Insurance applications can be dangerous to your financial health. You buy insurance to protect you from the unknown and to give you peace of mind. If you aren’t careful in filling out the application, however, the insurance you thought you had can vanish, leaving you exposed to the very risks you thought you had coverage to protect you against.
In order to understand the impact an incorrect answer to a question on an insurance application can have on your financial health, you must understand a little bit about insurance underwriting, which is the process through which insurance companies decide whether they want to insure you and if so, how much they charge you. The insurance underwriting process starts with the application for insurance. If you are applying for life insurance or disability insurance, the insurance application will probably have a whole bunch of questions asking about your height, weight, age, occupation and health history. The reason the insurance company wants this information is to evaluate your risk of dying or becoming disabled. If you provide incorrect information, the insurer can later refuse to honor an otherwise valid claim on the basis that the policy was issued in error, based on the bad information you supplied to it. If the insurer can show that it would not have issued the policy had it been supplied with correct information, or would have issued it in some other form or at a higher premium, then the insurer can refuse to honor the claim based on a misrepresentation in the application for insurance.
What Counts as a Misrepresentation?
Generally speaking, a misrepresentation does not have to be intentional. Even an innocent mistake can be considered a misrepresentation if the information supplied in response to a question on the application is incorrect. “I forgot” is not an excuse for failing to answer a question correctly.
Sometimes questions aren’t clear. If the person applying for insurance doesn’t provide information responsive to a question because the question didn’t clearly provide for disclosure of the information, then an argument can be raised that the question was vague and no misrepresentation occurred, as an insurance lawyer.
The Misrepresentation Must be Material to the Risk
In order for an insurer to deny a claim based on a misrepresentation, in addition to showing that a question on the application was answered incorrectly, it must also show that the information was “material” to the risk. Information that has not been provided in response to a question on an application is considered to be material to the risk if the insurer can show that disclosure of the information would have impacted its decision to issue the policy. If an insurer can show that disclosure of the information would have resulted in the policy being issued in some other form (for example, with an endorsement limiting coverage), being issued at a higher premium or not being issued it all, then the misrepresentation will be considered to have been material to the risk, unless the insured can show otherwise. Insurance companies usually have underwriting manuals or guidelines that indicate how information provided to the insurance company on an application are used in determining whether to issue a policy, the type of policy to be issued and the premium to be charged for coverage. In trying to figure out whether or not an insurance company is correct in stating that a misrepresentation was material to the risk, it is critically important to try to get the insurance company’s underwriting policies or manuals. Sometimes this can only be done through a lawsuit.
What Happens if there is a Material Misrepresentation?
If the insurer believes that there was a material misrepresentation on the application, it will likely deny the claim and rescind the policy of insurance. Sometimes, fraudulent misrepresentation can even result in criminal charges — meaning you’ll need a criminal defense lawyer before you meet with a personal injury attorney! Rescission of the policy means that it is void from inception-just as if the policy was never issued. Most states only allow an insurer to rescind a policy within a certain period of time after the policies issued. For example, Florida requires insurance companies to rescind a policy based on a material misrepresentation within 2 years from the date the policy was issued. As part of the rescission process, insurers are generally required to refund the premium that has been paid on the policy up through the time of rescission.