E&O Tip – Policy rescission – potentially your worst E&O nightmare?

Let’s assume that your agency is looking to write an account and for some various reasons, the market is not being as receptive as you would like. Every time you tell the carrier the truth, they decline the risk. One day, a thought comes to your mind – what if I don’t tell them the truth? You submit the application and the carrier is agreeable to writing the risk. You bind the account and “life is good” or so you think.

Insurance agency personnel (producers / CSRs. etc.) need to understand that there are some scenarios where the insurance carrier can choose to rescind the policy as if it never existed. If this occurs, you are now facing potentially your worst E&O nightmare.
First, let’s look at what elements are typically needed for an insurer to successfully rescind a policy:

–        There must have been a misrepresentation in or in connection with the application;

–        The misrepresentation must have been material to the risk being underwritten; and

–        The insurer must demonstrate reliance upon the material misrepresentation in deciding to issue the policy or to issue it at the premium charge or in the form written.

A charge of misrepresentation normally includes or is considered if the misrepresentation affected either the premium charged or the acceptability of the account. In other words, would the carrier have been willing to write the account had they known the true nature of the risk. Stating that the account had not had any losses (when it had) probably resulted in the carrier thinking that the risk was better than it actually was. There was a reliance on the information by the carrier underwriter. Upon the discovery of this information, the carrier could rescind the policy, returning any premiums as if the policy never existed. Is this easy to prove? Probably will be determined by the facts of the case.
What are some of the main E&O points of this discussion?
1 – Be HONEST with your carriers on the true and exact nature of the risk. You may think that you have pulled a fast one in getting the account written but at the end of the day, you have potentially made one of the biggest mistakes of your career. If this is discovered and the policy is rescinded, the reputation of you and your agency among the carriers you represent may be tarnished forever.
2 – Require that the customer / prospect review and sign the application. The customer may be misrepresenting the risk to you (as the producer) by providing you with inaccurate information. Since an applicant will typically be held responsible for the contents of an application that they signed, requiring the customer’s review of the application and signature could prove to be a significant aspect of the defense of your agency.
At the end of the day, trust me when I tell you that a policy rescission is not something you want to experience.                        
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