Contractors may not realize that an incorrect statement on their insurance application, be it a misrepresentation, an omission, a concealment or an innocent error, may cause an insurance company to deny issuance of a policy, cancel cover­age on an issued policy and even withdraw a settlement determination on a loss claim. Indeed, some states have laws that specifically provide insurance companies with this right.

According to Michael Spence at ReSource Pro, there are an average of nine mistakes in each policy they review. Spence asserts that the three most common errors are:

1. Incorrect location: wrong city, zip code, state or address;
2. Wrong limits: inadequate, incomplete or rushed assessment of the perils involved; and
3. Erroneous exposures: coverages may not be what was intended or purchased.

For example, potential insureds seeking coverage were given an application to fill out. The application required them to indicate if they had filed any claims of loss within the past five years. They actually had filed such claims but did not disclose this fact. They had two earlier loss claims registered with their prior insurance carrier and had collected payments on those claims.

It got worse. Suffering some damage from a recent storm, the insured filed a new claim for water and roof damage. The carrier accepted coverage and issued payment on the claim. The insured disputed the amount being paid and sued. This proved to be a stupid mistake. The insurance company further investigated the claim and discovered that the insured had left out crucial information on their initial application. Their policy was rescinded and coverage denied.

Such a misrepresentation, even if not fraudulently or knowingly made, is sufficient to cancel coverage. Why? The carrier has underwritten and priced the policy based on what it understood were correct and truthful answers to its inquiries. When that isn't the case, the exposure and coverage risks to the carrier can be vastly different.

Another more troubling example is that of an insured not realizing a prior minor conviction could adversely impact insurance coverage. A property owner ticked off the “no” box in response to whether he had ever been convicted. After all there had been no police involved, no arrest and the minor illegal incident occurred years ago. But the insurance company had a different take: When the insured hadn’t answered the question fully and truthfully, he didn’t allow the insurance company the opportunity to properly underwrite the risk of providing this insurance coverage, and this was more than sufficient to cancel coverage—a disappointing but understandable result.

What happens if an agent is the one who makes the mistake on an insurance application documentation? The contractor will likely still lose coverage or have your policy rescinded. But it has an avenue for relief: Insurance agent negligence is a very real cause of action and can provide some resolution in the form of monetary compensation for the damages the contractor suffers.

All this means is contractors must review the accuracy of the insurance documentation submitted on its behalf to any carrier—or pay a heavy price.