Completing an application for insurance can be time-consuming and tedious. Nevertheless, the application is important because an insurance company will use an applicant’s answers to determine whether to offer insurance and how much to charge. In making these determinations, insurance companies generally have the right to rely on an applicant’s answers without conducting their own investigation. However, insurance companies may be entitled to deny coverage to those who provide false or incorrect information on their application. Since a denial of coverage can be devastating for an insured, it is important to understand what is required of insureds when they are completing their insurance applications.
Pursuant to statute, information provided by an insured in an application for insurance is a representation rather than a warranty. For example, Florida’s statute states that, “any statement or description made by or on behalf of an insured…in an application for an insurance policy…, or in negotiations for a policy…, is a representation and is not a warranty.” Georgia’s statute similarly provides that “all statements and descriptions in any application for an insurance policy…shall be deemed to be representations and not warranties.”
Additional examples of similar statutes can be found in North Carolina’s Insurance Law (statements in application are not warranties) and Pennsylvania’s Insurance Company Law (statements in applications deemed representations, not warranties). Note that each state’s statutes should be reviewed for variations in wording, interpretation, and application.
The purpose of these provisions is to prevent an insurance company from claiming that any misstatement, regardless of significance, constitutes a breach of warranty that would entitle the insurance company to deny coverage. Rather, such statutes typically permit an insurance company to deny coverage only if the misrepresentation, omission, concealment of fact, or incorrect statement, is significant enough to warrant such a harsh result.
Consider Florida’s statute, which states that an insurance company can deny coverage under a policy only if:
- the misrepresentation, omission, concealment, or statement is fraudulent or is material either to the acceptance of the risk or to the hazard assumed by the insurer; or
- if the true facts had been known to the insurer pursuant to a policy requirement or other requirement, the insurer in good faith 1) would not have issued the policy or contract; 2) would not have issued it at the same premium rate; 3) would not have issued a policy or contract in as large an amount; or 4) would not have provided coverage with respect to the hazard resulting in the loss.
Judicial opinions interpreting this statute note that undisclosed information submitted in a policy application is generally material if the insurer would have altered the terms of the policy had the true facts been known, or if the true facts would have served as a basis for denying the policy application. If an insurer can establish materiality, then the insurance policy will be void ab initio, which means that the policy is rendered null and void from the date of inception as if the policy never had any legal validity. In such cases, there would be no coverage because the insurance company has an absolute defense to enforcement of the policy.
The manner in which an insurance company can establish the materiality of a misrepresentation, omission, concealment, or statement may vary depending on the particular facts. In one case involving the failure to list all residents in a home, a court referenced an insurance underwriter’s statement that “the unknown risk would have resulted in a higher premium.” In another case wherein the insured’s failure to disclose a prior bankruptcy was deemed material, underwriting standards were used to establish the insurance company’s policy of declining applicants who demonstrate a pattern of financial irresponsibility. Alternatively, a court ruled that since the matters relevant to the applicant’s omission were excluded under the policy anyway, the insurance company could not satisfy the materiality requirement. Given the flexibility of the statutory language, there are few hard and fast rules in this context.
It is important to note that under the Florida statute, an insurance company does not need to establish that the applicant’s misrepresentation, omission, concealment, or statement was done intentionally or even with knowledge of correctness or untruth. Rather, the insurance company need only establish materiality. This means that even those making innocent mistakes can be denied coverage under the statute.
If an insurance company is able to establish materiality, then the policy will be considered null and void regardless of whether the insurance company adhered to Florida’s claims administration statute or complied with Florida’s statutory notice of cancellation procedures. Additionally, since Florida law presumes that a person who signs a policy application does so with the intent to authenticate it, an applicant cannot argue that he or she did not read the application in its entirety before signing it.
Upon discovering that an application for insurance was incomplete or inaccurate, an insurance company will likely investigate the application’s deficiencies to determine whether they are sufficiently material to cancel the policy. This possibility of being denied insurance coverage should be incentive enough for insureds to take the time and make the effort to complete an application for insurance truthfully and accurately.
If you would like more information about applying for or obtaining insurance, or if you would like to discuss your specific insurance needs, please, contact us.