Exclusively from Foa & Son
In the minds of most insurance buyers a policy, once bought and paid for, is pretty much a settled issue. If a claim is presented most folks expect, rightfully, that it will be paid under the terms of the policy. And most times, that’s pretty much what happens. There are exceptions, though.
Insurance policies are contracts, and have the same elements as any contract, offer and acceptance, consideration (the premium) and legal purpose. At bottom, they are contracts that say that in return for payment of the premium by the policyholder the insurance company agrees to pay money to the policyholder in the future, under specific defined circumstances when a covered claim is presented, and subject to all the terms and conditions of the insurance contract. If you think about it, the policyholder is actually at a disadvantage in this type of arrangement. The policyholder performs first, by payment of the premium, and must rely on the good faith of the insurance company to perform in the future, when a claim is submitted. An unscrupulous insurance company, having collected the premium, may not be highly motivated to pay back anything for a claim subsequently presented. This is not about routine disagreements between claimant and adjuster about amounts to be paid or interpretation of the terms of a policy, which are pretty common, but about an insurance company refusal to pay just because, well, they think they can.
Situations where things like that happened were perhaps more frequent in the past but these days there is a well-developed and rigorous body of law and precedent governing insurance companies, and it can be a pretty costly proposition for any insurance company who fails to deal with a policyholder/claimant in good faith. The principal of good faith dealing with claimants by insurance companies is backstopped by some pretty hefty financial penalties against insurance companies who don’t do that.
Good faith goes both ways, though, and there is another side of the coin that policyholders need to keep in mind. When an underwriter entertains an application for insurance he needs to obtain enough information to determine if he wants to offer a policy to that applicant, what the limits, terms and conditions will be, and what premium he wants to charge for the risk he’s assuming. He’ll typically ask for an application, which requests information from the applicant the underwriter thinks he’ll need to make a decision.
For this reason the application carries a fair bit of weight. The underwriter will assume that the applicant is answering questions and providing information on the application that is honest and accurate. He has to; in this case the advantage lies with the applicant. All an underwriter can hope for is enough information to make an informed underwriting decision, but the applicant will always know his own affairs better than any underwriter possibly could. Since the underwriter is necessarily dealing with limited information, he must rely on the good faith of the applicant, and assume that the information being provided by the applicant is complete, accurate and honest. Incorrect or omitted information can drastically affect a carrier’s acceptance or rejection of the risk. That’s why insurance applications are so important and carry so much weight.
They are so important, in fact, that an insurance company can decline coverage and void the policy for incorrect information. Most applications that you will sign will state somewhere near the space for your signature that the underwriter is relying on the information provided. Often unstated is the corollary, that if the applicant misrepresents or omits material information and the insurance company discovers it either at the time of loss or after the policy is bound, they can seek to deny coverage and void the policy.
Material misrepresentation is the failure to disclose a fact that would change the carrier’s mind about issuing a policy. For one simple example, consider an applicant for a homeowners policy who fails to mention that he owns a pit bull with a history of attacking people without provocation. Most underwriters would not want to offer a policy if they knew that risk existed. An applicant who thought they could get a policy by concealing such a material fact could be unpleasantly surprised if they ever submitted a dog bite claim, but so too could an applicant who just hastily dashed off a signature on an application without reading it and noticing the omission. Whether deliberate or accidental, the information is material, and failing to disclose it could be a problem.
So, word to the wise: next time you have to sign an insurance application, take a couple of minutes to read it first and make sure it’s right.
Most applications that you will sign will state somewhere near the space for your signature that the underwriter is relying on the information provided. Often unstated is the corollary, that if the applicant misrepresents or omits material information and the insurance company discovers it either at the time of loss or after the policy is bound, they can seek to deny coverage and void the policy.