|January 7, 2014|
Previously published on January 6, 2014
Illinois law permits rescission of an insurance policy if, in negotiating for the policy, the insured made an innocent, but material, misrepresentation. As the Illinois Supreme Court said long ago:
The law is well settled, in its application to insurance contracts, that a misrepresentation of a material fact, in reliance upon which a contract of insurance is issued, will avoid the contract, and it is not essential, in equity, that such a misrepresentation should be known to be false. A material misrepresentation, whether made intentionally and knowingly or through mistake and in good faith, will avoid the policy.
U.S. Fid. & Guar. Co. v. First Bank of Dundee, 84 N.E. 670 (Ill. 1908). The Supreme Court has repeated this lesson again, Weinstein v. Metropolitan Life Ins. Co., 60 N.E.2d 207 (Ill. 1945), and again, Campbell v. Prudential Ins. Co., 155 N.E.2d 9 (Ill. 1958), and again, Golden Rule Ins. Co. v. Schwartz, 786 N.E.2d 1010 (Ill. 2003), most recently explaining that under 215 ILCS 5/154, the Insurance Code’s rule of rescission, “a misrepresentation, even if innocently made, can serve as the basis to void a policy.”
Even so, the Appellate Court admittedly has given this law no more than “lip service,” sparing insureds rescission if the misrepresentation, though material, was innocent. Knysak v. Shelter Life Ins. Co., 652 N.E.2d 832 (Ill. App. Ct. 1995). The Appellate Court has done it again, in Illinois State Bar Association Mutual Ins. Co. v. Law Office of Tuzzolino & Terpinas, a case about two law partners. Sam and Will were partners in their law practice, the Law Office. Unbeknownst to Sam, for a year and a half Will led a client to believe that the client’s lawsuit was in progress even though the court had already dismissed it because time ran out before Will filed suit; and when the client learned of his loss, Will offered the client $670,000. Later, the Law Office applied for insurance, representing that neither Will nor Sam was aware of any circumstance that may give rise to a claim against them.
After the client sued the Law Office, Will, and Sam and the insurer learned of these events, the insurer sued to rescind the Law Office’s insurance policy. The trial court ordered rescission, only to have the Appellate Court reverse the rescission as to Sam, because he was innocent of Will’s falsehoods. In the Appellate Court’s eyes, the Insurance Code’s section 154 “favor[s] innocent insureds.”
Section 154 says point blank that a false representation by an insured - or “in [sic] his behalf” - is grounds to avoid the policy if the representation is material, regardless of innocence. Plainly, Will’s possible malpractice was material - he offered hundreds of thousands of dollars to talk the client out of a lawsuit. Even if Will had done it all in his sleep, so that he could honestly say he did not know that his client may sue, the materiality alone justifies rescission. Sam can hardly complain, as the application was made “in his behalf” so that he would benefit from the application’s falsity. However innocent he was, he took Will as his law partner, putting his fortune in Will’s hands.
If Section 154 is to apply as the Supreme Court has instructed, then the Supreme Court ought to review the Appellate Court’s decision.