Written by Gary Reinhardt, Esq.
In Virginia, a material misrepresentation in an insurance application may render the insurance policy voidable. Who is an “applicant” is a question that an insurer must answer, particularly with small businesses set up as LLCs or corporations.
In Jeb Stuart Auction Services, LLC v. West American Ins. Co., 122 F.Supp.3d 479 (W.D. Va. 2015), the Court ruled on who was the “applicant” when an individual completed an insurance application for an LLC. The person completing the application previously had been convicted of insurance fraud. The insurance application asked, “Has any applicant been indicted for or convicted of any degree of the crime of fraud . . .” The individual completing the application on behalf of the LLC answered “No” to this question. The individual then signed the application at the “Applicant Signature” location.
Following a fire, the insurer voided the policy and denied coverage, claiming that the individual’s “No” answer to the fraud question amounted to a material misrepresentation in the application. The insured countered that the individual was not the “applicant.” Instead, the LLC was the “applicant” and the LLC had not been convicted of fraud, the LLC had not materially misrepresented facts on the application and, therefore, the LLC had coverage for the fire.
The insurer responded that an LLC obviously cannot complete an application and must speak through its members. Further, in order to assess risk, the application must seek information about the party or parties that make up an LLC. The insurer argued that the failure to disclose the fraud conviction voided the policy.
The Court sided with the LLC, finding that “The term ‘applicant’ is not ambiguous. It refers only to the party applying for insurance. In reaching this conclusion, one need look no further than the Application itself.” Jeb Stuart, 122 F. Supp. 3d at 483. The Court then quoted several parts of the application and the dec page showing where the LLC, not the individual, was the “applicant.” To further prove its point, the Court then went to the dictionary, quoting the definition that an “applicant” “requests something,” in this case insurance. The LLC needed the insurance, not the individual completing the application on behalf of the LLC.
Finally, the Court pointed out that a corporation is a legal entity separate and apart from the individual that forms it. Had the insurer wanted different information about the LLC members or the person completing the application on behalf of the LLC, the insurer should have asked those specific questions instead of asking about just the “applicant.”
Often, individuals look to the tax and liability protections of corporations like LLCs when operating small businesses. Applications need to adjust and request information not only about the “applicant” but the officers and/or directors of these small businesses to ensure that underwriting gets all the information necessary to make an informed choice.