How Does Honesty Apply To Insurance?


This is a subject that has been debated over the years many times. In essence, honesty is one of the bedrocks of the insurance product. Without an honest insured, it is very difficult for an insurance company to adequately assess the risk that they might be asked to cover. Insurance is the spreading of the cost of a claim over larger groups of similar types of risks, so that no one person/entity, needs to shoulder the whole claim. If an insurer cannot rely upon the honesty of the insureds to say when they have exposure to a given risk then the spreading of such risks and related costs is flawed.


One of the most difficult underwriting functions is to try to underwrite against what, in the insurance industry we call; “the moral hazard”.  This means that most insurance policies are designed in some manner to make; the identification, measurement, or incidence of a claim against an insurance policy, something that can be objectively measured. A moral hazard exists when a potential insured has the ability, the opportunity, the means, and the motive to create a claim against the insurance company, where one did not happen as an accident, independently. An example of such a situation is where; a business with severe financial problems all of a sudden has a claim that the business has burned down. An underwriter needs to know the type of business to be underwritten and the health of the business in order to determine if there is any moral hazard in the coverage offered.


A life insurance policy issued to a person who had misrepresented their health is another problem of moral hazard or honesty. The underwriter relies upon the honesty of the insured in disclosing all the potential risks to the person’s health so that the underwriter can make a proper assessment of the risk. In some cases, underwriters use independent evaluations of health in order to make that assessment, in others, underwriters exclude coverage for ailments they feel might be undisclosed. The insurance company is in the business of providing coverage for accidents yet to happen, not those known but not disclosed.


It is always a good idea to be honest in your applications for insurance. While this is a valuable concept for managing your life in any event, in insurance applications, it is especially important as you may not know that a small lie is working against you.  For example, a professional who indicates in his/her professional liability insurance application that they know of no potential claims, may find that the insurance company later can prove that they did know. If the insurance company can prove that the insured lied on the insurance application, they can void the coverage as to that lie and perhaps the whole policy. The insured might think that they were covered for a given claim when all along they were not.


Unfortunately, in today’s world, the underwriters have had to learn the hard way that they need to always consider the potential for untruths. Accordingly, they have words in the policies that guard against the resulting fraudulent claims.


Sometimes insurance seems unfair because claims are not covered. Or it is difficult to obtain insurance. Many times people do not realize that insurance is not available once you have the accident; it is only available for purchase before the accident happens. People confuse insurance with government. Government sometimes feels the need to try to fix accidents and catastrophes after they happen, but insurance companies are only obligated after the fact, if you pay take out the policy before.


There is an area where insurers make mistakes and benefit of the doubt goes to the insured. In poorly worded policies or insurance applications, the insured is not expected to be an expert in insurance.  So if you answer a question honestly, and the question was poorly constructed or the available answers were badly presented, then you cannot be expected to try to correct insurance company mistakes. In those cases the poorly worded policy or application runs in favor of the insured, as long as the insured was honest in his/her response.


Remember to be honest on your insurance applications.  If you have questions of coverage call the company, or ask your insurance agent. Many times frequently asked questions are answered on the company website.



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