Colorado Life Producer License Practice Test

What happens if a policyholder misrepresents information during the application process?

1. The policy will always be valid regardless

2. The insurer may void the policy or deny claims

3. The insured receives additional benefits

4. Claims will be faster to process

The correct answer is: The insurer may void the policy or deny claims

When a policyholder misrepresents information during the application process, the insurer has the right to void the policy or deny claims based on that misrepresentation. This stems from the principle of "utmost good faith" in insurance, which obligates both parties—insurer and insured—to be honest and transparent about relevant information. If false information is provided intentionally or unintentionally, it can affect the insurer's ability to assess risk accurately. In the event of a claims submission where misrepresentation is discovered, the insurer may refuse to pay out on that claim, as the terms of the policy were based on the information that was provided during the application process. This also allows the insurer to cancel the policy altogether if they find that the misrepresentations were significant enough to influence their decision to issue the policy in the first place. Offering additional benefits or expediting claims would not be a response to such misrepresentation, as those actions would contradict the obligations of good faith in the insurance contract.