What Is Misrepresentation in Insurance?

Updated January 15, 2024
10 min read
What Is Misrepresentation in Insurance?

Introduction

The insurance industry has continued to experience consistent growth worldwide in recent years. More people understand the need to protect themselves and their families from unexpected events and losses, which has caused a rise in insurance-related activities, including the creation and extension of insurance contracts, the establishment of more insurance companies, and the employment of more insurance personnel. In practically every aspect of the industry, there is a clear boom. 

Unfortunately, with this industry growth comes a few downsides, most notably fraudulent and deceitful activities, which our discussion here will be based on. Specifically, we will be discussing the misrepresentation of insurance and a few issues surrounding this concept, including its types, examples, and ways of avoiding it. Let’s begin with the misrepresentation definition insurance owners may come across. What does it truly mean?

Definition of Misrepresentation in Insurance

The word misrepresentation simply refers to giving false statements and untrue accounts or claims. Therefore, to define misrepresentation in insurance, one simply has to relate misrepresentation to aspects of insurance where it can be perpetrated. In light of this, here is a concise misrepresentation insurance definition: 

Misrepresentation is the act of entering into a contract with a company or organization on a false basis by making statements that are not true. Misrepresentation on the part of the insured in an insurance policy grants the insurance company the right to cancel the policy. 

Misrepresentation in Insurance Law

What is a misrepresentation in insurance law? Generally speaking, under the law, misrepresentation is one of the elements of fraud and other fraud-based legal actions. The law dictates that all contracts, including insurance contracts, are subject to good faith. As a result, both the insurer and the prospective insured must act in good faith throughout the contract’s duration. Giving false statements to the other party during this process constitutes the element of representation, which, by implication, becomes illegal.

Types of Misrepresentation in Insurance

Insurance misrepresentations can be either positive or negative. A positive misrepresentation happens when the (potentially) insured says something not true about a fact that is vital to the insurer (a material fact).

One example of misrepresentation in insurance would be giving a wrong answer on purpose to a question during the underwriting process. On the other hand, a negative misrepresentation happens when the (potential) insured doesn’t tell the insurer about a fact that is important. This could happen, for example, if the (potential) insured did not tell the insurance company about a medical condition they knew about when they filled out the life insurance proposal form. The insurance company can misrepresent all factors necessary for a payout.

In positive or negative misrepresentation, the underlying element is the presence (or absence) of material facts. Therefore, for better clarification, let’s briefly address the question, what is material representation in insurance? 

A material misrepresentation insurance contract happens when a party makes a false statement that is: 

  1. Vital to the acceptance or approval of the risk; or

  2. If the statement could change the percentage the insurance would give or the insurer’s decision to give the contract at all.

Examples of Misrepresentation in Insurance

Misrepresenting something is often telling a lie (commission) or not revealing vital information (omission). A lie of omission would be, for example, not telling the insurance company that you put in a swimming pool when you did and have a construction contract that can prove it. Also, saying that a sober passenger was driving when a drunk person (who is the insured) was actually behind the wheel is an example of a lie of commission.

When Can a Misrepresentation Void a Policy

Generally, insurance policies are void for misrepresentation if the aggrieved party can prove three things:

  1. The claim made was false;

  2. The party knew it was false or made it in bad faith; and

  3. The claim was made under pretenses.

How To Protect Yourself From the Misrepresentation of Information from the Insurer

People often buy the insurance and then put it away until a loss happens and a claim is made. Some people then find out their policies don’t cover everything their agents said they would or even have no coverage. Many innocent individuals have different stories of how the agent falsely presented certain terms, leading them to pay significant amounts of money, ultimately leading to nothing. 

To protect yourself from such unexpected mishaps, here are a few tips: 

  1. Choose an insurance plan you can afford;

  2. Conduct your research to see how stable the company is;

  3. Do not purchase a plan you don’t need;

  4. Be sure to get a second opinion;

  5. Thoroughly go through your policy;

  6. Know the punishments and penalties for making withdrawals from your policy or plan; and

  7. Keep track of your investments and stay informed.

Conclusion

Summing up, what is misrepresentation in insurance? Insurance’s ultimate goal should be to protect your interests in case of unforeseen circumstances, and the existence of misrepresentation (by either party) defeats that purpose. Thankfully, the law provides for seeking remedies and compensations in case of such acts.

Be sure to speak to your attorney to seek further advice if you find yourself in such situations. Provide them with all the necessary information and documents to prepare for any obstacles that may come up, such as an outright denial by the alleged party. Do not feel anxious and leave any facts out because the attorney-client relationship between you automatically protects your information.

Article by
Yevheniia Savchenko
Lawrina

Yevheniia Savchenko is a Product Content Manager at Lawrina. Yevheniia creates user interface copies for Lawrina products, writes release notes, and helps customers get the best user experience from all Lawrina products. Also, Yevheniia is in charge of creating helpful content on legal template pages (Lawrina Templates) and up-to-date information on US law (Lawrina Guides). In her spare time, Yevheniia takes up swimming, travels, and goes for a walk in her home city.

If you have any questions or suggestions regarding the product or UX content for Lawrina, feel free to contact Yevheniia directly at y.savchenko@lawrina.org or connect with her on LinkedIn.