Ambiguity in Policy Application Questions Leads to Reversal by Appellate Court

05.13.2015

On May 5, 2015, the United States Court of Appeals for the Fourth Circuit handed down its opinion in Certain Underwriters at Lloyd’s, London v. Cohen, No. 14-1227, 2015 WL 2040764 (4th Cir. May 5, 2015), reversing the judgment of the district court.  The case involved a suit by Certain Underwriters at Lloyd’s, London, seeking a declaration that they properly rescinded Dr. Max Cohen’s disability insurance policies.  The magistrate judge held that Dr. Cohen made material misrepresentations on his policy applications and granted summary judgment to the Underwriters.  Finding the language of the policy application to be ambiguous, the Fourth Circuit concluded that summary judgment was inappropriate.

In April 2011, Dr. Max Harry Cohen, a general surgeon practicing in Maryland and the District of Columbia, submitted several applications for disability insurance.  At issue in this case were Dr. Cohen’s responses to three of those questions.  When asked “Are you actively at work?,” Dr. Cohen checked the “Yes” box.  In response to the question “Are you aware of any fact that could change your occupation or financial stability?,” Dr. Cohen checked the “No” box.  When asked “Are you party to any legal proceeding at this time?,” Dr. Cohen again checked the “No” box.  Dr. Cohen signed final applications with these answers and the policies became effective on August 8, 2011.

Shortly after the submission of his initial applications, but prior to the submission of his final applications, Dr. Cohen signed a Consent Order with the Maryland State Board of Physicians (the “Board”), which suspended his license to practice medicine in Maryland.  The Consent Order provided that Dr. Cohen would be suspended for three months and that prior to his suspension Dr. Cohen would wind down his practice and refer all patients to other doctors.

One month after the disability policies went into effect, Dr. Cohen sought medical treatment for injuries resulting from a fall.  Dr. Cohen’s insurance agent provided the Underwriters with notice of a possible claim, and the Underwriters retained a third party to investigate and adjust the potential claim.  The investigation uncovered the Consent Order.  Subsequently, the Underwriters notified Dr. Cohen that they intended to rescind the policies.  Dr. Cohen initiated the policies’ grievance procedures and requested an informal review, and at both stages the rescission was upheld.

In the lawsuit filed against Dr. Cohen, the Underwriters asserted that Dr. Cohen made material misrepresentations on his applications for insurance and, thus, the Underwriters sought a declaration that they properly rescinded his policies.  The case proceeded before the magistrate judge, and Dr. Cohen filed a motion in limine to exclude all references to any proceedings, records, files or orders by the Board.  The magistrate judge denied the motion in limine, concluding that the Consent Order was admissible.  The parties filed cross motions for summary judgment, and the judge found that the Underwriters validly rescinded the insurance policies because Dr. Cohen made material misrepresentations in his applications.  Dr. Cohen appealed both the granting of summary judgment to the Underwriters and the denial of his motion in limine.

Applying the general principles of contract law, the Fourth Circuit concluded that each of the questions to which Dr. Cohen allegedly gave false answers is subject to more than one reasonable interpretation.  The Underwriters argued that by answering “Yes” to the question “[a]re you actively at work?,” Dr. Cohen falsely represented that he was performing surgery on a daily basis when he was, in fact,  prohibited from performing surgery.  However, Dr. Cohen claimed that his response could be deemed correct because during his suspension he continued to perform various duties related to his Maryland practice, including administrative work, research and professional development.  Importantly, the application did not define the phrase “actively at work.”  The Court deemed both interpretations to be reasonable.

The Court found the second question—“are you aware of any fact that could change your occupation or financial stability?”—to be similarly ambiguous.  While the Underwriters argued that because Dr. Cohen was suspended from working as a surgeon he lacked active income, Dr. Cohen asserted that because his Maryland suspension was temporary and because he could still practice in D.C., his occupation as a surgeon was not in danger of changing.  Again, the application did not defined “financial stability.”

Finally, the Underwriters maintained that Dr. Cohen’s answer “No” to the question “are you a party to any legal proceeding at this time?” was materially false.  The Fourth Circuit agreed with the magistrate judge and found this question to be ambiguous.  The application did not define “legal proceeding.”  Although the Consent Order had certain characteristics of a legal document, the Board proceeding did not involve a court, and Dr. Cohen could have reasonably concluded (as he claimed he did) that by agreeing to the suspension of his medical license, he would avoid a legal proceeding.

As the Fourth Circuit explained, Maryland courts have repeatedly made clear that in order for an insurer to rely on an insurance application, the application “must be reasonably designed to elicit from [the applicant] the information which he possesses, material to the risk.”  Because each of the three questions contained undefined terms and was susceptible to more than one reasonable interpretation, summary judgment was inappropriate.

Turning to the magistrate judge’s denial of Dr. Cohen’s motion in limine, the Court held that § 14-410 of the Maryland Code, Health Occupations Article, explicitly bars the admission of “any order” of the Board in “a civil or criminal action” except by consent, or when “a party to a proceeding before the Board” brings a civil action, claiming to be “aggrieved by a decision of the Board.”  Because Dr. Cohen did not consent to its admissibility, the Court held that the Consent Order had been improperly admitted into evidence.

The application questions at issue in this case, while seemingly straightforward, were found to be subject to multiple interpretations.  As is the general insurance rule, when ambiguous, insurance documents are to be interpreted in favor of the insured. Dr. Cohen’s interpretations—which were much more expansive than the Underwriters’ readings—were nevertheless deemed reasonable by the Court.  The Cohen opinion gives insureds some ammunition when battling with an insurer over the meaning of words and phrases in the application.  An insurer’s effort to rescind an insurance policy is a draconian measure and policyholders must be prepared to challenge such moves.