Legal Definitions - knowledge-of-falsity exclusion

A knowledge-of-falsity exclusion is a specific clause found in certain types of insurance policies, particularly professional liability (Errors & Omissions) and directors and officers (D&O) insurance. This exclusion states that the insurance policy will not provide coverage for claims or losses that arise from an act where the insured party knew they were making a false statement or misrepresenting a material fact at the time they made it.

In essence, if an insured individual or entity intentionally provides false information, knowing it to be untrue, and a claim is subsequently made against them related to that false information, the insurer can deny coverage based on this exclusion. It aims to prevent coverage for deliberate deceit or fraud rather than genuine mistakes or negligence.

• Example 1: Corporate Misrepresentation

  A pharmaceutical company's CEO, aware that a new drug has not successfully passed all required safety trials, publicly announces that the drug is "fully approved and safe for immediate use" to boost stock prices. When the truth about the drug's incomplete trials and potential side effects comes to light, shareholders sue the CEO and the company's board for misleading them. The company's Directors & Officers (D&O) insurance policy would likely invoke the knowledge-of-falsity exclusion. This is because the CEO *knew* their public statement about the drug's approval and safety was false when they made it, and the lawsuit directly stems from that intentional misrepresentation. Consequently, the D&O policy would not cover the CEO's legal defense costs or any resulting damages.

• Example 2: Professional Advice

  An independent financial advisor recommends a highly speculative investment fund to a client, assuring them it's a "low-risk, guaranteed return" opportunity, even though the advisor *knows* the fund carries significant risk and is unsuitable for the client's conservative investment goals. The advisor makes this false claim to earn a higher commission. When the client loses a substantial amount of money and sues the advisor for negligent advice and misrepresentation, the advisor's professional liability (Errors & Omissions) insurance policy would likely apply the knowledge-of-falsity exclusion. The insurer would deny coverage because the claim arose from the advisor's deliberate and known false statement regarding the investment's risk profile.

• Example 3: Contractual Obligations

  A software development firm bids for a major government contract, falsely stating in its proposal that it has a team of 50 certified cybersecurity experts on staff, when in reality, it only employs 10. The firm *knows* this statement is untrue but believes it will help secure the contract. After winning the contract, a critical security breach occurs, and an investigation reveals the firm's actual staffing levels, leading the government to sue for breach of contract and misrepresentation. The firm's professional liability insurance would likely deny coverage for the lawsuit under the knowledge-of-falsity exclusion, as the claim originated from the firm's intentional and known false statement made during the contract bidding process.