Abuse of Material Misrepresentation in Claims
Updated: Jan 17
An alarming trend is returning to Texas non-standard auto insurance, the abuse of material misrepresentation in the denial of claims.
From 2004 - 2008 this was a common practice where the use of material misrepresentation was used for thousands of claims and the majority of carriers and managing general agencies using it as a form of denial did not have an understanding of its application. The general idea is this: Had you truthfully presented the risk at the point of binding we would not have bound the policy, therefore on discovery of misrepresentation of the risk, the claim is denied and the policy rescinded as if to say the policy never existed.
The Texas Department of Insurance investigated the abuse in 2009 and made it abundantly clear to the market place that material misrepresentation should never be used as a defense to a third party claim. The use of material representation returned to contractual law file only to be brought out on rare occasions, involving first party coverage. However, things have changed with new market entries over the last decade.
Last week I spent time with independent agents across Texas. Each month I make time to sit with independents as a form of gratitude for their use of our products and to learn the latest in their experiences which generally reveal market shifts. I was astonished at the number of agents who asked me about claim files denied by competitors. They shared the nature of the loss and then multiple times I heard the words,” material misrep”. In no scenario presented was material misrep used correctly. In the majority of examples given carriers and MGAs were using it to deny claims from unlisted household members.
New MGA entrants are often looking for magic bullets to reduce loss ratio. When Named Driver endorsements were in effect I saw examples of MGAs using misunderstanding or abusing the endo and applying it to mean “people you are related too”, an absolute misuse which created a wealth of issues with Department and consumer groups.
Proving material misrepresentation in court is a difficult task. There are five conditions which must exist for material misrepresentation to be considered as viable use for a denial.
First, a representation must be made. Sounds simple, but some carriers are not even asking the questions for which they are denying the claim. Therefore, the representation was not made. Agents may not have a formal process of questioning and enter the data reputed by the carrier and elements may not be included in the Q&A.
Second, the representation made must be false and the carrier must prove it is false.
Third, the representation must be material to the risk. This means that if the representation had not been made the insurer would not have issued the policy. This does not mean that the insurer would have uprated the policy. So for example if the insured failed to identify a household resident driver it is only material to the risk if the insurer would not have issued the policy with that driver on the policy. If the insurer would have simply uprated the policy, then that representation is not material to the risk.
Fourth, the insurer must have relied on the representation. This means that the representation must have been known by the carrier and of the type that the carrier would have acted upon if known.
Fifth, the claim must have been made with intention of deceiving the carrier. This is where I believe carriers would lose in court in many of the examples I’ve heard and seen from agents most recently.
In the multiple examples shown to me from agents these five elements did not all exist. This is damaging not only to the client and the agent, but the industry as whole and the stigma which already, incorrectly, hovers over non-standard auto insurance. We are a needed and useful economic resource in Texas and I worry greatly about abuses from particular programs. Not only do these programs deceive consumers, but often carriers and reinsurers. Further, once their abuse is discovered it almost always costs all other carriers time and effort with data calls and follow ups.
Agents, carriers, and reinsurers should do their due diligence before this abuse grows further. Agents experiencing the use of this on one of their client’s claims should submit it to the TDI for review and encourage their client to do the same. Denials for misrep and recessions should be rare. Let’s protect our clients and the industry with an awareness and aggressive correction of such abuses.