Hawaii Insurance Adjuster License Practice Exam

What is the typical consequence of an insured knowingly omitting a material fact in an insurance application?

1. Policy cancellation

2. Reduced premiums

3. Immediate coverage

4. Delayed payment

The correct answer is: Policy cancellation

When an insured knowingly omits a material fact in an insurance application, the typical consequence is policy cancellation. This is primarily because insurance contracts are based on the principle of utmost good faith, requiring both parties to disclose relevant information. When a material fact is omitted intentionally, it undermines the foundation of trust essential for the insurance contract. If the insurance company discovers that significant information was withheld, it may determine that the risk it agreed to cover has changed or that the terms under which coverage was granted would not have been accepted initially. As a result, the insurer has the right to cancel the policy as a means of protecting its interests and the integrity of the underwriting process. Other potential outcomes, such as reduced premiums, immediate coverage, or delayed payments, do not typically arise from the knowingly omitted material fact and do not align with the established principles of insurance law regarding misrepresentation and non-disclosure. It is crucial for applicants to provide complete and truthful information to avoid severe repercussions like cancellation, which is a direct response to the breach of the duty to disclose.