Kreisman Law Offices Professional Corporation
The Illinois Supreme Court has reversed the Illinois Appellate Court in a case centering on an application for legal malpractice insurance. In this case, one of the partners of the law firm of Tuzzolino and Terpinas (T&T) filled out a renewal form for legal malpractice with ISBA Mutual for himself and for the firm. In the application, he was asked whether there were any circumstances that would give rise to an unreported legal malpractice claim. The attorney who filled out the form answered “no.” In fact, a legal malpractice claim had already been brought against one of the firm’s attorneys, Mr. Tuzzolino, but was not yet reported to the firm’s
insurer.
The attorney who filled out the form, Mr. Terpinas, did not sign his name to the form. He claimed to have become aware of the claim against Mr. Tuzzolino about a month later and then reported the claim to ISBA Mutual.
As ISBA was then on notice of the claim and the errant application form, it filed a lawsuit for rescission of the insurance policy in March 2009. There were cross-motions for summary judgment filed and the trial court granted ISBA’s motion for summary judgment. The trial judge found that ISBA was entitled to rescission of the policy in its entirety and that it had no duty to defend Terpinas or the law firm because of the errantly completed form.
An appeal was taken to the Illinois Appellate Court, which reversed the trial judge. That court held that the innocent-insured doctrine preserved Terpinas’s coverage (he was the innocent one) even though Tuzzolino’s coverage was properly rescinded. ISBA then appealed to the Illinois Supreme Court, which reversed the Illinois Appellate Court.
Section 154 of the Insurance Code, 215 ILCS 5/154, sets out the circumstances in which an insurer may rescind the insurance contract. The circumstances include a statement made on the application that is false and/or materially affect the acceptance of the risk assumed by the insurer.
Justice Charles E. Freeman set forth in his Illinois Supreme Court opinion that a representation, even if innocently made, can serve to void a policy and that intent to deceive is not necessary. There is no dispute in this case that the misrepresentation on the application materially affected acceptance of the risk.
The defendants argued that Section 154 is in conflict with Illinois public policy and it should not be used as a sword to vitiate insurance coverage. The defendants argued that the appellate court was right in applying the innocent-insured doctrine to protect the interest of attorney Terpinas.
Justice Freeman disagreed when he observed that the case law authority in which the appellate court relied for the innocent-insured doctrine, Economy Fire & Casualty v. Warren, 71 Ill.App.3d 625 (1979) did not involve rescission of an insurance policy under Section 154. That case involved the rescission of a settlement agreement between an insured and an insurer when one of the insured’s misrepresented facts that led to the settlement.
Justice Freeman concluded that the appellate court was wrong in applying the doctrine in this case.
In addition, Justice Freeman pointed out that the appellate court was in error in partially severing the policy to facilitate application of the innocent-insured doctrine pursuant to the ISBA policy’s severability clause.
The Supreme Court said that even if the legal malpractice insurance policy was treated differently for each of the attorneys insured, there was nothing in to permit the application, or the misrepresentation it contained, to be split off from any individual contract.
Justice Freeman acknowledged that the law of rescission puts the parties back in the same place they were before the misrepresentation or contract took place. In other words, the parties have restored to the status quo. This could happen in an insurance policy case where the insurer refunds the premium it received. ISBA did that here. That was the restoration of the status quo ante but it was impossible to do that not because of the parties seeking rescission, but because such restoration may not be required by law.
There was an argument raised by the defendants that the application was nothing more than a renewal form. The court disagreed. There was one dissent by Justice Kilbride who maintained that the innocent-insured doctrine should be applied because Terpinas had reasonable expectation of continuing insurance overage.
Accordingly, the Illinois Supreme Court reversed the Illinois Appellate Court’s decision allowing rescission. The court found that the Illinois Insurance Code, Section 154, does not require an intent to deceive and may give rise to an insurer to rescind based on an innocent, but material misrepresentation in an application.
Kreisman Law Offices has been handling catastrophic injury cases, commercial litigation, business disputes, and medical malpractice cases for individuals, families and businesses for more than 38 years in and around Chicago, Cook County and its surrounding areas, including Schaumburg, Riverside, Bannockburn, Berwyn, Calumet City, Deerfield, Evergreen Park, Elk Grove village, Flossmoor, Gurnee, Homewood, Highwood, Itasca, Joliet, Chicago (Kenwood, Canaryville, Bridgeport), Lockport and Markham, Ill.
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