Usually the first interaction between an insurer and its insured is the submission of an application for insurance. The questions in the application represent the information the insurer asserts that it needs to assess the risk it is being asked to insure. With respect to professional liability coverages, there are certain expectations with regard to the knowledge of the applicant in providing answers to those questions. Where the insurer believes that it has not been provided accurate information, coverage problems may arise.
In Massachusetts, a material misrepresentation by the applicant may void an insurance policy.1 Under Massachusetts statute:
No oral or written misrepresentation or warranty made in the negotiation of a policy of insurance by the insured or in his behalf shall be deemed material or defeat or avoid the policy or prevent its attaching unless such misrepresentation or warranty is made with actual intent to deceive, or unless the matter misrepresented or made a warranty increased the risk of loss.2
Where questions typically arise in this context is whether the information constitutes a misrepresentation, and if so was it material.
Knowledge of Applicant
As discussed below, a policy is potentially voidable where an applicant, knowingly or inadvertently, has misstated a fact. However, most instances of “misrepresentation” are not quite co clear. Where either the question asked or the information supplied is subject to interpretation, there may be a question as to whether the applicant has in fact made a misrepresentation.
Whether a statement in an insurance application is a misrepresentation starts with the question asked. As with insurance policies, ambiguous questions in an insurance application are interpreted in favor of the insured. Where a question in an application reasonably can be interpreted in different ways, and the insured’s answer is an honest response to one of those interpretations, it cannot be deemed a misrepresentation.3 The insured is not held responsible for failing to properly guess as to what information the insurer is seeking. However, an insured cannot avoid the consequences of a misrepresentation simply by claiming that it misunderstood what was being sought.
One of the most common areas of dispute in professional liability applications is the request for information about claims. All professional liability applications ask a question seeking the applicant’s knowledge as to existing or potential claims. However, these questions are usually worded broadly, inquiring not only into knowledge of “claims” but also facts or circumstances which may give rise to a claim. Where such inquiry is into what the applicant believes, this can lead to disputes over whether the applicant’s failure to make a certain disclosure was reasonable.
In assessing whether an applicant’s statement as to the possibility of claim is accurate there has been a debate over whether a subjective or objective standard applies. Applicants have argued that as the questions are directed to them, it is their subjective knowledge or belief which controls. Insurers have responded by indicating that such application questions require the prospective insured to provide a response based on an objective standard. In the professional liability context at least, the latter standard appears to control.4 However, absent clear indication of a potential claim (such as written or oral notice), whether an objective individual would reasonably believe that a claim might arise is usually a question of fact.5
Assuming that a misrepresentation has been made, an insurer may avoid coverage only if it is considered “material”. Materiality in this context is often mistaken for intentional conduct. However, under Massachusetts statute, a misrepresentation in an application for insurance is material if it is intentional or if it increases the risk of loss.6 Thus, the “increased risk of loss” element of this statute allows an insurer to void or rescind its policy under certain circumstances even if the insured makes only an innocent misrepresentation.
In order to avoid a policy based on a misrepresentation in an insurance application, the insurer does not have to show that if it was provided the correct or complete information not have written the policy at issue. In fact, the insurer does not have to show that it relied on the misrepresentation at all, as Massachusetts law does not consider "reliance" a separate element which an insurer must prove in order to invalidate an insurance policy and/or deny a claim.7 Rather, what the insurer needs to demonstrate is that the misrepresented statement (or omission), when measured by an objective standard, would “naturally influence the judgment of [an] underwriter in making the contract at all, or in estimating the degree and character of the risk, or in fixing the rate of the premium.”8
The broadest argument presented in these cases is where the insurer asserts that had it been provided the misrepresented information, it would have been a factor for consideration by the underwriter in deciding whether or not to write the policy. Where the insurer can show that the inaccurate or missing information is of the type normally considered in issuing a policy, it is likely to be successful in declining coverage.9
More narrowly, an insurer may also argue that the misrepresented fact is material because it affected the ability of the underwriter to estimate the degree and character of the risk. This is often characterized by the assertion that while a policy still may have been issued, the underwriter would consider placing certain conditions on coverage. These could take the form of coverage limitations such as restrictions on the limits written or exclusions. Similarly, an insurer can show materiality simply by establishing that the misrepresented information would have been considered in fixing the rate of the premium.
While materiality is based upon an objective standard, subjective factors may be considered. An insurer can present industry standards or outside expert testimony. Where consistent with industry practice, courts have also considered the insurer’s own underwriting requirements. However, one particular issue is always deemed material, the existence of potential claims. Where a misrepresentation relates to an applicant's exposure to potential claims, courts consider this to be so fundamental to underwriting as to be deemed to increase the risk of loss as matter of law.10
Fundamentally, applications for professional liability insurance are the same as applications for other types of coverage. The applicant is obligated to provide accurate information and the insurer is required to appropriately utilize that information in underwriting and issuing a policy. However, much like professional liability claims, there is a slightly higher expectation for applicants for professional liability insurance. Unlike the general public, professionals are deemed to understand their potential risk exposure and are required to assess and express that potential risk for an insurer when asked to do so. A failure to do so, even an innocent one, can result in a loss of coverage. Accordingly, when it comes to disclosure in insurance applications, it is always better to err on the side of caution.
1 Barnstable County Ins. Co. v. Gale, 425 Mass. 126, 128 (1997).
2 M.G.L.A. 175 § 186
3 Hingham Mut. Fire Ins. Co. v. Mercurio, 71 Mass.App.Ct. 21, 24 (2008).
4 TIG Ins. Co. v. Blacker, 54 Mass.App.Ct. 683, 688 (2002) (The phrase “reasonable basis to foresee,” in an insurance application or policy “refers to what a reasonable attorney would foresee given the insured's knowledge.”)
5 Chicago Ins. Co. v. Lappin, 58 Mass.App.Ct. 769, 779 (2003).
6 M.G.L.A. 175 § 186
7 Shapiro v. American Home Assurance Co., 584 F.Supp. 1245, 1250 (D.Mass. 1984), citing, Pahigian v. Manufacturers' Life Ins. Co., 349 Mass. 78 (1965); Davidson v. Massachusetts Casualty Insurance Co., 325 Mass. 115 (1949).
8 A.W. Chesterton Co. v. Mass. Insurers Insolvency Fund, 445 Mass. 502 , 513 (2005), citing Employers' Liab. Assur. Corp. v. Vella, 366 Mass. 651, 655 (1975), quoting Daniels v. Hudson River Fire Ins. Co., 66 Mass. 416, 12 Cush. 416, 425 (1853).
9 See generally Employers Liability Insurance, Ltd. v. Vella, 366 Mass. at 655; Ayers v. Massachusetts Blue Cross, Inc., 4 Mass.App.Ct. at 536; Northwestern Mut. Life Ins. Co. v. Iannacchino, 950 F. Supp. 28, 31 (D. Mass. 1997) (facts are material where disclosure of the truth merely would have influenced the judgment of the underwriter).
10 Shapiro v. American Home Assur. Co., 584 F.Supp. 1245, 1249-50 (D.Mass., 1984); TIG Ins. Co. v. Blacker, 54 Mass.App.Ct. 683, 689 (2002).