If an insurer issued a policy based on the application, which of the following best describes the information provided by the applicant?

• A. It is only used for marketing purposes and not for underwriting.
• B. It is not legally binding and can be disregarded by the insurer.
• C. It is considered a warranty and must be absolutely true.
• D. It is considered a representation and must be substantially true.

Answer: (D)

Verified step by step guidance

1. Understand the concept of 'representation' in insurance: In financial accounting and insurance, a representation refers to statements made by the applicant during the application process. These statements are not required to be absolutely true but must be substantially true to the best of the applicant's knowledge.
2. Differentiate between 'representation' and 'warranty': A warranty is a statement that must be absolutely true and is legally binding. In contrast, a representation is not legally binding and does not require absolute truth, only substantial truth.
3. Analyze the options provided: Evaluate each option based on the definition of representation. For example, the option stating 'It is considered a warranty and must be absolutely true' is incorrect because representations do not require absolute truth.
4. Focus on the correct answer: The correct answer is 'It is considered a representation and must be substantially true.' This aligns with the definition of representation in insurance and financial accounting.
5. Conclude the reasoning: The applicant's information is used for underwriting purposes, and while it is not legally binding like a warranty, it must be substantially true to ensure the insurer can assess the risk accurately.