A Warning to Policyholders About the Vital Role of Disclosure During the Insurance Application Process: Tell the Truth or Face the Consequences

I often get calls about denied claims that are sadly dead on arrival. Most of the time, it is when a claim is denied because a material misrepresentation was made when filling out the application. For policyholders, the recent unpublished Ninth U.S. Circuit Court of Appeals decision out of California, Evanston Insurance Company v. Footprints Behavioral Interventions, Inc., 1 serves as a powerful reminder: honesty is not just the best policy, it is crucial when dealing with insurance applications.

The Case Overview

Footprints Behavioral Interventions, Inc. (“Footprints”), a company that offers in-home educational services to children with autism, faced a major issue when it failed to disclose the potential for a lawsuit on its insurance renewal form. This led to the nullification of their insurance coverage. The case centered around the criminal actions of a former employee, Abigail Kim, who was convicted of serious crimes against a client. The company did not reveal this situation, which was seen as a material misrepresentation. The exact question Footprints answered “no” to was: “Are you aware of any circumstances which may result in a malpractice claim or suit being made or brought against you or any of your employees?” In agreeing with the trial court, the appellate court found no reasonable jury could conclude that Footprints was unaware of the circumstances that might result in a malpractice claim being brought against it.

Despite Footprints’ argument that the lawsuit was not a malpractice claim but rather a claim against it for battery and related torts, the court ruled that failing to disclose the potential for any claim was significant enough to void the insurance policy. This meant that Evanston Insurance Company was not obligated to defend them when a claim was made against them after the policy went into effect.

This case highlights several critical points:

• Material Misrepresentation: Not disclosing key facts can lead to your policy being canceled. For Footprints, not mentioning a potential lawsuit tied to a former employee’s criminal actions was enough to void their policy.
• Scope of Disclosure: Insurance applications often ask about potential claims. This includes anything that could lead to a claim, even if it’s not directly related. Footprints did not see how an employee’s criminal actions could lead to liability, but the trial court did.
• For Homeowners and Business Owners: Insurers rely on the truthfulness of your application. Failing to disclose prior claims or potential risks can result in denied coverage when you need it most, even if the liability claim made against you is unrelated to your separate property loss.
• Legal Consequences: This case shows that courts will strictly enforce the terms of the insurance policy. Ambiguities may still be ruled against you if it’s clear you didn’t disclose material facts.

To avoid issues like those faced by Footprints, homeowners and business owners should:

• Be Thorough and Honest: Disclose all relevant information truthfully on your insurance applications, including prior claims and potential risks – like prior losses or claims – if inquiries are made.
• Understand Policy Terms: Contact an attorney if you are unsure what constitutes a material misrepresentation and the scope of required disclosures.
• Document Everything as Best as Reasonably Possible: Keep detailed records of all claims and communications with your insurance company.

Dissenting Opinion

It is notable that one of the judges did offer a dissenting opinion. He believed there was a factual issue about whether Footprints misrepresented its knowledge of potential claims. He noted that the application specifically mentioned malpractice claims, while the actual lawsuit involved different torts. He believed this ambiguity deserved further examination rather than summary judgment.