No Such Thing as Post Claim Underwriting in Illinois

No Coverage for Loss Before Inception of Policy

Insurance, by definition, only applies to fortuitous losses. If a loss had already occurred before the insurance was acquired it cannot be fortuitous to the insurer. For that reason many liability policies – rather than rely on common law – exclude losses that occurred before the start of the policy. In addition, every insurer has the right to learn from potential insureds every fact necessary to make a reasoned decision and select who it is willing to insure.

In Arch Insurance Company v. PCH Healthcare Holdings, LLC, The People’s Choice Hospital, LLC PCH Management Newman, LLC, PCH Lab Services, LLC, PCH Labs, Inc., Seth Guterman, David Wanger, Aetna, Inc., and Aetna Life Insurance Company, No. 18 C 02691, United States District Court for the Northern District of Illinois Eastern Division (August 5, 2019) the insureds – the PCH Defendants – claimed that Arch should have asked questions about pending litigation and to do so after a claim was made was wrongful post claim underwriting.

Arch Insurance Company sought a declaration that it has no duty to defend the PCH Defendants from a lawsuit brought by the Aetna Defendants because they predated the policy that was not disclosed at the time of the application.


The Underlying Complaint

In September 2017, Aetna filed a complaint against the PCH Defendants in the United States District Court for the Eastern District of Pennsylvania. The complaint included claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), as well as common law fraud, negligent misrepresentation, unjust enrichment, civil conspiracy, tortious interference, and equitable accounting.

In that underlying complaint, Aetna alleged that the PCH Defendants created “an extensive health care billing fraud scheme through which they bilked Aetna, employers that sponsor health plans, and Aetna members out of more than $21 million.” Aetna’s theory is that the PCH Defendants caused Aetna to overpay for laboratory tests and services at hospitals that PCH managed in a fraudulent scheme.

PCH allegedly did this by taking advantage of the hospitals’ agreements with Aetna, under which Aetna had agreed to pay higher-than-usual prices for laboratory services conducted at the hospital. But instead of having the hospitals conduct the tests (as required for the higher prices Aetna had agreed to), PCH had the tests performed at out-of-network laboratories that would usually have commanded a lower rate from Aetna. PCH then billed Aetna at the higher rate without disclosing the fact that the tests had been outsourced.

Aetna is not the only entity that has sued PCH for damages incurred as a result of the alleged scheme. Before Aetna filed its lawsuit, Newman Memorial Hospital had also sued the very same set of defendants, relating to the same alleged fraudulent billing scheme. Newman claimed, among other things, that the defendants submitted claims to private payors, including Aetna, under Newman’s national provider identifier number for laboratory tests in violation of Newman’s provider agreements with payors. Aetna specifically mentioned the Newman lawsuit in the underlying complaint in its own case against PCH.

The Insurance Policy

PCH purchased the Arch policy at issue here for the policy period of September 11, 2017 to September 11, 2018. The Policy does not cover claims arising from, based upon, or attributable to the same wrongful act as claims that were first made before the policy period began. In addition, among other exclusions, the Policy also bars coverage for claims resulting from “healthcare services.”

Motion for Judgment on the Pleadings

In deciding a motion for judgment on the pleadings, the Court must accept all well-pled allegations as true and view the alleged facts in the light most favorable to the non-moving party. In evaluating an insurance-coverage dispute, the Court must look to the allegations of the underlying complaint to determine whether it alleges facts within or potentially within policy coverage.

Motion to Dismiss

A complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. These allegations must be enough to raise a right to relief above the speculative level. The allegations that are entitled to the assumption of truth are those that are factual, rather than mere legal conclusions.


Arch’s primary argument in this case is that the Aetna lawsuit and the Newman lawsuit arise from the same claim, and that claim arose before the coverage period began. Arch’s motion for judgment on the pleadings echoes those arguments. Arch correctly points out that contract provisions cannot be waived before a contract is in force

Arch’s alleged failure to ask any questions about pending lawsuits is not in conflict with the Policy’s exclusion of claims for prior or already-pending litigation. In fact, it is perfectly sensible that a potential insurer would not worry about documenting claims that would clearly fall outside the scope of its coverage.

PCH theory is that Arch engaged in “post-loss” or “post-claim” underwriting, or waiting until a claim has been filed to obtain information and make underwriting decisions which should have been made when the application was made, not after the policy was issued.

Post-claim underwriting is not prohibited in Illinois. Illinois law imposes no duty on an insurer to conduct an independent investigation of insurability before issuing an insurance policy. An insurance company has the right to rely on the truthfulness of the answers given by an insurance applicant. The Policy clearly excludes claims made before the coverage period began. There is no reason to think that knowing about the Newman lawsuit would have changed Arch’s decision to issue the Policy. Even an Arch underwriter who knew about the Newman lawsuit could reasonably have assumed it would not be covered under any policy that was eventually issued.

To be clear, the Newman lawsuit is mentioned in the underlying complaint. PCH’s response to that fact is that the underlying complaint does not contain enough information on the underlying lawsuit. In any case, by PCH’s own account, the only information about the Newman lawsuit that the Court needs to determine liability here are two things: (1) whether the lawsuit began before the Policy period; and (2) whether it is “interrelated to the claim or suit submitted for coverage.”

The most sensible explanation for the exclusion is that the Policy is a narrow one—it simply does not cover the many possible liabilities that could arise from PCH’s healthcare services. The contract language must control. PCH does not allege that Arch breached the insurance contract in any way except in its refusal to cover the Aetna lawsuit. So on the pleadings, there has been no conduct by Arch that could amount to a breach of contract.

A declaratory judgment was entered for Arch concluding that there is no duty to defend the PCH Defendants


Underwriting is the process of deciding to insure or not insure a risk presented by a potential insured. It cannot, and never occurs, after the policy is issued. The underwriter decides to take on a risk. After the risk has been agreed to by the underwriter the policy wording governs whether there is any coverage available to the insured. The health insurance fraud scheme that was the subject of the Aetna suit was excluded as a health insurance claim and as a non-fortuitous loss since it had occurred before the inception of the Arch suit. This is another appropriate failure of allegations of the impossible claim of post loss underwriting.

© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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