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An insurance applicant must make a complete and truthful disclosure of all relevant information so that the insurance company can decide whether the applicant meets its criteria. If the applicant knowingly and willfully supplies false information regarding any material fact with the intent of deceiving the insurer, the applicant has acted in bad faith and committed insurance fraud. In determining whether a misrepresentation in an insurance application is “material,” the issue is what effect knowledge of the falsehood would have had on the insurer’s decision to enter into the contract to provide insurance. Information is deemed “material” if knowledge of the true state of affairs would have influenced the decision to issue the policy, or the amount of the premium. The Connecticut Supreme Court stated this succinctly in Davis-Scofield Co. v. Agricultural Insurance Co., a 1929 decision: “A fact is material to the consideration of a contract of insurance when, in the judgment of reasonably careful and intelligent persons, it would so increase the degree or character of the risk of the insurance as to substantially influence its issuance, or substantially affect the rate or premium.” Actual conscious design to defraud is not necessary to find that a misrepresentation is material. If the insured knew that the misrepresentation was false when it was made, the intent to deceive is implied. It’s blackletter law that the law presumes that persons intend the natural consequence of their acts. If the completed application is attached to and made part of the policy, there is an implicit agreement that the information therein forms the basis of the contract and defines the risk assumed. The most recent example of this principle can be found in a Superior Court case decided earlier this year in which Judge Salvatore C. Agati rescinded a life insurance policy based on a material misrepresentation by the insured that his cancer was in remission at the time he applied for insurance. According to the court, material misrepresentations relied on by the company that are “known by the [insured] to be untrue when made, invalidate the policy without proof of actual conscious design to defraud.” See Sherman v. Prudential Insurance Company of America, 8 Conn. Ops. 345 (April 1, 2002). THE CONSEQUENCES OF MISREPRESENTATION If an insured submits an application containing material misrepresentations, the insurer has the right not only to deny the insured’s claim, but also to void the policy from its inception. Although rescinding the policy of insurance based on material misrepresentations in the application may at first appear extreme, absent this consequence an insured has no incentive to deal honestly regarding issues that affect the insurer’s decision to issue the policy. Superior Court Judge Julia L. Aurigemma explained this in Middlesex Mutual Assurance Co. v. Perrino, a 1994 decision: The penalty for making material false statements is a voiding of the entire policy. While the result may seem harsh, the rationale for such a penalty is to insure that the parties deal fairly and honestly with each other. This is a rule that can do an honest man no harm. This is not too harsh a consequence in view of the insured being put on notice and the alternative of encouraging an “everything to win and nothing to lose proposition” for the insured. LIKELY RESPONSES FROM THE INSURED Insurance applicants often insist that they should not be bound by misrepresentations in their insurance applications on the grounds that an insurance agent wasn’t careful and added false information without their knowledge or consent. They also sometimes argue they did not review the application before signing. However, it is the duty of all insurance applicants to read the application for accuracy. Any person who fails to do so is nonetheless bound by the agreement. Insureds also often claim that an insurance company waived its right to rescind when it accepted the application without first confirming its truthfulness. Waiver is the intentional relinquishment of a known right. To succeed on a claim of waiver, an insured must prove not only that the insurer knew of the misrepresentation when it accepted the application and issued the policy, but also that the insurer intentionally relinquished its right to rescind at a later date based on misrepresentation. It’s the insured, not the insurance company, who has the burden of proving that the insurer had “actual knowledge” that information in the application was false. The fact that the insurance company could have obtained the information had its agents done a more thorough examination or investigation does not create the actual knowledge necessary for waiver. In fact, even if insurance company employees didn’t follow a company procedure that required investigation, there is no waiver. According to Pinette v. Assur. Co. of America, a 1995 decision by the U.S. Court of Appeals for the 2nd Circuit, there is simply no duty on the part of insurers to investigate the truth of any representations in insurance applications except in the extraordinary situation where the insurer is put on notice that some type of investigation is necessary. THE EFFECT OF RESCISSION It would be natural to assume that there is no legal significance to who triggers the inquiry into potential insurance fraud. In 1995, however, the Connecticut Supreme Court held in Munroe v. Great American Ins. Co. that because automobile liability insurance is compulsory and is designed to protect innocent third parties, an automobile policy cannot be rescinded based on misrepresentations in the application when third parties are injured and make claims. The MonroeCourt also stated that the prohibition against rescission of an auto policy on the basis that the application was fraudulent applies only to liability coverage. Presumably, rescission may be permitted with respect to other coverage. Joel Rottner and Matt Gordon are principals of Skelley Rottner, skelleyrottner.com, where they specialize in the areas of first- and third-party insurance coverage.

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