Question

Risk Management

When applying for property insurance coverage, Freddy Jones tells the insurance company that his building is equipped with a sprinkler system and that a guard is on duty inside the premises when the building is closed to the public. Neither of these statements is true.

The insurance company covers the building and it is destroyed by a windstorm five months after the policy is placed. Do you believe that an intentional misrepresentation by an applicant for insurance should permit the insurer to deny coverage for a loss even if the misrepresented fact had no relationship to the loss? Explain your position.

Answer 1

Yes, any intentional misrepresentations by an applicant for insurance should permit the insurer to deny coverage for a loss even if the misrepresented fact had no relationship to the loss. This is because in case of any intentional misrepresentations the insurer gets a right of recession that is based upon fraud.

In this case the misrepresentation by Freddy Jones voids the policy ab initio (i.e. at its inception). This is because the misrepresentations by Freddy Jones in this case were with regards to material facts related to the property and this misrepresentation may have induced the insurer to act and thus insure the property. Here the misrepresentations were that the property had a sprinkler system and always had a guard on duty. These two material misrepresentations led the insurer to make an incorrect risk assessment with regards to property and this incorrect and lower assessment of risk profile of the building led the insurer to provide insurance coverage.

Thus we can conclude that even though the misrepresentations made by Freddy Jones had no relationship to the loss but still the insurer can deny coverage in this case.