There are instances where there may be a material misrepresentation but not made intentionally and to such a degree that it would result in a claim being fairly rejected in totality. It basically means that the premium paid by the insured client was not at the correct amount based on all the material facts needed to calculate the risk. This can be best explained with reference to an actual example adjudicated by the Ombudsman for Short Term Insurance.
Facts of the Car Insurance Claim: Learner Driver as Regular Driver
Mr. D contacted the insurer to insure a vehicle which he had just purchased. During the underwriting of the policy, Mr. D informed the operator that he had purchased the vehicle for his daughter, Ms. L, who was only in possession of a valid learner’s license at the time of the call. Mr. D also informed the operator that Ms. L was scheduled to take her driver’s license test approximately one month thereafter.
The insurer required the details of the regular driver to underwrite the risk and could only list a driver with a valid driver’s license. The operator inquired whether Mr. D would be the regular driver until the daughter obtained her license.
He confirmed that he would be. The operator advised Mr. D that he would need to call the insurer once his daughter became the regular driver as the premium would then be calculated based on his daughter’s risk profile. Mr. D agreed and the policy incepted.
Ms. L obtained her driver’s license approximately one month after the inception of the policy. However, Mr. D failed to inform the insurer that she had become the regular driver. Ms. L was involved in an accident approximately six months after she had become the regular driver.
The insurer repudiated the claim on the ground that there was a material change in risk. The insurer advised that it would have charged a higher premium had Ms. L been noted as the regular driver.
Accordingly, as a result of the lower premium that was paid, the insurer suffered prejudice in the premium that it had received.
In the Ombudsman’s view, there was no evidence that Mr. D intentionally failed to inform the insurer that Ms. L had become the regular driver.
The fact that he had disclosed, during the underwriting call, that the vehicle was bought for Ms. L and that she would be the regular driver once she obtained her driver’s license, was evidence that Mr. D did not intend to misrepresent this information in order to pay a lower premium. basis.
Based on the jurisdiction of the office to apply equity, where appropriate, the Ombudsman made a recommendation for the claim to be settled proportionately. The insurer, after much deliberation, agreed to settle the claim on that basis.
A proportionate settlement is where the insurer settles a claim in proportion to the percentage of the premium received in relation to the premium that should have been received. For example, if the insurer only received 50% of what the premium should have been with the correct risk noted, 50% of the claim will then be settled.
— Arrive Alive (@_ArriveAlive) February 9, 2017