Misrepresentation

What is misrepresentation?

Misrepresentation is supplying false information, whether intentional or by accident.

When it comes to insurance, misrepresentation most commonly refers to providing false information on an insurance application or failing to inform one’s insurance provider when important information changes. Withholding essential information when asked for it is considered misrepresentation as well.

Misrepresentation falls into two broad categories: innocent misrepresentation and willful misrepresentation.

Innocent misrepresentation is when someone provides false information that they genuinely believe to be true; basically, they make a mistake.

Similarly, there’s negligent misrepresentation. It’s still an instance of someone providing false information that they think is true, but with the added wrinkle that they had a responsibility to verify the information and they didn’t. A lot of information on a home insurance policy could fall under this category.

Willful misrepresentation is supplying false information on purpose—lying or withholding important information. There are many reasons someone might be tempted to lie on an insurance application: getting lower premiums, getting better coverage, or getting coverage at all.

Whether intentional or not, misrepresentation can have consequences for an insurance policyholder.

In this example, Roger isn’t necessarily doing something malicious; he just wants to save a little money. But he’s still misrepresenting the occupancy of his home to the insurance provider.

Theoretically, Roger might get away with it completely. After all, if he’s buying home insurance online, it’s unlikely that anyone from the insurance company ever visits his house.

But, if Roger ever makes a claim, it’s much more likely that someone will drop by, and then he might have some issues. Given that the purpose of insurance is being able to make claims, that’s a problem.

Of course, not all misrepresentation is the same.

Sometimes it’s just too small to matter; an insurance company wouldn’t penalize their customer for misspelling their middle name on an application, for example.

But in Roger’s case, the insurance provider may consider his false information to be material misrepresentation.

What is material misrepresentation?

In insurance, material misrepresentation is when false information is particularly important—so important that, without it, the insurance provider would not be able to properly assess the property and charge the right premium.

So, while the spelling of the insured’s middle name probably isn’t a risk assessment factor, the home’s occupancy certainly is.

In Roger’s example above, he’s claiming that his house is occupied only by him (the owner). As far as occupancy categories go, that’s one of the most favourable to insurance providers. After all, who takes better care of a home than the person that owns it?

But the reality is that Roger also has an unrelated tenant paying rent to live in his home, which most insurance providers consider higher risk—because of the increased number of plumbing fixtures, kitchens and people in the home. That means they would likely have charged higher premiums. Or, if they were unusually cautious, they might have declined to offer a policy at all—maybe they just don’t like to insure multi-suite homes.

Either way, the insurer considered the home’s occupancy to be a material fact. It was information they needed to decide if they were going to insure the home, and how much it would cost to do so.

What happens when misrepresentation is discovered?

If an insurance provider finds that one of their customers has misrepresented something, they have several options. Which they choose depends on the nature of the misrepresentation.

1. Do nothing. If the misrepresentation was innocent and something small, the insurer can choose to treat the policy as valid and carry on as normal (though they’d probably at least correct the info).
2. Cancel the policy. The insurance provider can cancel the policy per the policy terms. Just as they would for something like non-payment, they can do so by sending notice of cancellation to the insured via registered mail, in which case the insured would have coverage until 15 days after they receive the notice.
3. Rescind the policy. In the most serious cases of material misrepresentation, the insurer can rescind the policy, meaning they basically treat it as though it never existed. This is known as treating the policy void ab initio.

Aside from sounding like a wizard spell, “void ab initio” means the policy was invalid from the very beginning, and the insured never had coverage under it (not to mention they don’t have coverage going forward). In other words, if someone obtained a policy by providing false information, then the policy never existed, and they had no right to any of its protection.

Obviously, that’s an extreme option. Most companies would rather have a customer than not have a customer, so they’re only going to utilize options 2 or 3 when it’s necessary.

The important points

• Misrepresentation is when someone provides false information or withholds important information.
• Misrepresentation can be intentional or accidental.
• Material misrepresentation is when the false information is important enough that it influences the nature of a contract. In insurance, that means it prevented an insurer from accurately assessing an applicant or policyholder, calculating the appropriate premium, or determing what type of coverage to offer to the customer.
• If an insurer discovers material misrepresentation, they may cancel the policy or rescind it completely.

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