Navigating Disclosure Requirements When Applying for Insurance
Applying for liability insurance can be a time-consuming and tedious task for even the most experienced of policyholders. Insurance applications and related submissions should be carefully completed lest an inadvertent mistake or omission encourage insurers to deny coverage later.
One potential pitfall in the application process relates to disclosure of potential claims that might arise in the future.
For example, certain insurance applications may ask if the policyholder has “knowledge or information of any act, error or omission which might reasonably be expected to give rise to a claim?” If yes, the application often requests disclosure of that information as part of the application.
Similarly, under certain circumstances, an insurer might ask the policyholder to sign a “warranty letter” that includes language such as the following: “No Proposed Insured has knowledge of any act, error, omission or circumstance which would lead a reasonable person to suspect that such Potential Exposure might give rise to a Claim under the Proposed Coverage, except as detailed in the attached.”
The risk with these types of requests is that they are inherently vague and ambiguous. Theoretically, any act, error, omission or circumstance “might give rise to a claim” over time. This vagueness leaves the policyholder without clear guidance as to what information the policyholder should disclose.
Further, the policyholder’s decision whether or not to disclose certain information may impact coverage for future claims. If certain facts are disclosed, the insurer might add an endorsement to the policy expressly excluding coverage for any claim related to the disclosed information.
The risk with these types of requests is that they are inherently vague and ambiguous. Theoretically, any act, error, omission or circumstance “might give rise to a claim” over time.
On the other hand, if the relevant facts are not disclosed, and a claim eventually arises that is related to those facts, the insurer may argue that the policyholder failed to disclose material facts in applying for the policy and therefore forfeits coverage for any claim related to those facts.
Even worse, the insurer may contend that the failure to disclose warrants the loss of coverage for any claim under the policy — whether or not tied to the non-disclosed facts — for any policyholder with knowledge of those facts.
In light of these perils, what is a prospective policyholder to do? Policyholders can employ several strategies to help minimize the risk of losing coverage:
- Review all insurance applications carefully to understand the scope of the information requested. Ask your insurance broker if they have other applications that use more precise wording.
- If the insurer requests that you sign a warranty letter, consult with your broker or coverage counsel about negotiating the specific terms of that letter. Consider proposing more precise language that provides a clearer disclosure obligation (e.g., disclosure of facts the policyholder “believes will give rise to a claim in the future.”)
- Once the language of the final application and any warranty letter is confirmed, consult with counsel to identify known and unknown claims and consider what information needs to be disclosed during the application process.