Misrepresentation: Insurance Company Efforts to Avoid Statutory Requirements

Statements in an application for insurance can be considered either representations or warranties. See, e.g., Allstate Ins. Co. v. Boggs, 271 N.E.2d 855, 858 (Ohio 1971). If an allegedly incorrect statement is considered a representation, the insurance company must prove that it is material (or possibly that it was intentionally fraudulent) before it can succeed in a misrepresentation defense or rescission action based on the alleged misrepresentation. See, e.g., Lee R. Russ & Thomas F. Segalla, Couch on Insurance, '81:26 (3d ed. 2007). A statement is material if it affected the insurance company's decision to sell coverage or establish the premium. See, e.g., Mitchell v. United Nat'l Ins. Co., 25 Cal. Rptr. 3d 627, 638 (Ct. App. 2005). If, however, the statement is considered a warranty, the insurance company need only show that the statement was untrue. It need not show that the misstatement was material in order to succeed in defeating coverage. Couch '81:26.

Courts initially upheld the use of warranties under common law, in order to protect insurance companies from the imbalance between their knowledge of facts relevant to the risk insured and the applicant's knowledge. State legislatures, however, became concerned with the 'hardship arising from the strict enforcement at common law of warranties in insurance policies concerning matters having no real or proximate relation to the risk assumed by the insurer.' Cont'l Cas. Co. v. Owen, 131 P. 1084, 1087 (Okla. 1913). As one commentator has noted:

Once the warranty rule was held by the courts to apply to other types of insurance, a profusion of warranties began to pervade insurance policy forms, and many of these were of the most trivial character. The effect of such warranty provisions was increasingly to jeopardize the rights of policyholders, no matter how honest and careful they were. As the use of warranties ' together with the rule requiring literal satisfaction ' was brought to bear on an increasingly large portion of all insured transactions, it led to numerous lawsuits which called upon the courts to consider whether the failure to satisfy what was urged, on behalf of claimants, to be an immaterial warranty should preclude all rights of an insured to coverage. Robert E. Keeton & Alan I. Widiss, Insurance Law: Practitioner's Edition at 564-65 (1988) ('Keeton & Widiss').

Many states passed statutes that converted warranties into misrepresentations by stating that no misstatement would avoid the policy unless it was fraudulently made or material to the risk being insured. See, e.g., Md. Code Pub. Gen. Laws, 1904, art. 23 '196 (cited in Mut. Life Ins. Co. of N.Y. v. Mullen, 69 A. 385, 386 (Md. 1908)). Courts generally read such changes broadly to abrogate the old common law standard and to apply to all statements insurance companies sought to rely on to avoid coverage: '[b]eing remedial, [the statute's] manifest purpose to redress the wrong and advance the remedy should not be frittered away by any technical criticism.' Hartford Life Ins. Co. v. Stalling, 72 S.W. 960, 961 (Tenn. 1903); see also Penn. Mut. Life Ins. Co. v. Mechanics' Sav. Bank & Trust Co., 72 F. 413, 437-38 (6th Cir. 1896).