You are filling out a disability insurance or life insurance application and there is a blank for your “earned income.” Do you include earnings that you had off the books, say for commissions or tips that you did not report?
If you do, it will jack up your total income which will qualify you for a greater amount of coverage. However, when you make a claim, you may find it denied on the grounds that you made a material misrepresentation.
The Appellate Division, First Department held in Naghavi v. New York Life Ins. Co., 260 A.D.2d 252 (1st Dept. 1999) that an insured was bound by the income reported to the IRS in the year he submitted his application, not the higher amount that he listed that included commissions earned but not reported. In the case, the insurance company submitted underwriting guidelines stating no disability policy would be issued to an applicant who earned an annual amount less than $16,000. The insured reported income of $100,000 for the years in question.
The Court noted that the application defined “earned income” in terms of amounts reportable for federal income tax purposes. Beware, however, that even if that definition is not included in an application, an insured who has listed income earned off the books may find himself in hot water when subsequently making a claim.
As a footnote, the decision also upholds the rule in New York that the insurance company is not at fault for negligence of the insurance agent. If the insured told the agent that the income was unreported, and the agent did not communicate that information to the company, the insured must suffer the consequences. In other words, if the insured communicates information to the agent, and it is neither written down or the company does not admit to learning of it, the insured is out of luck.