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Null and Void

Withholding the truth may cost you your policy.

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This story appears in the February 2004 issue of Entrepreneur. Subscribe »

It's a technique often used in relationships to deal withsomething unpleasant: Let's just pretend it never happened. Butdid you know your insurance carrier could do that, too? It'scalled rescission. "By definition, rescission is voiding thepolicy at its inception," says attorney Lance A. LaBelle, apartner with the law firm Berger Kahn in Irvine, California. "Thecarrier takes back the policy and returns the premiums to theinsured. In effect, it's canceling the coverage as if it neverexisted."

Insurers can rescind policies if they determine amisrepresentation was made on the application, and that had theinformation provided been true and complete, the policy would nothave been issued or would have been issued under different terms.LaBelle says the laws governing rescission vary by state.Typically, rescission arises when a loss occurs, and in the courseof adjusting the claim, the carrier uncovers information indicatinga misrepresentation on the part of the insured. Rescission can bedevastating if it happens when a large claim is pending.

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