False statements to an insurance company could be hazardous to your business’s financial health.
Misrepresentation in insurance could result in the cancellation of a business insurance policy, financial penalties or legal charges. If a small business owner makes false statements on an insurance application or when they file a claim, an insurance company might refuse to provide coverage or process a claim.
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Misrepresentation in insurance occurs when someone obscures or hides important facts that undermine the financial viability of an insurance policy.
For example, a construction company owner might understate their number of work-related injuries to reduce their workers’ compensation insurance cost.
Whatever the motivation, providing false facts to an insurance company can lead to serious consequences for an entrepreneur’s business and personal finances and it may be a felony. In addition, insurance companies must report any fraud on an insurance application or during the claims process to state regulators who may investigate and seek criminal charges.
These are the most common forms of misrepresentation:
This occurs when a business owner or employee accidentally says something false. Since the person thought the statement was true, there was no intent to deceive. In insurance, innocent misrepresentation could still result in the insurance company canceling a policy.
This happens when someone should have known a statement was false, but failed to verify it. Failing to take steps to get the facts right can lead an insurer to cancel a policy or deny a claim.
This means intentionally and knowingly making a false statement that misleads an insurance company into entering a contract under false pretenses. Since the person intended to deceive, the consequences of lying can be severe — and be treated as a felony. It will usually result in an insurance company denying or canceling coverage or declining to pay a claim.
If business owners provide information to their insurance company that interferes with the correct assessment of their risks, they have committed material misrepresentation.
“Material” refers to a type of misrepresentation that affects an insurance company’s decision to cover a small business or the outcome of a claim. When the truth is revealed, the insurance company might:
If the insurance company doesn’t have all the correct facts, it might issue the policy and, as a result, not issue the correct premium for the amount of risk.
Not all insurance misrepresentation is material. For example, incorrectly describing a damaged piece of equipment when submitting a claim might not be material if the claim value doesn’t change. But a claim for a more expensive piece of equipment than the business owner actually owns would be a material misrepresentation.
Misrepresentation usually occurs around applications and claims. Here are some common examples:
These are just a few possibilities. Agents and brokers encourage their clients to verify the accuracy of all statements made to insurance companies because the results can be really rough on a growing business. Honesty really is the best policy.
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