Honesty Is the Best Policy: A Misstatement in Your Application May Void Your Coverage

Share on linkedin
Share on twitter
Share on facebook

It is inherent in human nature to question whether we will be accepted for who we are. Sometimes, this may tempt us to “hedge” a bit in how we present ourselves. But a recent Illinois appellate court decision[1] adds new meaning to the adage “honesty is the best policy.” In that case, misstatements in the business insurance policyholder’s application voided coverage for the very risk that prompted the company to purchase the policy in the first place.

The insured, a company that marketed LED lightbulbs, was not candid in its application for its workers’ compensation insurance coverage. For example, it misstated the number of employees and misrepresented the risks associated with its business operations. It also represented that it sold product but misrepresented that its employees did not perform installations when, in fact they did. One day, a sales representative for the company was visiting a customer and slipped and fell on ice in the customer’s parking lot. The accident did not involve a hazardous activity and it did not relate to a misrepresentation in the policyholder’s insurance application. But in the course of investigating that claim, the insurance company discovered the unrelated misrepresentations and declared that it would not have underwritten the risks covered in the policy had it been aware of the true nature of the policyholder’s business. The insurance carrier denied the claim and sought to rescind the insurance policy. Based on the evidence, the trial court concluded that the insurer would not have sold the policy had the policyholder been candid about its business. While the policyholder obtained a refund of the premium it paid, it now had no coverage for the loss.

Under Illinois law, an insurer may rescind an insurance policy where the statement forming the basis for rescission is (1) false; (2) made with the actual intent to deceive or material to the acceptance of risk or hazard assumed by the insurer. It does not matter whether the statement on which rescission is based was made by the insured directly or whether it was made on the insured’s behalf by an insurance broker or some other person communicating on behalf of the insured. Consequently, a policyholder should always confirm the accuracy of the information in an application.

[1] Hartford Insurance Company v. Serenity LED and Christopher Sass, 2020 IL App (2d) 191075-U.

In the case involving the lightbulb retailer, although the misrepresentations were not material to the cause of the accident that gave rise to the insurance claim, the representations were material to the insurer’s decision to issue the insurance policy. Policyholders should expect that insurers will always take steps to avoid paying a claim, and that includes scrutinizing the information included in the original application.

While it may be tempting to “hedge” on your application to obtain more coverage or a better price, that lie may void your coverage when you need it most. Honesty is the best policy. Double check your application for accuracy before submitting.

This article originally appeared on LinkedIn on December 17, 2020.