(Article from Insurance Law Alert, March 2015)
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The Illinois Supreme Court ruled that the "innocent insured" doctrine does not preclude an insurer from rescinding a policy based on misrepresentations in the policy application. Illinois State Bar Assoc. Mut. Ins. Co. v. Law Office of Tuzzolino and Terpinas, No. 117096 (Ill. Feb. 20, 2015).
A law firm was insured by the Illinois State Bar Association Mutual Insurance Company ("ISBA"). In a renewal application for the policy, Sam Tuzzolino (a member of the law firm) had represented that the firm was not aware of any circumstances that could give rise to a claim, when in fact he had recently attempted to settle potential malpractice claims. When ISBA learned of this information, it sought to rescind the policy. An Illinois circuit court granted ISBA’s summary judgment motion, ruling that rescission was proper and that ISBA had no duty to defend an underlying malpractice suit against the firm, Tuzzolino, and Will Terpinas, another member of the law firm who had not participated in the preparation of the policy. Terpinas appealed, arguing that he was an "innocent insured" with respect to the misrepresentation. An appellate court agreed, and held that the policy should not be rescinded as to that attorney. The Illinois Supreme Court reversed.
Illinois statutory law permits rescission if a statement made in the application is false and either (1) made with actual intent to deceive or (2) materially affects the risk assumed by the insurer. See Ill. Ins. Code 215 ILCS 5/154. Terpinas did not dispute that the misrepresentations at issue were material, but argued that Section 215 rescission was barred by a "common law innocent insured doctrine." The Illinois Supreme Court disagreed. The court held that the doctrine is limited to cases in which an innocent insured seeks to recover under a policy notwithstanding application of a policy exclusion (usually relating to intentional or wrongful acts) as to other insureds. The court explained that "the rationale for applying the innocent insured doctrine to questions of policy exclusions and insurance coverage is absent from the rescission context." Although an insured’s innocence is relevant to whether an intentional acts exclusion applies, it is irrelevant to the rescission analysis because Section 215 allows rescission as to innocent insureds so long as the misrepresentation was material.
The court also rejected Terpinas’ assertion that a severability clause allowed for partial rescission, reasoning that although the clause creates a "separate agreement for each insured," it does not "permit the application— or the misrepresentations it contains—to be split off from any individual contract."
Three other courts have also recently allowed insurers to rescind policies based on misrepresentations in policy applications. See Maryland Cas. Co. v. Malone, 2015 WL 1088105 (N.D. Ga. Mar. 11, 2015) (rescission of liability policy proper because misrepresentations in application were false and material as a matter of law); Catlin (Syndicate 2003) at Lloyd’s v. San Juan Towing & Marine Servs., Inc., 778 F.3d 69 (1st Cir. 2015) (marine policy voidable under uberrimae fidei doctrine, which requires insured to make full disclosure of all material facts); Morales v. Castlepoint Ins. Co., 2015 WL 775007 (N.Y. App. Div. 2d Dep’t Feb. 25, 2015) (property policy void as a result of material misrepresentation in application, even if made without policyholder’s authority, because policyholder ratified representations by accepting and renewing policy).