How to Insure Your Income: Underwriting
Underwriting is the process of selection, classification and rating of risks. The underwriter is that person working in the home office of the insurance company who receives, reviews and evaluates all relevant information in order to accept or reject a risk.
In insurance circles, the term risk refers to the person or company applying for insurance.
The underwriter's sources of information include:
- the agent, also known as a field underwriter;
- the application -- including the agent's statement;
- inspection reports;
- medical information and attending physician's reports; and
- other information, such as occupational or avocational questionnaires.
Underwriting is an impersonal process. It follows strict formulas and guidelines -- with little regard for the subjective story behind the application.
The agent is usually the only person who actually sees the risk to be insured. It's the agent's job to deal with subjective or personal issues -- and to provide clear and accurate information regarding the applicant.
In this process, one of the agent's important responsibilities is the completion of the insurance application. The application is the principal tool of the underwriter. It contains the important information about the risk, which usually includes:
- the age, sex and occupation of the applicant;
- past medical history and current physical condition;
- moral habits;
- information regarding other insurance owned;
- family history information; and
- unusual hobbies or avocations.
A good illustration of an underwriting issue: Can a disabled person demand disability insurance? The 1995 federal appeals court decision Susan Doukas v. Metropolitan Life Insurance Co. considered a disabled person's application for disability coverage.
Doukas had been diagnosed with bipolar disorder -- a "mood disorder in which both manic and depressive episodes occur" -- in 1983. She had been under a physician's care and had taken medication for her condition since that time. She had not been hospitalized due to the disorder since 1985.
In July 1991, Doukas applied for mortgage disability insurance with MetLife for a condominium she planned to purchase in New Hampshire. MetLife denied her application in a letter that allegedly stated that MetLife's decision had been influenced by Doukas' medical history.
Doukas reapplied for insurance in August 1992. MetLife denied Doukas's application a month later, again indicating that its decision was influenced by her medical history. She sued, citing protection under the Americans with Disabilities Act of 1990 (ADA) and the federal Fair Housing Act.
The first part of Doukas' lawsuit invoked Title III of the ADA, which establishes a prohibition against discrimination by public accommodations.
Title III also prohibits -- among other things -- unfair discrimination by the insurance business in establishing the terms and conditions of any contract.
Doukas argued that MetLife had violated the ADA by denying her September 1992 application for mortgage disability insurance.
She further contended that MetLife's "actions in denying [her] application for mortgage disability insurance in September 1992 were inconsistent and ... not based on sound actuarial data and are therefore a mere subterfuge used to evade the purposes of the [ADA]."
MetLife argued that the relevant statute of limitations -- 180 days -- had lapsed. Therefore, Doukas's claim was invalid.
The court didn't agree. It concluded that:
... requiring individuals to identify a violation of their civil rights under the ADA, evaluate whether that violation warrants the initiation of a federal action and actually initiate the suit within 180 days of the discriminatory conduct complained of is inconsistent with the ADA's broad objectives.
What's more, New Hampshire's residual or general personal injury statute of limitations stated:
Except as otherwise provided by law, all personal actions, except actions for slander or libel, may be brought only within three years of the act or omission complained of.
The court found the New Hampshire statute of limitations applicable to claims most analogous to Doukas's ADA claims. Therefore, the claims were subject to the three-year limitations period. MetLife's motion to dismiss those claims as barred by the statute of limitations was denied.
Doukas also alleged that MetLife's denial of her application for mortgage disability insurance because of her handicap violated a section of the Fair Housing Act. Section 3605 of that act states:
It shall be unlawful for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of ... handicap.
MetLife argued that Doukas' Fair Housing Act claim failed to state a claim because the company is not "an entity whose business includes engaging in residential real estate transactions."
On this count, the court ruled in favor of Metlife:
Mortgage disability insurance is insurance designed to help the insured meet mortgage payments in the event that the insured becomes disabled.
Although such insurance is clearly a form of financial protection against the loss of one's home due to a period of disability ...mortgage disability insurance is not a form of "financial assistance" for purchasing or maintaining a dwelling.
So MetLife's motion to dismiss the final part of Doukas' lawsuit was granted.
