2.5 Field Underwriting: Application, Receipts, Delivery & Replacement

The Producer as Field Underwriter

The home-office underwriter never meets the applicant. The producer does, which is why the outline calls the producer's role field underwriting. It has four duties: gather complete and accurate information, describe the risk honestly to the insurer, avoid selecting against the insurer, and set correct expectations with the client.

Completing the Application

The application has three parts: Part I collects general information (name, address, occupation, income, other coverage, beneficiary); Part II collects medical history; and where an exam is required, Part III is the paramedical or physician's report.

Rules the exam tests:

• Never answer a question for the applicant, and never guess. The producer records what the applicant says.
• All questions must be answered. Blank answers are treated as an incomplete application; the insurer will return it, and an insurer that issues on an incomplete application is generally held to have waived the missing information.
• Corrections are made by having the applicant initial the change — not by erasing and not by writing over.
• Required signatures: the applicant, the producer, and the proposed insured if different from the applicant.
• The application, once attached, becomes part of the entire contract.

The producer must also make point-of-sale disclosures: HIPAA privacy and authorization to obtain medical information, the Fair Credit Reporting Act notice that an investigative consumer report may be ordered, Gramm-Leach-Bliley privacy notices, and any state replacement notice.

Receipts: The Difference That Decides Claims

Whether coverage exists before the policy is issued depends entirely on which receipt the producer gave.

The classic item: an applicant completes the application, pays the premium, receives a conditional receipt, and dies or is hospitalized before the policy is issued. Is there coverage? Only if she would have qualified as a standard risk on the relevant date. If underwriting would have rated or declined her, there is no coverage and the premium comes back. Under a binding receipt, the same facts produce coverage regardless.

Delivery and the Effective Date

Delivery is not a formality; it is when several duties come due.

• If the initial premium was collected with the application, coverage begins on the receipt's terms and delivery is largely administrative.
• If the initial premium was not collected, coverage begins at delivery, when the producer collects the premium and obtains a statement of continued good health — a signed attestation that nothing has changed medically since the application. If health has changed, the producer must not deliver; the case returns to underwriting.
• The producer must explain the policy: its provisions, riders, exclusions, ratings, and any way the issued policy differs from what was applied for. A rated policy or one with an impairment rider is a counteroffer and requires the applicant's acceptance.
• Many insurers require a signed delivery receipt, which also starts the free-look period in states that measure it from delivery.

Replacement: A Regulated Transaction

Replacement means a new policy is purchased and, in connection with that sale, an existing policy is lapsed, surrendered, reduced, converted, or otherwise diminished. Under the NAIC model replacement regulation the producer must:

1. Ask on the application whether the sale involves replacement, and obtain a signed statement.
2. Give the applicant a notice regarding replacement at or before application, and leave a copy.
3. Submit to the replacing insurer a list of the policies being replaced.
4. Send the existing insurer notice and a comparison of the existing and proposed coverage, which triggers the existing insurer's right to attempt conservation of its policy.

Replacement is not itself prohibited. Replacement induced by misrepresentation is twisting, a prohibited practice. The regulation exists because replacement can restart contestable and pre-existing-condition periods, reset elimination periods, and cost the client benefits accrued under the old contract — which is exactly what the comparison statement is designed to expose.

Worked example: the same facts, three receipts

An applicant completes a disability application on April 2, takes a paramedical exam on April 9, and is seriously injured in a car accident on April 20. The policy has not been issued. Underwriting later concludes she was a standard risk on April 9.

• Insurability-type conditional receipt, premium paid: coverage attaches retroactively to April 9, the later of the application and exam dates. She was insurable, so the condition is satisfied and the claim is covered.
• Approval-type conditional receipt: no coverage on April 20, because the insurer had not yet approved the application. Coverage would begin only at approval.
• No premium collected: nothing is in force. Coverage would have begun at delivery, and the injury now means she cannot sign a statement of continued good health, so the case returns to underwriting.

Change one fact — assume underwriting would have rated her rather than issued at standard — and the insurability-type conditional receipt fails too, because it conditions coverage on standard-risk insurability for the coverage applied for. Only a binding receipt would have paid on every version of these facts, which is why binding receipts are far less common.

What the Producer Must Never Do

Field underwriting has a short list of disqualifying errors, and each maps to a prohibited practice or a licensing action:

• Answering medical questions for the client to avoid a rating, which is misrepresentation on the application.
• Backdating the application to obtain a lower age or an earlier effective date, except where state law expressly permits backdating for age.
• Delivering a policy after learning of a material health change without returning the case to underwriting.
• Failing to remit premium promptly, which is commingling once the funds enter an operating account.
• Recommending replacement without the required notices, which converts a lawful transaction into a regulatory violation regardless of the client's outcome.