Agent’s Lie to Insurer Voids Policy | Expert Commentary | IRMI.com

When the agent/broker transacting insurance with, but not on behalf of, an insurer misrepresents material facts to the insurer, the insured person may be harmed and find themselves without coverage. In all cases, when a claim is denied, both parties are upset and litigation invariably follows.

victory of georgia vs. valleywood

in georgia cas. & surety company v. Valley Wood, Inc., 2016 Ga. lexis app 181 (ga. ct. app. march 23, 2016), the georgia court of appeals was faced with a situation where georgia casualty and surety (gcs) lost a jury trial seeking insurance coverage and bad faith damages and appealed the failure of the trial judge to render a directed verdict. valley wood also appealed the trial court’s refusal to award bad faith damages.

Reading: When an insurance broker lies to you

facts

following a jury trial, gcs appealed a judgment in favor of valley wood, inc. gcs asserted that he was entitled to a direct verdict in his favor based on ocga § 33-24-7(b), which provided as follows.

“false statements, omissions, concealment of facts and misstatements will not bar a recovery under the policy or contract unless:

  1. fraudulent;
  2. important either for the acceptance of the risk or for the danger assumed by the insurer; or
  3. the insurer in good faith would not have issued the policy or contract or would not have issued a policy or contract in such a large amount or at the rate of premium requested or would not have provided coverage in respect of the peril resulting in loss if the true facts would have been known to the insurer as required either by the application of the policy or contract or otherwise.”
  4. Evidence presented at trial showed that Valley Wood’s co-owner, Richard Ramey, obtained insurance coverage with GCS and that the insurance applications submitted to GCS were unsigned. Ramey testified that until the week before the trial, he had never seen the application before. He denied that anyone asked him the questions on the application “for anyone”, giving permission for anyone to answer the questions or for anyone at the Lanier agency to ask him the type of questions on the application. no one from the lanier agency testified at the trial.

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    a gcs subscriber testified that they received the application via email from the lanier agency, which would have denied the application for crime coverage if the application had indicated that valley wood did not audit with a certified public accountant and they do not require countersignatures on the checks, and that your underwriting decision was based on the requests. Ramey admitted that Valley Wood did not conduct full audits each year or require endorsements on checks.

    analysis

    “a direct verdict is authorized only when ‘there is no conflict of evidence as to any material issue and the evidence (add), with all reasonable deductions therefrom, will require a particular verdict.’ ocga § 9 -11-50(a). [cit.]” massachusetts bay ins. co. v. of wood, 215 ga. application 386, 387(2) (450 se.2d 857) (1994).

    A material misrepresentation is one that would influence a prudent insurer to determine whether or not to accept the risk, or to set a different premium amount in the event of such acceptance. whereas normally the question of materiality is for the jury, where the evidence precludes all reasonable inference except that the misrepresentation was material, the question becomes a question of law for the court. it is well established that the insurer need not show “actual knowledge of the falsity of the false statements in order to avoid a recovery under the policy”. united family life ins. co. v. Shirley, 242 Ga. 235, 237-238 (248 se.2d 635) (1978).

    In this case, the indisputable evidence showed that the use of a CPA audit and the requirement that checks be countersigned were material to GCS’s decision to issue crime coverage to Valley Wood and that it would not have issued the policy. If only I had known the true facts. When the evidence shows that the insurer would not have issued the policy if he had known the true facts, the evidence requires that the omissions or misrepresentations be found to be material to the acceptance of the risk.

    To the extent that Valley Wood argues that it cannot be bound by misrepresentations in an unsigned application filed by its insurance agent, the court found these arguments to be without merit. Independent insurance agents or brokers are generally considered agents of the insured, not the insurer. A principal is bound by all representations made by the agent of him in the business of his agency and also by his deliberate concealment of material facts, even if unknown to the principal and known only to the agent. The Lanier Agency was authorized to contract insurance on behalf of Valley Wood, and his conduct in submitting an application for insurance would undoubtedly fall within the scope of their agency relationship.

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    gcs sought “a statement that the insurance policy is void because valley wood misrepresented its applications for georgia accident insurance.”

    The court explained that an insurer can bring a declaratory action to determine whether an insurance policy is voidable. Although a prerequisite for rescission is to place the other party in the status quo ante, it does not follow that the insurer must allege a return of premiums when requesting a declaratory judgment that it has the right to cancel the policy. An insurer may want to know if a policy is, in fact, voidable before trying to terminate it, and a declaratory judgment is an appropriate means to that end.

    the trial court’s denial of a verdict directed in favor of gcs was reversed on the question of whether the policy was void based on misrepresentations in the application. the insured’s appeal was dismissed as moot.

    conclusion

    As I have often said, insurance is a contract of the utmost good faith. When a person appoints an agent to obtain insurance for him or her, the agent must act fairly and in good faith in applying for the insurance. in this case, the agent lied about material facts that the insured admitted were false, and the insurer’s underwriter testified about the materiality of the misrepresented facts. Simply put, lying to an insurer about material facts voids the insurance.

    © 2016 barry zalma, cfe

    See also: Should I Cancel, Suspend, or Reduce Car Insurance When I Don’t Drive?

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