Representations, Misrepresentations, and Material Misrepresentations
What are the implications for an insured, producer (insurance agent), and insurance company of Representations, Misrepresentations, and Material Misrepresentations on an insured’s application for insurance?
An insurance application is the foundation for the terms of a contract between an applicant and an insurance company (company). The company relies upon the applicant’s statement that the information provided is accurate and complete. The producer guides the applicant through the application process, confirming the information provided and the coverage sought by the applicant, and transmits the application to the company. Upon issuance, the coverage provided by a policy reflects the (accuracy of) information provided. Inaccurate or incomplete information may lead to rejected applications, additional underwriting, cancelled policies, denied claims, and rescinded policies for the applicant/insured; losses for the company; and cancelled company appointments, California Department of Insurance (CDI) sanctions, and E&O exposure for the producer.
Generally, representations are information provided to a company to enable them to determine if an applicant qualifies for coverage and if so, what the appropriate premium is for that coverage. The decision to accept a risk and set a premium is dependent on the accuracy of the information. Inaccurate information is sometimes unavoidable and inconsequential, at other times it can be devastating to the parties involved. The significance of the information with respect to underwriting the risk determines if inaccuracies are misrepresentations or material misrepresentations.
Misrepresentations occur when an insured or producer quotes a risk with inaccurate information that affects rating factors. The result of the misrepresentation is often inadequate premium for the risk resulting in higher than expected underwriting losses. These losses may lead a company to raise their rates or, in severe cases, limit access to the program. The inaccurate information and resultant loss ratio may impact a producer’s reputation with the company and can have negative implications for a producer seeking E & O coverage and new appointments. Important company appointments may be withheld due to the current loss ratios. A producer who knowingly submits an application with misrepresentations may be subject to license restrictions from the CDI as well as termination by the company. An insured can expect uprates and a bill for any prior premium owed and possible cancellation of the policy.
Material misrepresentations on an application for insurance have the most critical implications for the insured, company, and producer. A misrepresentation rises to the level of material representation when the inaccurate information provided on an application leads a company to accept and underwrite a risk that would have been rejected if the company had been provided an accurate description of the risk being submitted (e.g., automobile insurance – an applicant’s automobile is not for personal use, rather it is a taxi cab. In this case, the company may not offer coverage for taxi cabs and in fact may not be chartered to write commercial business. The risk (vehicle) would not be acceptable with the company at any premium level and the policy would be rescinded if the company became aware of this information.) Unfortunately, a company often learns of material misrepresentations when a claim is filed, often resulting in the rescission of the policy and leaving the insured, producer and third party to sort out amongst themselves who is responsible and going to pay for any losses. No winners here – insured has no policy and no coverage, third party may have to litigate to collect damages, company is the messenger of bad news to everyone, and the producer may be drawn into litigation as a defendant with potential investigations by their E&O carrier and the CDI. There may even be a criminal fraud investigation.
All of this can and should be avoided with the careful submission of accurate applications.