Insurance policies across the spectrum are issued only after the completion of the insurance application. The primary purpose of the insurance application is to give the insurer the facts necessary so that it can determine if the potential insured is an acceptable risk and what premium to assign based on the information submitted in the application. However, the application serves a secondary purpose as well -- it is evidence.
How an insured answered questions posed on the insurance application can serve as the smoking gun in any future declaratory judgment complaint to deny coverage and rescind the policy. Many states including, but not limited to, Illinois and Missouri allow even an innocent misrepresentation to serve as the basis for a denial of coverage under a policy of insurance, so long as the innocent misrepresentation materially affects the acceptance of the risk or hazard assumed by the insured.
Imagine the insured answers “no” to the following question on an application for a claims-made medical malpractice insurance policy:
Do you have any knowledge of facts or circumstances that relate to a medical incident(s) arising from professional services which could reasonably result in a claim that has not been reported to a prior insurance carrier?
Now, imagine that immediately after this question, the application for insurance contains the following warranty:
The applicant to this insurance policy warrants the representations in this application to be true, the policy is conditioned upon the truth of the representations in this application, and the falsity of any representations made in the application for insurance will avoid the policy.
Under this scenario, to rescind the policy and prevail on a complaint for declaratory judgment to deny coverage, the insurer must only show that the insured made a misrepresentation in completing the application for insurance, even if that misrepresentation is innocent, and must show that the misrepresentation was material to the acceptance of the risk. Such a task is easily completed by producing the application for insurance, proving that an answer in the application is false, and calling an underwriter to testify that the answer was material to the acceptance of the risk and issuance of the policy to the insured.
However, most insurance applications do not require the applicants to warrant the representations made in the application. Rather, most insurance applications contain “knowledge and belief” language, such as the following:
I hereby affirm that the preceding statements and answers are accurate and complete to the best of my knowledge and understanding. I understand that this application acts as the foundation of the insurance contract and those inaccurate or partial statements can invalidate my insurance coverage and, if deemed fraudulent, can possibly lead to criminal and/or civil prosecution.
Although this “knowledge and belief” language may appear similar to the above warranty, it is not treated as a warranty by most courts. For example, the Illinois Supreme Court has held “that such language in an application for insurance changes the inquiry from whether the representation in the application for insurance was true to whether the applicant at the time of completing application believed the representation to be true.” Similarly, Missouri Courts have found that “knowledge and belief” language in an application for insurance requires an insurance company to establish the applicant believed the answer in the application for insurance was false at the time the application was completed before the insurer can prevail on a complaint for declaratory judgment to rescind a policy or deny coverage under a policy of insurance. Thus, where an application for insurance contains “knowledge and belief” language, it becomes the burden of the insurer to show that an insured knew or had reason to believe that the answers in the application were false at the time the application was completed. Simply showing that an answer in the application for insurance was misrepresented is not enough to prevail on a complaint for declaratory judgment to rescind the policy and deny coverage where the application contains “knowledge and belief language.”
Accordingly, “knowledge and belief” language in insurance applications do not serve an insurer’s interest in protecting its rights in ensuring the answers given in an application for insurance are true. Rather, an insurer is better served by replacing “knowledge and belief” language in an application for insurance with warranty language, or alternatively by simply omitting all knowledge and belief language” from an application for insurance.
David A. Schott is an insurance litigation attorney with Hoagland, Fitzgerald & Pranaitis in Alton, Illinois.
