By Blake Stafford
On May 5, 2015, the Fourth Circuit issued its published opinion in the civil case of Certain Underwriters at Lloyd’s v. Cohen. This case (in federal court under diversity jurisdiction) involved an insurer’s rescission of disability insurance policies due to alleged material misrepresentations on the policy applications. The Fourth Circuit reversed and remanded the summary judgment that was granted in favor of the Underwriters on two main grounds. First, the Court held that three questions on the policy application were facially ambiguous; thus, the applicant’s answers were not, as a matter of law, “material misrepresentations” that justified rescission of the policy. Second, in a matter of first impression, the Court held that Consent Orders from the Maryland State Board of Physicians are inadmissible as evidence in a criminal or civil action given the plain language and legislative history of § 14–410 of the Maryland Code, Health Occupations Article.
Dr. Cohen’s Insurance Application and Consent Order to Suspend His Medical License
On April 1, 2011, Dr. Max Cohen submitted several initial applications for disability insurance to an authorized broker of the Underwriters. Dr. Cohen’s responses to three of the application questions were at issue:
- “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.”
These responses were submitted with the initial policy applications as well as with the final applications, which were signed on August 8, 2011. The policies became effective on that date.
Shortly after submitting the initial applications (but before signing the final applications), Dr. Cohen signed a Consent Order with the Maryland State Board of Physicians (the “Board”). This Consent Order suspended his license to practice medicine in Maryland for three months beginning on August 2, 2011. This Consent Order required Dr. Cohen to wind down his practice and refer all patients to other doctors during the three-month period. If he returned to active practice after the suspension, he would be placed on probation for five years. Dr. Cohen also maintained a license to practice medicine in the District of Columbia, and this license was not affected by the Consent Order.
On September 8, 2011, one month after the disability policies went into effect, Dr. Cohen sought medical treatment for injuries he sustained from a fall. The insurance agent notified the Underwriters of a possible insurance claim, and their efforts to investigate and adjust the potential claim led them to uncover the Consent Order. They notified Dr. Cohen that they intended to rescind the policies and issued him a refund check for his premium payments.
Asserting that Dr. Cohen made material misrepresentations on his applications for insurance, the Underwriters sought a declaration by a magistrate judge that their rescission was proper. During this proceeding, Dr. Cohen filed a motion in limine to exclude all references to the Consent Order, which was denied. The magistrate judge granted summary judgment to the Underwriters, concluding that the Underwriters validly rescinded the insurance policies because Dr. Cohen made material misrepresentations on his application.
Maryland’s Rule for Material Misrepresentations
In the first part of its opinion, the Court identified two requirements for a valid rescission of an insurance policy on the basis of a “material misrepresentation.” Under Maryland law, the court must determine: (1) whether the policyholder made a false statement on the application, and (2) whether the false statement was material to the risk assumed by the insurer. These are typically questions of fact for the jury unless the insurer demonstrates falsity and materiality by “uncontradicted or clear and convincing evidence,” thus making them questions of law.
Ambiguous Questions and Undefined Terms
The Court noted that insurance policies must be construed under contract principles, and policy terms are given the meaning a “reasonably prudent layperson would attach.” Policy language is ambiguous if it is “general” and “suggests two meanings to a reasonably prudent layperson.” The court applied these principles to the three questions at issue.
1. “Are you actively at work?”—”Yes.”
The Court found this question to be ambiguous. The Underwriters interpreted this language to indicate that Dr. Cohen was performing surgery on a daily basis. Dr. Cohen interpreted this language more broadly, noting that he was still a licensed surgeon and performed various duties at his office related to his practice (including research, administrative work, and professional development). The Court found that both interpretations were reasonable—the application did not define the phrase “actively at work,” did not restrict the work to Maryland, and did not provide that “actively at work” requires performance of any specific “daily duties” that may have been listed elsewhere in the application.
2. “Are you aware of any fact that could change your occupation or financial stability?”—”No.”
The Court also found this question to be ambiguous. The Underwriters contended that “financial stability” (another term undefined in the application) only referred to active income, not net worth, since disability insurance only protects active income. Dr. Cohen interpreted this language to include net worth as well as his “active practice” in D.C. The Court found that “financial stability” is a broad term that could refer to net worth; a figure that did increase during Dr. Cohen’s suspension.
3. “Are you party to any legal proceeding at this time?”—”No.”
The magistrate judge found that this question was ambiguous, and the Fourth Circuit affirmed that finding. The application did not define “legal proceeding.” While the Board proceedings had many characteristics of a legal proceeding (including representation by counsel and the resulting Consent Order—a legal document), no court was involved, and persons subject to a Board proceeding could conclude that, by agreeing to the Consent Order, they are able to avoid a legal proceeding.
Because these questions were ambiguous, the Court held that summary judgment was inappropriate.
The Consent Order
The Court then turned to the the denial of Dr. Cohen’s motion in limine to exclude all references to the proceedings and documents connected to his Consent Order with the Board.
Md. Code Ann. Health Occ. § 14–410 squarely addresses this issue. Except by express stipulation and consent of all parties in a proceeding before the Board: “(1) The proceedings, records, or files of the Board . . . are not discoverable and are not admissible in evidence; and (2) Any order passed by the Board . . . is not admissible in evidence” in a civil or criminal action.
In evaluating the plain meaning of the statute, as well as the legislative history, the Court held that Board orders are not admissible in a civil or criminal action absent consent, except for an action brought by a party aggrieved by a Board decision.
Reversed and Remanded
The Fourth Circuit reversed the district court’s judgment and remanded the case.