Generally speaking, the law charts a clear path for dealing with false statements of fact made in obtaining insurance. Such misrepresentations, even innocently made, void coverage ab initio.

Unfortunately, many litigants confuse this rule with the legal test for “fraud,” which has heightened scienter and proof requirements that do not apply to insurance misrepresentations. Policyholder advocates also suggest that the insurance misrepresentation rule is an “unusual” or “extraordinary” remedy. This is incorrect as well. There is a large body of law applying the rule to void insurance coverage. Some insurance adversaries go on to argue that if the true facts were “knowable” by the insurer prior to underwriting, there can be no insurance misrepresentation. This is not the case either, since in most misrepresentation cases insurers have neither a duty nor a reason to investigate an applicant’s representations until after a claim is made. Finally, parties to litigation often confuse the standard of proof. Insurance misrepresentations are governed by a preponderance of the evidence standard, not a “clear and convincing” threshold.

The principles mentioned above are consistent with the larger objectives behind the rule against insurance misrepresentations. Those seeking insurance are the best — and in some cases only — source for many facts material to determining the insurance risk posed. Insurers obtain those facts by asking for them in applications, a process through which the facts become representations that serve as the basis for granting coverage. Thus, the insured is responsible for the accuracy of representations it makes, and the insurer is entitled to rely on those facts in issuing coverage.

The efficiencies this creates are obvious: It avoids the costs that would be incurred if the insurer had to investigate and verify matters within the insured’s own knowledge, costs that would inevitably have to be passed along in the form of higher premiums. This in turn promotes the goal of getting accurate information at the lowest eventual cost to the policyholder community. All of these principles are illustrated through the cases discussed below.

Application Misrepresentations Void Coverage

This article focuses on New York law, which is emblematic of the general law in this area and central to many complex insurance disputes. Pursuant to New York law, an insurer may void coverage if the insured makes material misrepresentations in obtaining it. See, e.g., Curanovic v. New York Cent. Mut. Fire Ins. Co., 762 N.Y.S.2d 148, 150 (N.Y. App. Div. 2003); accord N.Y. Ins. Law §3105 (2006). In fact, the rule voiding coverage for misrepresentations is black-letter insurance law. “If a party to the contract is deprived of some important piece of information that would affect that party’s willingness to contract, and the other party may be considered responsible for this state of affairs, the party so deprived of information should not have to live up to the terms of the contract.” 6 Lee R. Russ & Thomas F. Segalla, Couch on Insurance, §81:1, at 81-9 (3d ed. 2005).

This rule has been applied by courts in a wide range of insurance cases. See Russ & Segalla, Couch on Insurance §82:10 (collecting cases). And the same rule applies under general contract law outside the insurance context: “[a] party to a contract … may rescind that contract and avoid liability thereunder if that party’s consent to the contract, was procured … by the other party’s nonfraudulent material misrepresentations.” Robbins v. Comprehensive Med. Mgmt., Inc., No. Civ. 300CV57 PCD, 2002 WL 32175190, at *2 (D. Conn. Feb. 22, 2002) (emphasis added; citation omitted). See also, e.g., Schiavello v. Delmarva Sys. Corp., 61 F. Supp. 2d 110, 114 (D. Del. 1999) (misrepresentation); Playboy Enters. Int’l, Inc. v. On Line Entm’t, Inc., Civil Action No. CV 00-6618(DGT), 2004 WL 626807, at *4 (E.D.N.Y. Apr. 1, 2004), aff’d, 135 Fed. Appx. 479 (2d Cir. 2005).

Applicant Responsible for Providing True and Complete Answers

As its widespread acceptance indicates, there are compelling policy reasons for the rule that material misrepresentations void insurance. The insured’s representations provide the insurer with the necessary information to assess the risk presented, to determine whether it wants to insure that risk, and to ascertain what premium and other terms will be appropriate if it elects to do so. When an insured misrepresents facts that affect the insurer’s decision on those questions, the insurer indemnifies a different and greater risk than it agreed to — a risk it might not have chosen to insure at all, or for which it would have required higher premiums or other protective terms, had it known the true state of affairs. The effects can go beyond a single policy or insured; by causing higher risks to be categorized inappropriately as lower risks, an insured’s misrepresentations can upset risk pools and drive up costs for all insureds.

The rule against misrepresentations permits insurers to rely on statements that applicants make when seeking coverage. Absent such reliance, insurers would be forced to incur the burden, delay and expense of making their own investigations into facts that are within the applicant’s knowledge and control. E.g., Skinner v. Norman, 59 N.E. 309, 310 (N.Y. 1901) (“The company may rely on the presumption that the insured has stated all the material facts, and as a rule, is not bound to make inquiries.”).

The compelling policies behind the rule are widely recognized:

Strict interpretation of representations permits insurers to take assertions at face value, facilitating more accurate risk assessments, and minimizing investigation costs. The insured supplies the information rather than the insurer searching for it; when claims arise, investigation is made but since claims arise on only a small portion of a pool, overall costs are lower, benefiting all insureds as well as beneficiaries … Lawrence A. Cunningham, Choosing Gatekeepers: The Financial Statement Insurance Alternative to Auditor Liability, 52 UCLA L. Rev. 413, 454 (2004).

Insurers have no duty to investigate the veracity of facts provided in an application, which would defeat the very purpose of seeking those facts in the first place. E.g., Pacific Ins. Co. v. Higgins, No. Civ. A 11284, 1994 WL 163635 (Del. Ch. Apr. 25, 1994), at *8 n.14 (rejecting argument that insurer was obligated to investigate representations); Philadelphia Indem. Ins. Co. v. Horowitz, Greener & Stengel, LLP, 379 F. Supp. 2d 442, 454 (S.D.N.Y. 2005). Nor can those who seek insurance evade the requirement that they give truthful answers by inviting the insurer to review materials that might confirm or contradict them. See Am. Sur. Co. v. Patriotic Assurance Co., 150 N.E. 599, 602 (N.Y. 1926) (“[I]t has never been held by any authority of substantial weight that a person making a material misrepresentation in an application for insurance will be relieved from the consequences thereof if he can show that the other party, by the exercise of sufficient diligence and pains, might have discovered the inaccuracy of the representation.”); Landers v. Cooper, 22 N.E. 212, 215 (N.Y. 1889). The bottom line is that “an applicant for insurance has an affirmative duty ‘to inform himself of the content of the application signed by him, under penalty of being bound by the representations recorded therein.’” Pinette v. Assurance Co. of Am., 52 F.3d 407, 410 (2d Cir. 1995) (citation omitted).

Thus, insurers commonly ask for an applicant’s age before issuing life or health insurance, but are not required to verify that information by examining birth records. See, e.g., Cutler v. Hartford Life Ins. Co., 282 N.Y.S.2d 97 (N.Y. App. Div. 1967), modified, 292 N.Y.S.2d 430 (N.Y. 1968). Similarly, insurers of commercial risks often ask for information or documentation concerning property conditions, prior plant operations, or financial statements, but are not required to audit their accuracy. E.g., Am. Int’l Specialty Lines Ins. Co. v. Towers Fin. Corp., No. 94 Civ.2727 (WK) (AJP), 1997 WL 906427 (S.D.N.Y. Sept. 12, 1997). Any such documents called for as part of an application are themselves representations. See, e.g., Towers Fin. Corp., 1997 WL 906427, at *8 (voiding insurance based on false financial statements furnished by insured as part of application).

It is universally accepted that an applicant for insurance represents that the statements in its application are not only true at the time of application, but also at the time that insurance is actually issued. “In a contract for insurance, material statements set forth in the application constitute continuing representations made as of the time of the delivery of and payment for the policy.” Guardian Life Ins. Co. v. Aaron, 40 N.Y.S.2d 687, 688 (N.Y. Sup. Ct. 1943); see also, e.g., Lau v. Guardian Life Ins. Co., 355 N.Y.S.2d 950, 955 (N.Y. Civ. Ct. 1974) (nondisclosure of visit to physician between time of application containing denials of medical attention and time of policy delivery constitutes misrepresentation); Metro. Life Ins. Co. v. Goldsmith, 112 N.Y.S.2d 385, 388 (N.Y. Sup. Ct. 1952) (citing cases).

Thus, when an endorsement increases coverage under an existing policy, the increased coverage is offered on the basis of the representations in the original application. See, e.g., Hidary v. Maccabees Life Ins. Co., 591 N.Y.S.2d 706, 710 (N.Y. Sup. Ct. 1992) (coverage under endorsement is dependent on whether the underlying policies are void due to misrepresentations). For example, representations made to induce a lender to establish a credit facility do not terminate with creation of the master credit facility itself, but instead continue to apply with full force to each successive borrowing. See, e.g., Hutchinson v. Mfrs. Hanover Trust Co., 27 B.R. 247, 250 (Bankr. E.D.N.Y. 1983) (“Each time a debtor uses her credit card she is making the continuing representation that she is using the card in accordance with the line of credit extended.”) (citing, inter alia, In re Perticaro, 5 C.B.C. 663 (Bankr. E.D.N.Y. 1975), aff’d, No. 74 B 1384 (E.D.N.Y. Dec. 15, 1976)).

A policyholder can respond to an insurer’s misrepresentation defense by proving that the application question was so ambiguous that the answer cannot be false. See, e.g., Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd’s, 136 F.3d 82, 86 (2d Cir. 1998); Fire & Cas. Ins. Co. v. 2207 7th Ave. Rest. Corp., No. 03 Civ. 4739(HB), 2004 WL 1933781, at *3 (S.D.N.Y. Aug. 30, 2004). But an insurance application question may only be considered ambiguous if its terms suggest more than one meaning when viewed objectively by a reasonably knowledgeable person who has examined the context of the entire related agreement. Scholastic, Inc. v. Harris, 259 F.3d 73, 82 (2d Cir. 2001); Alexander & Alexander Servs., 136 F.3d at 86 (the reasonable person standard may also consider the terminology as generally understood in the particular trade or business); Fire & Cas., 2004 WL 1933781, at *3 (applying rule to questions in application for insurance).

The Elements of Misrepresentation

Insurance misrepresentation has three elements: 1) a representation, 2) its falsity, and 3) its materiality to the insurer’s decision to issue coverage. Curanovic, 762 N.Y.S.2d at 150; Higgins, 1994 WL 163635, at *6-7; Pinette, 52 F.3d at 409. Statutes and case law define what each entails.

A representation is any “statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof.” N.Y. Ins. Law §3105(a). See also Vella v. Equitable Life Assurance Soc’y, 887 F.2d 388, 391 (2d Cir. 1989) (citing N.Y. Ins. Law §3204 (statements made on insurance application are representations)). As discussed above, documents that are required as part of the application constitute representations and are covered by the same rules. Towers Fin. Corp., 1997 WL 906427, at *8 (financial statements required by insurer as part of application were representations). Similarly, a statement that there has been “no change” from a previous application, or otherwise referencing statements in a prior application, is also a representation — which if false and material voids coverage. E.g., N. Atl. Life Ins. Co. v. Katz, 557 N.Y.S.2d 150, 151-52 (N.Y. App. Div. 1990); Leamy v. Berkshire Life Ins. Co., 362 N.Y.S.2d 60, 61 (N.Y. App. Div. 1974), aff’d, 383 N.Y.S.2d 564 (N.Y. 1976). The parties may further define what will constitute representations by agreement in the application and policy. See, e.g., Towers Fin. Corp., 1997 WL 906427, at *8.

Generally speaking, mere predictions or opinions in an application are not representations. This rule changes, however, when an applicant is uniquely in the position to know how a fact will turn out. “Even an opinion … may rise to the level of a misstatement of fact when made by one with special or superior knowledge.” Am. Life Ins. Co. v. Parra, 63 F. Supp. 2d 480, 501 (D. Del. 1999) (internal quotation marks omitted) (citation omitted), aff’d in part and rev’d in part, 265 F.3d 1054 (3d Cir. 2001) quoting E. States Petroleum v. Universal Oil Prods., 3 A.2d 768, 776 (Del. Ch. 1939) (“When representations are made by one who has, or who purports to have, expert or other special and superior knowledge, with respect to the matter being discussed, that fact is often important in considering what can be fairly and reasonably understood as a mere opinion and what is a misstatement of fact … ”).

In contrast, where the events lay outside the sole control of the party making them, related statements made in applications are usually held not to be representations. Marx v. Mack Affiliates, 696 N.Y.S.2d 436, 437-38 (N.Y. App. Div. 1999) (prediction of when government approval would be obtained for a site plan); Great Lakes Chem. Corp. v. Pharmacia Corp., 788 A.2d 544, 553-54 (Del. Ch. 2001) (incorrect sales projections); McCall v. Danbury, 116 F. Supp. 2d 316, 321 (D. Conn. 2000), aff’d, 16 Fed. Appx. 77 (2d Cir. 2001) (city’s inability to hire as many minority applicants as called for by an affirmative action plan).

A false representation is one that is not true. See N.Y. Ins. Law §3105. Proof of wrongful intent is not required. Under New York law, insurers are entitled to void coverage “‘even if the material misrepresentation was innocently or unintentionally made.’” See Curanovic, 762 N.Y.S.2d at 150 (citation omitted); Nationwide Mut. Fire Ins. Co. v. Pascarella, 993 F. Supp. 134 (N.D.N.Y. 1998). It is important to note that New York, and most other states, clearly distinguish between misrepresentation and fraud; fraud requires a heightened level of scienter that does not apply to insurance misrepresentation cases. See Hughes v. BCI Int’l Holdings, Inc., 452 F. Supp. 2d 290, 302, 303 (S.D.N.Y. 2006); Alliance Group Servs., Inc. v. Grassi & Co., 406 F. Supp. 2d 157, 163, 167 (D. Conn. 2005) (citations omitted); Student Fin. Corp. v. Royal Indem. Co., No. 02-11620, Civ.A. 03-507 JJF, 02-6803 LK, 2004 WL 609329, at *3 (D. Del. March 23, 2004).

Finally, a misrepresentation is material if knowledge of the true facts might have caused the insurer to decline to issue the policy on the same terms or for the same premium. See Christiania Gen’l Ins. Corp. v. Great Am. Ins. Co., 979 F.2d 268, 278 (2d Cir. 1992); N.Y. Ins. Law §3105(b). The relevant inquiry was articulated by Judge Irving Lehman in language that has long been a touchstone on this issue. The question:

is not whether the insurance company might perhaps have decided to issue the policy even if it had been apprised of the truth, the question is whether failure to state the truth where there was a duty to speak prevented the insurance company from exercising its choice of whether to accept or reject the application upon a disclosure of all the facts which might reasonably affect its choice. Geer v. Union Mut. Life Ins. Co., 273 N.Y. 261, 266-67 (1937) (citations omitted).

See also, e.g., Aetna Cas. & Sur. Co. v. Retail Local 906, 921 F. Supp. 122, 131 (E.D.N.Y. 1996) (“Thus, the insurer need not prove that it would not have issued any policy at all, but that the policy in question would not have been issued.”) (citations omitted), aff’d, 106 F.3d 34 (2d Cir. 1997). In making this inquiry, courts apply a “reasonable person” standard and consider the insurer’s underwriting practices based on statements from underwriters and other evidence. E.g., Falcon Crest Diamonds, Inc. v. Dixon, 655 N.Y.S.2d 232, 236-37 (N.Y. Sup. Ct. 1996) (underwriter’s affidavit regarding significance of application questions demonstrated materiality).

Misrepresentations regarding certain facts — such as concealment of a serious disease in an application for life insurance or failure to disclose a company’s true financial condition in an application for Directors and Officers coverage — are generally considered to be material as a matter of law. See Towers Fin. Corp., 1997 WL 906427, at *8; Ris v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 86 CIV. 9718 (RO), 1989 WL 76199, at *2 (S.D.N.Y. July 6, 1989) (“where the facts misrepresented are so serious that one would know them to be of substantial concern to the insurer, they may be found to be material as a matter of law”) (citations omitted) (quotations omitted); Gutowski, 113 A.2d at 581-82.

The rule that answers to questions on an insurance application are presumptively material flows from the logic that an insurer determines what information is critical to its assessment of the risk and asks questions in its application that will elicit such information. Anyone completing the application is put on notice that the insurer considers the facts requested to be material.

When an insurer specifically requests information in an insurance application, that information is material as a matter of law. Geer, 273 N.Y. at 266. As Judge Lehman explained:

where an applicant for insurance has notice that before the insurance company will act upon the application, it demands that specified information shall be furnished for the purpose of enabling it to determine whether the risk should be accepted, any untrue representation, however innocent, which either by affirmation of an untruth or suppression of the truth, substantially thwarts the purpose for which the information is demanded and induces action which the insurance company might otherwise not have taken, is material as matter of law. Id.

If an issue arises concerning the materiality of a representation, the nature and “perspective” of the proof can become an issue. Proof of materiality is generally offered through common-sense, self-evident testimony of underwriters who explain why something affects the underwriting process. Beyond common sense, insurers often submit underwriting guidelines, premium pricing tools, and other documentary or testimonial evidence of general or specific practices. But no particular type of evidence is required.

Some policyholders argue that an insurer must offer proof of how it treated other insureds when dealing with the type of information misrepresented. Relying on cases such as Falcon Crest Diamonds, Inc. v. Dixon, 655 N.Y.S.2d 232, 237 (N.Y. Sup. Ct. 1996), and Tuminelli v. First Unum Life Ins. Co., 648 N.Y.S.2d 967, 967-68 (N.Y. App. Div. 1996), they argue that the carrier must establish its underwriting practices with respect to applicants with similar histories, and demonstrate it through insurance company underwriting manuals, rules, or bulletins which pertain to insuring similar risks. This is incorrect. These cases do not impose such proof rules. They simply suggest specific tools that can be — not “must be” — used to prove materiality.

Finally, it is important to remember that evidence is to be viewed from the insurer’s perspective, i.e., would the insurer at issue have issued the same coverage on the same terms and at the same price if the requested facts were accurately portrayed in the application. Geer v. Union Mut. Life Ins. Co., 273 N.Y. 261, 266-67 (1937).

The ‘Preponderance of the Evidence’ Standard

An insurer must prove misrepresentation by a preponderance of the evidence. See, e.g., Russ & Segalla, Couch On Insurance, at 81-115 (“The defenses that representations in an application are either fraudulent, material to the risk, or that the insurer in good faith would not have issued the policy had it known the true facts, are affirmative defenses which the insurer must plead and prove by a preponderance of the evidence.” (emphasis added)); Guzman v. Am. Life Ins. Co., 548 N.Y.S.2d 284, 285 (N.Y. App. Div. 1989); Hartnett v. Home Life Ins. Co., 239 N.Y.S.2d 308, 311 (N.Y. App. Div. 1963); Metro. Life Ins. Co. v. Goldberger, 155 N.Y.S.2d 305, 313 (N.Y. Sup. Ct. 1956); Travelers Ins. Co. v. Monpere, No. 93-CV-0127E(F), 1997 WL 9792, at *4 (W.D.N.Y. Jan. 2, 1997) (“In order to prevail on the first claim, Travelers would have to show, by a preponderance of the evidence, that Monpere made a material misrepresentation in his insurance applications.”) (emphasis added) (citing N.Y. Ins. Law §3105(b); Guzman).

There are a few cases that seem to cause confusion in this area. In Brayer v. John Hancock Mutual. Life Ins. Co., 179 F.2d 925, 928 (2d Cir. 1950), for example, the Second Circuit appeared to impose a “clear and convincing” standard of proof for policies governed by New York law. See also Fire & Cas. Co. of Conn. v. 2207 7th Ave. Rest. Corp., No. 03 Civ. 4739 (HB), 2004 WL 1933781 (S.D.N.Y. Aug. 30, 2004) (quoting Brayer without discussion). On closer reading, the Brayer court’s standard is actually a “preponderance of clear and convincing evidence” rather than the modern “clear and convincing” test. See 179 F.2d at 928. Appellate Division and other New York state courts that have addressed this exact issue after Brayer have held that a preponderance of the evidence standard applies. See, e.g., Guzman, 548 N.Y.S.2d at 285; Hartnett, 239 N.Y.S.2d at 311; Metro. Life Ins. Co. v. Goldberger, 155 N.Y.S.2d 305, 313 (N.Y. Sup. Ct. 1956). Those decisions establish the preponderance standard as the New York rule, since decisions of New York state courts on a question of state law must control. E.g., Sec. Pac. Credit, Inc. v. Peat Marwick Main & Co., 586 N.Y.S.2d 87, 94 (N.Y. 1992).

Conclusion

The principles surrounding insurance application misrepresentations are often confused with causes of action that carry with them more difficult intent and proof requirements. Case law that that helps explain the actual rules underlying the insurance misrepresentation defense has been provided in this article.

Harry Lee is a partner with Steptoe & Johnson LLP, in Washington, DC. Lee regularly represents insurers in complex insurance and reinsurance coverage disputes around the country and internationally. The thoughts contained in this article are his own, and not those of his clients or firm. He wishes to thank Timothy Walsh and Andrew Racca for their assistance in the preparation of this article.