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The insurance policy is the written instrument in which a contract of insurance is set forth.
Representations are statements believed to be true to the best of one's knowledge, but they are not guaranteed to be true. For insurance purposes, representations are the answers the insured gives to the questions on the insurance application.
Untrue statements on the application are considered misrepresentations and could void the contract. A material misrepresentation is a statement that, if discovered, would alter the underwriting decision of the insurance company. Furthermore, if material misrepresentations are intentional, they are considered fraud.
Representations are statements believed to be true. Insured's statements on the application are representations.
Know that a representation may be changed or withdrawn prior to the effectuation of the policy, but not after. Misrepresentations that are pertinent to underwriting the insurability, level of risk, and decisions of either party are grounds to void a contract. However, it must be determined that the information was given under a false pretense, done so with the intent to commit fraud, and was material in making the decision to enter the contractual terms.
A representation is considered false when the facts fail to correspond with its assertions or stipulations.
According to CIC 782, any person violating this provision is guilty of a misdemeanor punishable by a maximum fine of $25,000, imprisonment in a county jail for a period no longer than 1 year, or by both a fine and imprisonment. If the loss to the victim exceeds $10,000, the fine should not exceed three times the amount of the loss. In addition, the Commissioner may suspend the license of the agent for a maximum period of 3 years.
A warranty is a statement considered to be guaranteed to be true and becomes part of the contract. According to the California Insurance Code, a certain format of words is not necessary to create a warranty. Warranties can either be expressed or implied. Statements in a policy are considered express warranty. Every express warranty becomes part of the insurance contract. Implied warranty is an unwritten or unspoken guarantee presumed to be made based on the circumstances of a transaction.
Note: A representation cannot qualify an express provision in a contract of insurance; but it may qualify an implied warranty (CIC 354).
The creation of the warranty will take place at or before the execution of the policy and will be contained in the policy itself. The warranty is not limited by time; therefore, it may relate to the past, the present, the future or any combination of these time frames. Violation of a material warranty on either party entitles the other to rescind the policy.
Furthermore, the breach of an immaterial provision (meaning that it is not important) does not void the policy unless specified by the policy itself. In addition, if the policy contains a statement implying that there is an intention to do or not to do that which affects the risk, it will be taken as a warranty that such an act or omission will take place.
The concept of materiality is based on the idea that all parties to a contract are entitled to all information necessary to make an informed decision about the quality or nature of the contract. Materiality is determined by the "probable and reasonable influence of the facts" that they would have on the party that needs the facts to make a decision, whether that party is the insurer or the insured. Failure to disclose material information may entitle the "injured" party to rescind the contract.
Of paramount importance is the weight of disadvantages on either party. Disadvantages are always material information. Every contract has disadvantages for both parties, but they may not be compelling when it comes to deciding whether or not to accept the contract. Insurers are entitled to know material information about prospective insureds: Have they been diagnosed or treated for cancer, heart disease, or diabetes? Have they ever been hospitalized? Do they fly an aircraft? Have they ever been convicted of a felony?
If an insured intentionally concealed information about a recent heart attack, this would probably have a larger impact than if the insured had misrepresented their age by 5 years. The materiality of a given concealment determines the importance of a misrepresentation.
Insureds, however, are also entitled to know the disadvantages the contract has for them: cash value surrender charges, principal exclusions (war, terrorism, aviation, suicide), length of term, increase in premium at end of term, internal fees and expenses, or a substandard rating, for example. Producers have a responsibility to share disadvantages with the prospect, not just the advantages of the contract.
Concealment is the legal term for the intentional withholding of information of a material fact that is crucial in making a decision. In insurance, concealment is the withholding of information by the applicant that will result in an imprecise underwriting decision. Concealment may void a policy.
Concealment is the failure to disclose known facts. An injured party is entitled to rescind the policy regardless of whether the concealment was intentional or unintentional. Each party should have the reasonable expectation that the other is acting in good faith without attempting to conceal or deceive the other. Neither party of the contract is legally bound to provide information pertaining to matters of their own judgment or opinions, even in matters in question. The right to rescind the policy is permissible for an intentional and fraudulent omission on the part of either party.
The following information does not need to be communicated in a contract: