the lower court’s ruling and other federal court precedents, the appellate court held that ERISA federal common law applied to allow for “equitable rescission of an ERISA-governed insurance policy that is procured through the material misstatements or omissions of the insured,” according to Washington-based legal publisher BNA.

“[U]ntil Congress indicates otherwise, we hold that a misrepresentation as to a material matter made knowingly in an application for an ERISA-governed insurance policy is sufficient to rescind the policy,” Circuit Judge David Hansen said in the court’s ruling.

>Further, the appeals court determined the participant’s answers on the enrollment form were misrepresentations and that they were material. In addressing materiality, the court noted that the enrollment form clearly limited coverage for preexisting conditions, indicating that the participant’s answers to the questions contained in the form were relevant in determining the extent of his coverage and premium amounts.

Falsified Forms

>William Shipley enrolled in his employer’s health plan, denying on the enrollment form that he had ever had symptoms of, or been treated for, shortness of breath, asthma, emphysema, or any other disorder of the lungs or respiratory system.   Just four months later, he was diagnosed with cancer, chronic obstructive pulmonary disease, and emphysema.

>A subsequent investigation by Arkansas Blue Cross, the insurer, revealed the participant’s prior treatment for asthmatic bronchitis and other respiratory disorders. After its investigation, the insurer retroactively rescinded the participant’s coverage, indicating in its rescission letter that the policy would have been rated differently had the participant disclosed his prior medical history.

>Shipley sued Arkansas Blue Cross, arguing the insurer abused its discretion by rescinding the policy. A judge in the US District Court for the Eastern District of Arkansas ruled in favor of the insurer after finding that Shipley made misrepresentations on his enrollment form.

The case is Shipley v. Arkansas Blue Cross and Blue Shield, 8th Cir., No. 02-2867, 6/30/03.