Medical History Misstatements On A Disability Insurance Application Can Void The Policy In The Future
Under Pennsylvania law, as affirmed by the Third Circuit Court of Appeals, insurance companies can legally void a disability insurance policy if the insured has made fraudulent misstatements about their past mental or medical history. This is known as “rescission” and is a common tactic insurance companies use to avoid paying claims. In Sadel v. Berkshire Life Insurance Company of America, 473 Fed.Appx. 152 (2012), pharmacist Michael Sadel (“Sadel”) owned two pharmacies in Philadelphia. In 2002, Sadel underwent treatment with Linda May, a clinical social worker, for abuse of prescription narcotics. Sadel continued treatment, in individual and group therapy sessions, through 2006. In 2005, Sadel purchased disability insurance from Berkshire Life Insurance Company of America (“Berkshire”), whose parent company is Guardian, but did not disclose his past drug use or treatment for various mental or emotional disorders to Berkshire when completing the disability insurance coverage application. This could have been due to an ambiguous question on the application form. For example, if the question had asked if Sadel had been or was under the care of a medical doctor, he may not have understood that this also includes care for mental or emotional disorders.
In January of 2007, Sadel lost several fingers on his left hand during a robbery at one of his pharmacies. When treated for the injury, Sadel admitted his past drug use to emergency room workers so that they would not administer drugs to him that would cause a relapse. In February of 2007, Sadel exercised an option to purchase a Future Increase Option policy with Berkshire, which increased his disability insurance coverage. Sadel returned to work at his two pharmacies, but stopped working after an incident at his pharmacy in June of 2007, in which a customer approached him from behind and said “stick ‘em up.” During the incident Sadel said his life flashed before his eyes and he realized he could no longer work at the pharmacy. Sadel put his pharmacies up for sale, and notified Berkshire, in August of 2007, of his intent to claim disability benefits under his Berkshire disability insurance policies.
After receiving Sadel’s notification, Berkshire sent Sadel several forms to fill out, and obtained Sadel’s emergency room medical records documenting the robbery incident and treatment. Berkshire also received a report and chart prepared by Linda May, where she indicated that she had treated Sadel for narcotics abuse from 2002 through the time he purchased the original disability insurance coverage with Berkshire. In June of 2008, Berkshire notified Sadel that they had found inconsistencies with his medical records and the insurance policies. Berkshire informed Sadel, in November of 2008, that they were still reviewing the validity of his policies.
Sadel filed suit against Berkshire in January of 2009, alleging bad faith and breach of contract, and sought money damage for the unpaid disability income benefits. Berkshire counterclaimed for rescission of his disability insurance policies, alleging that Sadel had made fraudulent statements on his disability insurance coverage applications. Berkshire was able to make this counterclaim because the disability insurance benefits contract specifically stated that the policy could be voided due to fraudulent misstatements during the application process. Berkshire was successful in District Court, and Sadel appealed to the Third Circuit.
Though Sadel tried to justify his application statements by arguing that he was doing well when he filled out the initial disability insurance application, and that his drug abuse was a small matter which he dealt with in a matter of weeks, Sadel did not prevail in his Berkshire disability claim. The Third Circuit Court upheld the Pennsylvania District Court’s ruling that Berkshire had not acted in bad faith. In fact, the Third Circuit agreed with the District Court finding that Sadel had “knowingly provided fraudulent misrepresentation on his disability insurance applications . . . and he [could not] establish bad faith on the grounds that Berkshire lacked a reasonable basis to deny him benefits.”
This Pennsylvania case is important because it shows that inaccurate or fraudulent statements on a long term disability insurance coverage application, though undiscovered at the time of purchasing disability insurance, will likely come to light when the insured tries claim disability insurance benefits under their policy. Thus, for the insured, when in doubt about what to disclose on long term disability insurance application forms, it is better to err on the side of caution and always disclose your medical history. Insurance purchasers should also keep a copy of the application, which is considered part of the disability insurance policy that will be delivered with the final executed policy to the inured. Furthermore, when filing an insurance claim it is important to have a disability insurance attorney review not just the policy, but the application as well, to see if there are potential problems to claiming the benefits of a disability insurance policy.