Certified Financial Consultant (CFC) Practice Exam

In insurance terms, what is a key aspect of material misrepresentation?

1. Misrepresentation must be intentional

2. It must involve financial loss

3. It affects the outcome of the contract

4. It must be verbal only

The correct answer is: It affects the outcome of the contract

Material misrepresentation in the context of insurance refers to the act of providing false or misleading information that is significant enough to influence an insurer's decision on whether to issue a policy or the terms under which it is issued. When an individual misrepresents details about their health, lifestyle, or prior claims history, it can lead to a misunderstanding of risk from the insurer's perspective. The essence of material misrepresentation lies in its impact on the insurance contract itself. If the misrepresentation is material, it means that it could have altered the insurer's judgments regarding the coverage offered, the premium charged, or even the decision to provide coverage at all. This notion is grounded in the principle of utmost good faith (uberrima fides) that governs insurance contracts, where both parties are expected to disclose all relevant information. A key aspect, therefore, is the effect of such misrepresentation on the outcome of the contract, making it a pivotal element in assessing whether an insurer can deny a claim or rescind a policy. In contrast, aspects such as requiring intentional intent, needing financial loss, or restricting misrepresentation to verbal communication do not capture the core principle behind material misrepresentation in insurance. It can occur in written or oral form and does not necessarily have