Material misrepresentations in insurance policies
Misrepresentation of facts or information impacts insurers and other insureds financially.
You see it on most applications, in most policies, and on most claim forms: a statement regarding material misrepresentation and that any material misrepresentation may be considered a fraudulent, if not criminal, act in certain states. However, what exactly is material misrepresentation? As is often the case with insurance, it can become a matter of degree.
Merriam Webster online defines material as having real importance or great consequences; something that is material is not just an overlooked detail, but a significant fact that can affect the outcome of a claims decision. Misrepresent is defined as to give a false or misleading representation, usually with an intent to deceive or be unfair.
Lies of omission vs. commission
A misrepresentation is often a lie of commission or omission. An example of a lie of omission is failing to tell the insurer that you installed a swimming pool. An example of a lie of commission is saying that a sober passenger was driving when in fact the driver was the inebriated insured. Putting the two together, a material misrepresentation is a statement made by someone with an intent to deceive or mislead another party, with information that is significantly important to the issue at hand.
While an application may state that material misrepresentation is a criminal act in certain states, it doesn’t necessarily specify consequences. Those consequences appear in the policy language. The ISO Commercial Property Conditions states that coverage is void in any case of fraud, or if any party intentionally concealed or misrepresented a material fact concerning coverage parts, covered property, interest in the property or a claim under the coverage.
The ISO Homeowners Policy states that coverage is not provided if an insured has, before or after a loss, intentionally concealed or misrepresented any material fact or circumstance, engaged in fraudulent conduct or made false statements. It also states that if a material misrepresentation was made that would have caused the carrier not to issue the policy, the policy may be canceled. Other policies contain similar language as well. Some states even use the concept of material misrepresentation in their statutory definition of insurance fraud.
Avoiding misrepresentations
The big question then is what makes a piece of information material? The color of an insured’s car, for example, is not of significant importance. Despite the mistaken belief by some that red cars are charged higher premiums, they are not. That has no effect on the acceptance or rating of a policy. The breed of dog, however, could very well have an effect on how the policy is underwritten, and many carriers have lists of dog breeds for which they refuse to write coverage. It’s one thing if the insured’s car is more blue than lilac; it’s another if the dog is a Rottweiler instead of a mutt, or the insured doesn’t admit to having a dog at all.
There are plenty of workers’ compensation cases where the insured misrepresented the number of employees working for the company in order to reduce premium payments. The number of employees is a critical factor in underwriting and rating workers’ compensation policies. Likewise, other employers have been known to bribe employees so as not to report injuries on the job in order to avoid increases in premiums.
Material facts for underwriting would be anything related to the eligibility criteria: false statements about the use of the property, animals, number of drivers, business activity, number of employees, activities of the insured and any other such information. There are situations where an insured uses his employer’s address instead of his own on his auto application if rates are cheaper at his employer’s address. If the carrier would have turned the application down or rated it differently had it known of the information at the time that is a material fact.
While material misrepresentation is bad enough on the application side, it is much worse when it comes to claims. With the internet, people driving without insurance are now buying a policy online after they have had an auto accident and before the police get to the scene, and reporting the claim to the carrier after the fact, giving an incorrect time and maybe even date of the accident. The carrier certainly would not have offered coverage on an existing accident, and may not have even offered a policy had it known of the accident.
However, these types of situations occur, as well as situations where people burn houses and cars for the insurance money, claim that phantom vehicles hit them when the insured actually hit a tree or some other object, claim they had expensive personal property when in actuality they did not, and many other forms of misstatements or outright fabrications.
When application or claim information is materially misrepresented, it costs the carriers and other insureds financially. Carriers must use a variety of reports in order to verify what they have been told about a certain risk. They may have to inspect the property and review loss histories for the past three years. Claims must be investigated; witnesses and others need to be interviewed; weather data may need to be obtained if an insured is claiming a lightning strike or a hailstorm when the claim information doesn’t seem to fit the reported damage. The industry spends millions of dollars verifying information and investigating claims in order to not pay fraudulent claims or provide coverage based on faulty information.
Christine G. Barlow, CPCU, (cbarlow@alm.com) is managing editor of FC&S Expert Coverage Interpretation, the authority on insurance coverage interpretation and analysis for the P&C industry.
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