Material misrepresentations and your clients
By Frank N. Darras
One of the most devastating mistakes that a prospective policyholder can make is not reviewing their own insurance application during the agent/broker interview. Why is it so important to make sure that your clients are reviewing their own applications thoroughly before submission to the carrier? Often times, the insured will argue when the carrier raises the except fraud or material misrepresentation defense that the agent/broker misheard, misunderstand, or misreported health, occupational, or financial information.
What potentially could happen when you don't have your clients thoroughly review their application before submission? The insurance carrier might deny the claim based on a material misrepresentation. What does this mean? In the simple terms, material misrepresentation is a misstatement or an omission on an insurance application form. A rescission based on material misrepresentation may not just cost the insured her policy, but may expose you to a lengthy and costly legal battle.
Remember, it's tough out there in a declining economy to find folks interested in purchasing life, health or disability products. Once you get them to the kitchen table, you have to walk them through all the features, advantages and benefits of the policy and the carrier you are recommending. Often times, pricing, policy comparisons and unfamiliar legal terms need explanation.
The application is often rushed just because there is so much to cover. Be smart and very, very careful. You built your business on your stellar reputation. Your relationship with the carrier for which you sell depends on a quality book of business, not a basket of material misrepresentations or except fraud legal battles.
For example, a New York lower court decision found an insurance agent could potentially be held responsible for misrepresentations in a life insurance application. In the case, the insured failed to disclose that she regularly consumed large amounts of alcohol and had recently received treatment at a residential substance abuse facility. This information became known after her death, and the carrier rescinded the policies due to a material misrepresentation. The deceased's husband sued the agent, alleging he failed to advise the insured of the importance of providing truthful answers to all the questions on the policy application.
Under New York law, insurance agents are not held responsible for misrepresentations in insurance applications signed by the insured, where the insured attests to the truthfulness of the information provided. Both of these elements existed in this case. There is an exception, however, where the agent and the insured had a fiduciary relationship. Such a relationship can exist where the agent provides services beyond assisting the applicant in purchasing insurance. In this case, the agent provided the insured and her husband with financial advice. The trial court found that because of this additional service, he owed the insured a fiduciary duty.
The case was appealed and ultimately the agent received a reversal of the lower court's decision. Even though the agent won the case, the amount of time, potential loss of reputation and out-of pocket-defense dollars was substantial.
Statistics have shown that one in five people think it is okay to lie on an insurance application. Insurance companies are more sensitive to the nature and extent of the questions asked on the application, the manner and method of how applications are taken, and if the insured was told to read the entire application before signing.
Many states give the insurance companies the right to look back to determine if there was a material misrepresentation or omission in the application. Even if the misrepresentation had nothing to do with the policyholder's death, a life insurance company may deny the claim.
What can you do as an agent to ensure that your clients or their beneficiaries do not encounter a denial on the grounds of misrepresentation? The most effective means is for you and your client to review the application prior to submission. Read the application question verbatim, exactly as they are written on the application. Make sure the prospective insured thoroughly reads and understands what they are signing and that you have exhausted any questions they may have about what is being asked.
What you may find after a thorough examination of the application is that there may be some discrepancies in what you heard or what your client thought the question meant. By ensuring the application is fully correct and no omissions have been made, your client will not run the risk of having a denial of their claim.
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