Author: Chris Boggs
An insured's offer to purchase insurance is made in the form of the application, supposedly completed by the insured. Acceptance flows from the insurance carrier in the form of a policy. Logically, then, the insurance negotiation begins with the application.
Because the relationship between the insurer and the insured begins with the application, three factors must be considered when completing an application:
- How did the insured interpret the application question;
- Did the insured answer truthfully based on his/her understanding; and
- Was all pertinent information provided?
One recent court case disallowed an insurer's attempted claim denial arising out of the insured's supposed misrepresentations in the application. The court held that the application question at issue was ambiguous, and because the insured answered truthfully based on how they understood the question, the carrier could not assert misrepresentation.
What Does 'Bite History' Mean
In completing his homeowners' insurance application, Christopher Tilley was asked if there were any animals or exotic pets kept on the premises. When he answered yes, Tilley was asked to provide the breed and bite history. The agency CSR recorded Tilley's response, "American bull dog – no biting incidents." (Schultz v. Tilley, 2017 Mass. App. LEXIS 62 (Mass. Ct. App. May 18, 2017).
Subsequent to this meeting, Bocephus (Tilley's dog) attacked two Yorkshire Terriers owned by Edith Shultz. In the attack, Schultz herself limped away with a broken arm, a face laceration and various other injuries.
Tilley filed the claim with his insurance carrier, Vermont Mutual (VM). During its investigation, VM discovered that sweet Bocephus had an active history of attacking dogs owned by surrounding neighbors. With this new information, VM asserted material misrepresentation, denied the claim and attempted to void the policy – all because of Tilley's answer to the "bite history" question.
Tilley testified in court that he understood the question to mean, had the dog bitten any person. The truthful answer to this question was, no; Bocephus was as sweet as pie to people (he just didn't care much for other dogs).
Ultimately, the court agreed that the question about "bite history" was ambiguous and subject to multiple reasonable interpretations. The carrier had to pay the claim.
Three other court cases also found ambiguity in application questions:
All three courts declared that because: 1) there were multiple reasonable interpretations of the questions meaning (there was ambiguity); and 2) the insured answered truthfully based on his/her understanding of the question, there was no grounds for claim denial based upon material misrepresentation. Each decision pulled from and quoted several other similar cases; application ambiguity is not a new phenomenon.
If the insured expresses uncertainty about the meaning of a question, be very careful how you explain the intent of the question. Does your explanation match the carrier's intent? If you're not sure, you may want to ask the underwriter, and get their response in writing.
Creative Lying by Application
I don't want anyone to misinterpret my intent, I'm not accusing anyone of any impropriety – necessarily. My purpose is only to point out one sample situation where the ACORD application fails to require sufficient detail to avoid improper agent "creativity."
Grab a copy of the ACORD 140 (Property Section). Go ahead, I'll wait. Now that you have it, look for the box entitled, "BUILDING IMPROVEMENTS." Got it? Good. Let's study this a minute.
What information is asked for in this section? First, have there been any updates to any of the major systems (heating, plumbing, roofing or wiring)? Second, in what year were those updates made?
That's it! No other details are sought. This is where the concept of "creative lying" comes into play. Two very important follow up questions aren't asked, but should be:
- What were the extent of the updates: Did the insured add a breaker or did they rewire the entire building? Did they patch a hole on the roof or reroof the entire building? and
- Who did the updates: Was it a licensed contractor or "Uncle John" who happens to like working with his hands?
This is only one example where the application may not ask all pertinent details, but failure to provide the necessary underwriting details in this or any similar situation is lying by omission.
As agents, our relationship with our underwriters is one of utmost good faith. Because of this, we owe the underwriter the whole story. We need to ask detailed questions and pass the information along to the underwriter.
The #1 Rule of the Insurance Application
Although I know there is no need to write this, outside forces require me to do so…. Rule number one of any and every insurance application: Never fill the application out for or on behalf of the client; they need to hear and answer every question.
Tying it All Together
You have no way of knowing if your insured understands the questions in the insurance application in the way the insurance carrier desired them to be understood. Further, you may understand the question differently than your insured and the insurance carrier. Lastly, you have no control over whether your insured answers truthfully. However, you do have control over asking follow-up questions to provide your carrier with all relevant information. Remember, just because it's not a question on the application does not mean the information isn't relevant to the underwriting.
Last Updated: September 29, 2017