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Voiding an Insurance Policy

An insurance policy may be voided, which means that it is terminated from the beginning, as if no policy ever existed.

Basis for voiding policy

An insurance policy may be voided by operation of law or by a clause in the policy. A voiding by operation of law is based upon principles of contract law. A voiding by operation of the policy is usually based on a provision that the policy will be void if the insured conceals or misrepresents a material fact concerning the insurance.

Concealment

A concealment in regards to an insurance policy occurs when an insured intentionally withholds a fact that he knows is material to the insurer's assumption of the risk. Different rules have developed with respect to determining whether a concealment will void a policy. An insured's fraudulent intent was largely required by courts in order to void a policy, but this rule has been relaxed by some courts. In some states, if the insurer makes no inquiry as to a certain fact and the insured makes no representation as to that fact, the insured's concealment of that fact does not void the policy, absent the insured's intent to defraud the insurer. On the other hand, the duty of good faith in contracts may impose upon the insured the obligation to disclose facts material to the risk even if an insurer does not inquire about them.

Misrepresentation

A contract may be voided due to a misrepresentation, which is an insured's affirmative statement as to a fact that is material to the insurer's assumption of the risk. It is distinguished from concealment because it is an actual assertion, whereas concealment is a lack of any action.

Materiality

A misrepresentation or concealment in an insurance application must relate to "material" facts in order to be the basis for voiding the policy.

There are several approaches to determining materiality. Depending on the jurisdiction, a court may find that a misrepresentation or concealment is material if:

• it concerns the subject of the loss and contributes to the loss
• that particular insurer would not have issued the policy at that time given the facts
• a reasonably prudent insurer, acting reasonably and following the usual industry practice, would not have issued the policy given the facts

Intent

There are various theories for voiding or not voiding an insurance policy based on an insured's intent in relation to the misrepresentation or concealment. Some states allow a policy to be voided based solely on the fact that a misrepresentation or concealment was material, regardless of the insured's intent. Other states require the additional element that the insured intended to deceive the insurer when he made the misrepresentation or concealed a fact. Moreover, other states allow the voiding of a policy without an insured's fraudulent intent if the misrepresentation is material and the insurer relies on it.

Estoppel of insurer

An insurer may be "estopped," or prevented by law, from denying coverage to an insured despite the insured's material misrepresentation or concealment. Such a case will arise if the insurer or its agent knew or should have known of the falsity of the insured's information so that the insurer or agent should have conducted a reasonable inquiry. An insurer may also be estopped from avoiding coverage if it accepts an insured's application in an incomplete state or if the application contains misrepresentations filled in by an agent without the insured's knowledge. In addition, an insurer may be prevented from denying coverage if it accepts premium payments from an insured after claiming that the policy is void.

Copyright 2006 LexisNexis, a division of Reed Elsevier Inc.