What Is Misrepresentation in Insurance?

Have you recently been denied insurance benefits after filing a claim? Was the denial ostensibly based on the wording of your insurance, even though you were clear that you should have been covered? It’s possible that your coverage was misrepresented by someone at the insurance company.

When interacting with an insurance provider, misrepresentation can take several forms. When an insurer acts in bad faith by misrepresenting the details of a policy you’re buying or a claim you’ve filed, you may be able to file a bad faith insurance claim to recover the benefits you’re entitled to.

What Is a Misrepresentation?

A misrepresentation occurs when one party makes a misleading statement of a material fact that influences the other party’s decision to enter into a contract.

If the misrepresentation is revealed, the contract may be deemed void, and the party that was harmed may claim damages, depending on the circumstances.

The defendant is the person accused of committing the misrepresentation, and the plaintiff is the party bringing the claim in this sort of contract dispute.

How Misrepresentation Works

Misrepresentation applies only to statements of fact, not to opinions or predictions. Misrepresentation is a basis for contract breach in transactions, no matter the size.

A seller of a car in a private transaction could misrepresent the number of miles to a prospective buyer, which could cause the person to purchase the car. If the buyer later finds out that the car had much more wear and tear than represented, they can file a suit against the seller.

In higher stakes situations, a misrepresentation can be considered an event of default by a lender, for instance, in a credit agreement. Meanwhile, misrepresentations can be grounds for termination of a mergers and acquisitions (M&A) deal, in which case a substantial break fee could apply.

False Information from an Agent

Your purchase of an insurance policy demonstrates that you understand that you need to protect yourself in the event of an accident.

However, the specifics of your insurance policy aren’t always easy to understand. How much coverage do you really need? Does your premium cover everything you asked for? Were all of the policy’s exclusions properly explained?

If your insurer misled you into purchasing unnecessary provisions that raised your rates but ultimately failed to protect you in the case of an emergency, it could have misrepresented the terms of your policy.

Misrepresentation by an Adjuster

When you file a claim for benefits in an emergency, insurers are never looking out for your best interests. In order to maintain their profit margins, their ultimate goal is to pay out as little as possible. As a result of this dishonest climate, insurance adjusters frequently deceive customers.

They may deny your claim, claiming that your policy doesn’t cover the damages you’ve sustained when, in fact, it does; or they may make you an impossibly low settlement offer, written in complicated jargon to confuse you into taking a smaller sum than your premium should cover.

In any event, an adjuster’s misrepresentation is a matter of bad faith that should never go unpunished.

Misrepresentation In Insurance Claims

Misrepresentation is a false statement of fact. In insurance law, material misrepresentation occurs when an individual provides false information in his or her application for coverage that, if provided truthfully, would have impacted the insurance company’s decision to issue the policy.

  • FRAUDULENT MISREPRESENTATION When someone purposefully gives incorrect information, they are aware that it is untrue.
  • MISREPRESENTATION INNOCENT  False information that the individual believes to be true.
  • MISREPRESENTATION OF MATERIAL Failure to disclose or a material truth in the applicant’s medical or personal background would have resulted in the policy never being issued from the start.

What is the “Contestability Period”?

When an application is approved, and the policy is issued, the policyholder is then subject to a contestability period, typically lasting two years.

During the contestability period, the insurance company is allowed to deny a claim if there is a misrepresentation regarding any of the information provided on the application for insurance, even if the misrepresentation was due to an oversight or error.

After two years have elapsed from the issuance of the policy, the misrepresentation must be fraudulent, which means that the erroneous information was provided either deliberately or recklessly. At this point, the burden of proof is on the insurance company to provide evidence of fraud.

Whether the misrepresentation in question is innocent or fraudulent, at the end of the day it can result in not only a denial of benefits; it can also render a contract void.

Why are Insurance Policies Denied?

Every day, countless disability, critical illness, and life insurance claims are denied and policies terminated on the basis of misrepresentation. Not all of these denials are legitimate, as often the questions on insurance applications are deliberately confusing and ambiguous.

Or the information in the policyholder’s medical records is incorrectly interpreted by the insurance company. It is critical to consult with an experienced insurance lawyer before accepting the insurance company’s denial of benefits.

Good Faith in Insurance Policies

The court held in Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality (1985) (1) SA 419 (A) that all transactions are subject to good faith, and that this includes insurance contracts.

As a result, both the insurer and the prospective insured must act in good faith at all times leading up to and during the contract’s tenure.

Types of Misrepresentation

The general prerequisites for contractual validity apply to insurance contracts, which include consensus, legality, formalities, possibility, capacity, and certainty.

With regard to the element of consensus, the parties to a contract must reach an agreement on the contract’s essential elements, or the contract will be voidable.

The contract will be voidable at the discretion of the innocent party if consensus is achieved in an improper manner, such as by misrepresentation.

Positive or negative misrepresentations might be made in the context of insurance. A positive misrepresentation arises when the (potential) insured makes a false statement to the insurer about a material fact. For instance, purposely answering a question during the underwriting process is an example of this.

When a potential insured fails to disclose a material fact to the insurer, it is referred to as a “negative misrepresentation.” Failure to disclose a medical condition known to the (potential) insured at the time of filling out the life insurance proposal form is an example of this.

If the insurer is encouraged to contract due to the insured’s misrepresentation of a substantial fact, the insurance contract will be voidable at the insurer’s request, and the insured may be held liable for damages. The insurer may also opt to reject the claim and continue to honor the policy with the insured.

In Qilingele v SA Mutual Life Assurance Society 1993 (1) SA69 (A), the court considered whether deception in the proposal form that led to the issuance of a policy was sufficient for the insurer to reject a claim, applying the criteria set in the Oudtshoorn Municipality decision.

The court determined that, while there was no doubt about the falsity of the information provided in the proposal form, the insurer had to show that the misrepresentation was material in the eyes of a reasonable man and that, had it known the truth, it would have declined to undertake the risk or, alternatively.

The court, having found that the insurer discharged the onus incumbent upon it, ruled in favor of the insurer with costs and in doing so upheld the repudiation and voidance of the insurance policy.

Duty to Disclose

Our law does not impose a general obligation on contracting parties to disclose facts known to one of them that may have an impact on the other party’s consensus. However, there is an exception to this rule in cases where the parties have a trust relationship and one party relies on the other party’s disclosure of facts.

Because the relationship between an insurer and the (potential) insured is one of trust, the obligation to disclose applies. A misrepresentation will only have the effect of making the insurance contract voidable at the insurer’s discretion if the misrepresentation is considered to be incorrect.

The wrongfulness of misrepresentation is judged on the standard of a reasonable man and based on the convictions of the community. An omission is wrongful if it is occasioned in breach of a duty incumbent on a party to act in a positive manner.

It is important to note that a misrepresentation by omission is only considered wrongful if the relationship is subject to a duty to disclose and the non-disclosure relates to material facts.

The duty to disclose extends only to all facts which are material, subject to the following exclusions:

  • Facts provided in a proposal form that have the effect of diminishing the risk;
  • Material facts that fall into a class of information previously waived by the insurer;
  • Material facts of which the insurer already has knowledge; and
  • Material facts that are covered by either an express or implied warranty in the contract of insurance.

Treating the Customer Fairly 

While insurers are able to cancel or void insurance contracts due to wilful misrepresentation on the part of the policyholder, it is important to note that insurers must act in a manner that is fair and considers the rights of the public.

The Financial Services Board (which is now the Financial Services Conduct Authority) adopted the concept of Treating the Customer Fairly (TCF) to promote the fair treatment of customers and to entrench the principles of TCF into the culture of the industry which has been known for its previous alleged mistreatment of customers.

The principles of TCF are: suitable advice, clear communication, culture and governance, product design, and performance standards.

Relevant to this article are the principles of culture, governance, and clear communication. In terms of culture and governance, insurers are required to promote the fair treatment of customers, which goes to the heart of the companies’ culture.

Clear Communication refers to an insurer’s duty to provide clients with clear and understandable advice in plain language and to keep them adequately informed at all stages of negotiations/contracting.

TCF requires insurers to apply their minds to all matters where potential prejudice could be caused to a customer and otherwise, and further requires insurers to place customers’ needs at the heart of their business.

Conclusion

Insurance contracts are regarded by our law as contracts of good faith, a duty that extends to both the insurer and the policyholder.

As such it is important that both parties act honestly and that prospective policy holders disclose any and all relevant information to their insurer to avoid a misrepresentation that could result in the voidance of the insurance policy.

Insurance law can be complex and easily misunderstood. If you as a consumer are in doubt as to whether certain information is necessary to be disclosed to your insurer and whether same might be classified as a misrepresentation by omission, speak with your broker or legal advisor before proceeding.

Similarly, should you have any disputes with your insurer, we suggest that you approach a lawyer with knowledge of insurance law to assist you.

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