Mississippi Property & Casualty Practice Exam

What can be a consequence of misrepresentation on an insurance application?

1. Increased premium costs

2. Denial of coverage

3. Automatic policy approval

4. Lower deductibles

The correct answer is: Denial of coverage

Misrepresentation on an insurance application can lead to denial of coverage because insurers rely on the accuracy and honesty of the information provided to assess risk. When an applicant provides false information, whether intentionally or unintentionally, it can create a significant discrepancy between the insurer's understanding of the risk being underwritten and the actual risk. If the insurer discovers that there has been a misrepresentation, particularly if it relates to a material fact (for example, previous claims history or the actual condition of the property being insured), they may choose to deny a claim or void the policy altogether. This is critical in maintaining the integrity of the underwriting process; insurers need to know who they are insuring and the associated risks. Misrepresentations can lead to a situation where the insurer has not been adequately informed of risks associated with the policyholder, impacting both the insurer's financial stability and the fairness of premium pricing for all insured parties.