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Rescission of Disability Policies Reversed, Based on Ambiguous Questions in Applications

Rescission of Disability Policies Reversed, Based on Ambiguous Questions in Applications

Certain Underwriters at Lloyd's v. Cohen, 785 F.3d 886 (4th Cir. 2015)

ERISA and Life Insurance News
(September 14, 2015)

In April 2011, Dr. Cohen, a general surgeon, submitted several applications for disability insurance to a broker authorized by Certain Underwriters at Lloyd's of London to enter into insurance contracts on their behalf.  The applications included the following questions and Dr. Cohen's responses:

Are you actively at work?  Yes.

Are you aware of any fact that could change your occupation or financial stability?  No.

Are you party to any legal proceeding at this time?  No.

Several days after submitting the applications, Dr. Cohen signed a consent order with the Maryland State Board of Physicians, which suspended his license to practice medicine in Maryland.  The consent order provided that Dr. Cohen's suspension would begin on August 2, 2011, and continue for three months.  Dr. Cohen agreed to wind down his practice, to refer all patients to other doctors during the three months prior to his suspension, and to provide the Board with 60 days' notice if he intended to become clinically active after the suspension.

One month after the disability policies went into effect, Dr. Cohen sought treatment for injuries sustained in a fall, and his insurance agent notified the Underwriters of a possible claim.  When an investigation disclosed the consent order, the Underwriters notified Dr. Cohen of their intent to rescind the policies.  

In a declaratory judgment action, the Underwriters asserted that Dr. Cohen made material misrepresentations authorizing rescission of the policies.  Dr. Cohen countered that he was "actively at work" during his suspension, because he was a licensed surgeon in the District of Columbia, and he continued to perform duties related to his Maryland practice, including administrative work, research, and professional development.  The district court granted summary judgment for the Underwriters.

The Fourth Circuit reversed, finding ambiguities in each of the application questions.  The court concluded that the questions contained undefined terms susceptible to more than one reasonable interpretation, making them ill-suited to elicit the specific information the Underwriters claimed to have requested.

With respect to the first question, the court noted that the application did not define "actively at work," did not limit its inquiry to Maryland work, and did not require performance of the specific "daily duties" an applicant might have listed in the limited space available for that response.

With respect to the second question, the court noted that Dr. Cohen's suspension was temporary, and because he could still practice in the District of Columbia, his "occupation" as a "surgeon" was not in danger of changing.  Moreover, the application did not define "financial stability" or provide guidance on how an applicant could determine whether his financial stability could change.  "Financial stability" could refer to net worth, and the record indicated that Dr. Cohen's net worth apparently increased during his suspension.

The court found ambiguity in the third question, as the application did not define "legal proceeding."  Dr. Cohen was represented by counsel before the Board, and the consent order he signed was a legal document.  Nonetheless, the court found that a person subject to a Board proceeding might conclude that, by agreeing to the suspension of his medical license, he would avoid a legal proceeding.  

The court remanded the case to the district court to decide whether extrinsic or parol evidence could cure the ambiguities.  The court further held that the consent order was not admissible under Maryland law absent Dr. Cohen's consent.  According to the court, "[b]arring the admission of board disciplinary orders in later civil and criminal actions encourages physicians to cooperate during board proceedings."

H. Sanders Carter
T (404) 962-1015
F (404) 962-1220
Andrea K. Cataland
T (404) 962-1045
F (404) 962-1255
Kenton J. Coppage
T (404) 962-1065
F (404) 962-1256

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