5.2 Misrepresentations in the Application Process

• Library: Insurance Law in Virginia (Virginia CLE) (2020 Ed.)

5.2 MISREPRESENTATIONS IN THE APPLICATION PROCESS ⁶

5.201 Rationale Behind the Rule in the Application Process. In Virginia, with the exception of misstatements of age, ⁷ it has been established that a material misrepresentation of fact by the insured in an insurance application renders the entire insurance policy void ab initio, ⁸ thereby relieving the insurer both from any obligation to provide coverage ⁹ and from any duty to defend. The underlying rationale behind Virginia's rule centers on providing the insurer a fair basis on which to make its underwriting claims decision.

Representations in an application for a policy of insurance should not only be true but full. The insurer has the right to know the whole truth. If a true disclosure is made, it is put on guard to make its own inquiries, and determine whether or not the risk should be assumed. A misstatement of material facts by the applicant takes away its opportunity to estimate the risk under its contract. A knowledge or ignorance of such facts would naturally and reasonably influence the judgment of the insurer in making the contract or in establishing the degree or character of the risk or in fixing the rate of premium. ¹⁰

In other words, the insurer is entitled to a truthful and full disclosure from the applicant so that the insurer can make its own inquiries, if any, to determine

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whether or not to assume the risk against which it is being asked to insure. ¹¹

In explaining why an insured's representations to his or her insurer must not only be true but also full, the Supreme Court of Virginia has said that

a lack of fullness, if designed, in a respect material to the risk, is tantamount to a false representation, and is attended by like consequences. This lack of fullness is termed a "concealment," which is the designed and intentional withholding of some fact material to the risk which the insured in honesty and good faith ought to communicate to the insurer. It is not mere unintentional silence or inadvertence. It is a positive omission to state what the applicant knows, or must be presumed to know, ought to be stated. It is a suppression of the truth, whereby the insurer is induced to enter into a contract which he would not have entered into had the truth been known to him. It is a deception whereby the insurer is led to infer that to be true, as to a material matter, which is not true. Hence, strictly speaking, under the general law of insurance, there can be no concealment of a fact which is not known to the applicant. ¹²

The applicant should state everything that might and probably would influence the mind of the insurer's underwriter in deciding whether or not to issue or reject the insurance application. ¹³ In order to determine whether to issue a policy or to pay a claim under a policy, an insurer must obtain the requisite information that it needs to make those informed decisions. The insurance application and claim forms completed by the insured after a loss are perhaps the two most important sources of information that an insurer uses in making its determination on whether to expose itself to a particular risk by issuing an insurance policy in the first place or to pay a claim.

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5.202 Section 38.2-309 of the Virginia Code.

A. In General. The starting point for any case involving an alleged material misrepresentation by the insured during the application process ¹⁴ is section 38.2-309 of the Virginia Code, which states that

[a]ll statements, declarations and descriptions in any application for an insurance policy or for the reinstatement of an insurance policy shall be deemed representations and not warranties. No statement in an application or in any affidavit made before or after loss under the policy shall bar a recovery upon a policy of insurance unless it is clearly proved that such answer or statement was material to the risk when assumed and was untrue.

The language of the predecessor statute, which was almost identical ¹⁵ to section 38.2-309, was held to be clear and unambiguous. ¹⁶ Section 38.2-309 and its predecessors have been uniformly applied to void an insurance

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policy when the insured has made a misrepresentation of facts material to the risk. ¹⁷

In Montgomery Mutual Insurance Co. v. Riddle, ¹⁸ the court summarized the insurance company's obligation under section 38.2-309 as follows:

[W]e reiterate that when an insurance carrier seeks to void a policy for alleged material omissions or misrepresentations pursuant to Code § 38.2-309, the insurer must show, by clear proof, two facts: (1) that the statement or omission on the application was untrue; and (2) that the insurance company's reliance on the false statement or omission was material to the company's decision to undertake the risk and issue the policy. ¹⁹

To the same effect, in Nationwide Property & Casualty Insurance Co. v. Burgoa, ²⁰ the court summarized an insured's requirements to prevail under section 38.2-209, stating, "[t]o prevail, [the insurer] must prove: 1) that the insured made the statement in the application for the policy; and 2) that the statement was untrue when made; and 3) that the untruthful statement reasonably influenced the company's decision to issue the policy." ²¹

B. Scope. Section 38.2-309 applies to all classes of insurance except ocean marine insurance other than private pleasure vessels, life insurance policies and accident and sickness insurance policies not delivered or issued for delivery in Virginia, contracts of reinsurance, and certain classes of annuities. ²² With the exception of these classes of insurance specifically excluded from its purview, section 38.2-309 is mandatory, is read into all insurance applications, and cannot be set aside by the insurer, even with the insured's consent. ²³ Insurers have raised this defense in cases involving practically every variety of insurance coverage available, including, but not limited

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to, policies of life insurance, ²⁴ a temporary insurance application and agreement, ²⁵ motor vehicle liability insurance, ²⁶ fire insurance, ²⁷ accident insurance, ²⁸ accident and health insurance, ²⁹ major medical expense insurance, ³⁰ professional liability insurance, ³¹ medical malpractice insurance, ³² disability insurance, ³³ disability income insurance, ³⁴ umbrella insurance, ³⁵ hospitalization insurance, ³⁶ mortgage loan insurance, ³⁷ sprinkler leakage insurance, ³⁸ renter's insurance, ³⁹ general liability insurance, ⁴⁰ the Virginia Automobile Assigned Risk Plan, ⁴¹ and crime insurance. ⁴²

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Section 38.2-309 only applies to applications for an insurance policy and reinstatement applications. ⁴³ Since there are no requirements for such applications to be solely in writing, the statute may apply to insurance applications that are oral, written, or partly oral and partly written. ⁴⁴ Insofar as the application is a mere offer to enter into a contract, the application does not merge into the policy that is ultimately issued, and parol evidence in oral statements made during the application process is admissible on the material misrepresentation issue. ⁴⁵ The statute does not apply outside of the application context to provisions in the policy itself, to statements that the insured may have made to a state agency, or to subsequent increases in hazard by the insured. ⁴⁶

The statute affords protection to the insured that cannot be set aside by the insurer, even with the insured's consent. ⁴⁷ Even though this statute is read into the application, however, the parties are not prohibited from entering into an agreement in the application that is more favorable to the insured. ⁴⁸

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One of the purposes of section 38.2-309, the predecessor ⁴⁹ of which was first enacted in 1919, was to eliminate for all practical purposes the strict enforcement of common law warranties in the context of insurance policies. ⁵⁰ Before the enactment of this predecessor, there was a distinction between warranties and representations. ⁵¹ Warranties were statements that pertained to a particular fact, were deemed to be part of the policy and, if determined to be untrue, operated to void the policy without any analysis of their materiality. Thus, intentional misrepresentations deemed to be warranties could still be a basis for rescission of the policy even if they were not material. Conversely, at common law, representations were not considered to be part of the insurance policy and, under the prior statute, could only serve as a basis for rescission if proven to be both material and either "willfully false" or "fraudulently made." ⁵² By defining all statements made in the application as representations and not warranties, former section 4220 of the Virginia Code modified the common law to require that representations in an application be both untrue and material to the risk assumed before they could be grounds for rescission of a policy. ⁵³ With the enactment of section

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4220 in 1919, it was no longer necessary for the insurer to prove that the insured's representations were willfully false or fraudulently made. ⁵⁴

C. Burden of Proof. Under section 38.2-309, the insurer has the affirmative burden of "clearly" proving that the representations made by the applicant during the application process in the application, medical examiner's reports, and the like were both untrue and material to the risk that would be assumed by the insurer. ⁵⁵

Where the applicant's representations are stated to be true "to the best of your knowledge and belief" or similar language, the insurer's affirmative burden under section 38.2-309 increases to having to "clearly" prove not only that the representations were material to the risk assumed but also that the representations were "knowingly false" as contrasted with simply being untrue. ⁵⁶

In contrast, in the absence of such application language requiring the insurer to prove that the insured knowingly made a false...