Misrepresentations In Insurance Applications: How To Avoid Them And How To Minimize Consequences When They Happen

Author:Mr Alex Hardiman
Profession:Anderson Kill & Olick, P.C.

Originally published in Corporate Counsel, January 2010

When faced with a policyholder's claim for insurance coverage, with increasing frequency insurance companies will comb through the policyholder's policy application in an effort to identify potential misrepresentations or omissions which could justify the insurance company's rescission (voiding) of the policy or pressure the policyholder into accepting less than full payment of a claim. This practice is often referred to as "post-loss underwriting".

The use of misrepresentations or omissions in a policy application as a means for insurance companies to escape payment of an otherwise covered claim is exemplified by a recent case, Pope v. Mercury Indem. Co. of Georgia, 297 Ga.App. 535 (Ga.App., 2009). In Pope, the policyholders made a claim for insurance coverage as a result of damage to their property from a tornado. The insurance company's investigation, however, revealed that contrary to the representation made in the insurance policy application that the policyholders' pool had no diving board, the policyholders' pool did in fact have a diving board. The insurance company subsequently refused to pay the tornado damage claim and sought to rescind the policy on the basis of the diving board misrepresentation in the policy application. The appellate court affirmed the insurance company's right to rescind the policy, even though the tornado damage claim was unrelated to the policyholders' use of a diving board.

The Pope case exemplifies why policyholders should be aware of the potential pitfalls when completing policy applications and of the strategies to minimize the consequences of any misrepresentation or omission if it occurs.

Beware of the "Broad" Question in an Insurance Policy Application

Whether in a property policy, a commercial general liability policy, a directors and officers' liability policy or any other type of policy, the questions asked in an application and the breadth or specificity those questions can often determine whether an insurance company may later succeed in rescinding a policy on the basis of a misrepresentation or omission.

Many rescission cases have centered on a policyholder's failure to disclose knowledge of facts at the time of the application that ultimately led to a claim after the policy was sold. An application that asks broadly: "Does any Director, Officer, Manager, Supervisor, Employee or Partner have knowledge of any Claim(s), fact(s), circumstance(s), situation(s),...

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