The Risks of Misrepresenting Information on Insurance Applications
Misrepresentation is a risk in practically every type of insurance policy. Insurance companies rely on the information provided by applicants at the beginning of their relationship to properly set the premiums. Insurance companies are in the business of taking on risk, and they need to know how much risk they are assuming. Although insurance companies can conduct investigations on their own before they sell a policy, they are often limited in the amount of information they can obtain in a short amount of time.
One should never take the risk of misrepresenting information on an insurance application. Trying to save some money today could come at a much greater cost tomorrow. Those costs could include monetary ramifications, forfeiture of coverage, and potential criminal incarceration.
Misstatements May Justify Nonpayment
Even if a policyholder is successfully able to misstate or conceal certain information at the time of their application, there are still consequences in the future if they are found to have lied. While an insurance policy is generally a contract between the policyholder and the insurance company, it does not mean that losses must be paid in all instances.
According to a recent case, New Jersey law states that “an insurer may rescind a policy for equitable fraud when false statements were made in the application which materially affected either the acceptance of the risk or the hazard assumed by the insurer.”
There are several major points to grasp from the law:
- Not every misstatement made in the application is grounds for rescission. The false statements must be material to the decision of insuring the applicant.
- If the application asks an objective question, it does not matter whether the applicant intended to deceive the insurance company. Any misrepresentation is grounds for rescission.
- If the insurance company has a reasonable basis to deny the claim, it would not be liable for bad faith.
Misstatements Could Void an Insurance Policy
The same principles that apply to any contract would govern an insurance policy. Any contract that is obtained under false pretenses is voidable by the other party. In fact, a court could rule that the insurance policy was never even valid in the first place because of the policyholder’s misrepresentations.
The insurance company has every right to conduct its own investigation before it pays a claim.
If the insurance company finds that the applicant was not truthful in their application, it could deny the claim altogether. It would be their right to do so because the policy was obtained using false assumptions.
To give a simple example, if an applicant for a life insurance policy puts down on their application that they do not smoke, the insurance company may not pay the claim if the policyholder died of lung cancer caused by their two-pack-a-day smoking habit. The insurance company would certainly find out the cause of death and would investigate further based on what it learned. A court could find that the insurance company never had an obligation to insure the policyholder in the first place.
One does not just need to tell an outright lie in order to risk nonpayment under their policy. Concealing information when the applicant has a duty to disclose is every bit as bad as an affirmative misstatement. For example, if a life insurance policy application asks which prescriptions the applicant is taking, and they do not put anything down, it would be the same thing as lying.
Misstatements Could Be Insurance Fraud
Not only does an applicant who makes misstatements on their insurance applications risk not getting paid when they file a claim, but they are also potentially committing insurance fraud under New Jersey law. One cannot knowingly omit a material fact or make a false or misleading statement to an insurance company. New Jersey prosecutors may charge insurance fraud as a third-degree felony. Those crimes are punishable by up to 5 years in prison. In addition, the insurance company can sue the person who committed fraud for the reasonable costs of its claim investigation.
Plainfield Insurance Lawyers at Herold Law, P.A. Help Policyholders With Disputes With Their Insurers.
If you have any questions concerning any aspect of an insurance application and its accuracy or need to respond to an insurer’s questioning when a claim is presented, Herold Law, P.A. has the experience to provide advice. Our Plainfield insurance lawyers have years of experience and can help you reach the outcome you deserve. Call us today at 973-715-4770 or fill out our online form for a confidential initial consultation. With offices in the Plainfield area, including Warren, New Jersey, we proudly serve clients across New Jersey.