A Cautionary Tale For Businesses: Make Sure You Have The Right Insurance Protections In Place

Given the important role that commercial insurance plays in protecting, and sometimes saving, businesses of every size, smart companies pay attention to their insurance applications, insurance policies and other communications from their insurer. The cost of having a competent law firm conduct an audit of a company’s risks and insurance coverage pales in comparison to an expensive lawsuit against an insurance company when a claim is rejected.

An recent case in Alabama provides a good example of the harm that can be caused when policyholders are not careful to make sure they get their insurance coverage right. Late last month, the Alabama Supreme Court issued a verdict that made one thing clear: those who don’t read their insurance-policy applications – and instead rely solely on verbal advice from their insurance agents — run the risk of having their claims denied and their insurance policies cancelled.

Though Alfa Life Insurance Corp. v. Reese, involved a consumer life insurance claim, the lessons apply to commercial insurance policies as well and should be heeded by those charged with purchasing their business’s insurance.

In Alfa v. Reese, the high court of Alabama ruled against a widow who, under advice from her licensed insurance agent, had misrepresented the seriousness of her husband’s medical condition on an insurance application for insurance that was supposed to cover his burial expenses.

In the case, the Alfa Insurance agent knew – and saw first-hand — that the woman’s husband was a diabetic with an amputated leg and advanced kidney failure. The agent nevertheless recommended that Mrs. Reese answer “no” to all the questions on the insurance form asking about diabetes, kidney failure, amputations and other medical conditions from which her husband clearly suffered. The agent apparently knew that answering “yes” to any of them would likely mean the husband would not get approved for the burial policy.

After Mrs. Reese’s husband died, however, Alfa rejected her claims and cancelled her policy for misrepresenting her husband’s condition when she filled out the forms. She sued — alleging bad faith, breach-of-contract and fraud.

Mrs. Reese claimed she was advised by Alfa’s own representatives to put the problematic answers on the application. She argued that her insurance agent’s advice trumped the words written in the policy itself, which stipulated that the policy would be cancelled if policyholders misrepresented anything in it.

Alfa filed a motion for summary judgment and to have the woman’s policy rescinded. The lower court ruled with the insurance company on the bad-faith claim but left in tact the woman’s claims of breach-of-contract and fraud, and denied Alfa’s summary-judgment motion to have the woman’s policy rescinded.

The high court, however, ruled in favor of the insurance company on all counts. In its opinion, the court wrote, “Put simply, there exists no issue for a jury to resolve in this case, because the undisputed evidence shows that [the widow] improperly relied on the agents’ oral representations…without making any attempt to read the insurance-policy application.”

The court also noted that the woman did not question the inconsistencies between what the agent said and what was clearly stated in the policy.

The take away: don’t rely on an insurance agent’s advice. Read your policy application yourself, ask any questions necessary to ensure you understand everything in it, and make sure you can answer truthfully to every question posed.

The insurance lawyers at Shapiro Sher Guinot & Sandler can review your company’s insurance coverage and the risks posed by your line of business, to assist in ensuring that your company can make reasonable and informed decisions about the protections that best suit your company’s needs.

For more information, contact Alex J. Brown, Esq., a partner and the Insurance Group practice leader at Shapiro Sher Guinot & Sandler, at 410-385-4220 or at ajb@shapirosher.com.