Misrepresentation involves making a false statement of fact to another party, which causes the other party to act or fail to act in reliance on the statement made.
There are three different types of misrepresentation. They are:
Fraudulent misrepresentation occurs when someone intentionally misstates a fact in order to induce another to act or fail to act. The party making the statement knows it to be false and intends to deceive or mislead the other party for their own benefit.
A very simple example of fraudulent misrepresentation by any professional offering services to another is when the professional knowingly overstates his/her credentials and/or experience in order to secure a new customer/client. If fraudulent misrepresentation is used to get a contract signed, the contract can be voided in its entirety when the fraudulent misrepresentation is discovered.
Negligent misrepresentation occurs when someone makes a false statement they had no reason to believe was true in order to induce another to act or fail to act. The party making the negligent misrepresentation does not know the statement is false, and does not intend to deceive the other party – but they also have no basis to believe the statement is factual or true.
If the party making the statement is a professional, has a higher duty of care due to being a professional, and is presumed to “know better,” then they can be liable for damages incurred due to the other party relying on the statement.
An example of a negligent misrepresentation might be a situation where a real estate broker knows a client wants to live in a quiet neighborhood, yet fails to research any noise sources in the neighborhood. If he or she tells the client a neighborhood is quiet, only to learn later the home next door is about to be demolished and months of noisy, new construction is about to begin, he or she would be at high risk for negligent misrepresentation.
Innocent misrepresentation occurs when someone makes a statement to another that they believe at the time the statement is made is true, but is later learned to be false. The party making the statement does not intend to deceive or mislead the party the statement is made to, nor does the maker of the statement usually have any duty to research or investigate the accuracy of the statement prior to making it.
An example of an innocent misrepresentation is when a seller tells a buyer that a computer being sold is “good as new” and has no knowledge this particular computer model has been discontinued and is no longer being updated or serviced.
The penalty for this kind of legal misstep are dependent upon the circumstances, which type of misrepresentation has been made, and the consequences of the reliance on the misrepresentation.
The party asserting misrepresentation may request relief ranging from simply rescinding the contract/agreement made all the way up to actual monetary damages, including special damages and attorney fees. The greater the duty the party has to their client or customer, the greater the consequences can be for making even an innocent misrepresentation.
It depends on what type of misrepresentation was made, why it was made, and what damages resulted from the misrepresentation. Generally speaking, E&O policies will provide coverage for negligent or innocent misrepresentation, but will not provide any coverage for fraudulent misrepresentations. As a professional, remember your duty to your customer/client may be much higher and therefore, the consequences of even the most innocent of misrepresentations can be very serious and very costly.