Rescission Available to Insurer Whose Insured Lied in Insurance Application About Use of Experimental Weight Loss Techniques

In Essex Insurance Company v. Galilee Medical Center S.C d/b/a MRI Lincoln Imaging Center, the insured, Galilee, represented to its insurer, Essex, that it did not offer any weight loss drugs to its patients. After a former patient brought suit against Galilee based on complications from injections of a weight loss drug, Essex sought to rescind its policy. The Seventh Circuit Court upheld summary judgment granted to Essex, finding that false statements made by Galilee provided a basis for rescission.

Galilee, a Delaware corporation that provides medical services in Chicago, IL obtained from Essex a Professional Liability policy that provided coverage for any act, error, or omission in Galilee’s professional services. The Essex policy also provided coverage for Galilee’s physicians while working for Galilee.

To obtain the policy, Galilee and its physicians filled out applications upon which Essex relied when issuing the policy. Specifically, the application asked “Do the Applicant’s employees or independent contractors use drugs for weight reduction for patients?” Galilee answered the question in the negative and provided no information in response to the second part of the question, which stated that if the applicant had had answered yes, it was to attach a list of the drugs used and the percentage of its practice devoted to weight reduction. Galilee also answered “no” to a question inquiring whether its employees or independent contractors performed any experimental procedures. Likewise, the Galilee physician that administered the injection question answered “no” to the following questions:

5. With the exception of surgery for obesity, does your practice include weight reduction or control by other than [sic] diet or exercise?

5.(b) Do you dispense any drugs?

5.(c) Do you use injections for weight control?

9.(a) Do you use experimental procedures, devices, drugs, or therapy in treatment or surgery?

In June 2011, a former patient of the Galilee physician brought an action for negligence based on treatments she received for injections into subcutaneous layers of fat that was intended to dissolve the fat. The patient claimed that developed painful, infected, blister-like granulomas after the injection. The physician admitted to providing such therapy to over 5,000 patients.

Galilee sought coverage for the claim under the Essex Policy and Essex denied coverage and filed a declaratory judgment action, seeking rescission of the policy based on the answers given by Galilee and its physician in the insurance application, which Essex claimed were materially false. Essex filed a motion for summary judgment on March 22, 2013 and the District Court granted the motion. Galilee appealed.

The Seventh Circuit noted that under Illinois law, insurers may deny coverage and rescind a policy if a statement in the insurance application is false and the false statement was either made with intent to deceive the insurer or if it materially affects the insurer’s acceptance of the risk. The Seventh Circuit  found that due to Galilee’s failure to disclose on its application information related to administering and recommending weight reduction procedures with experimental drugs, Essex was not able to correctly price the policy it issued to Galilee based on the risk it was actually undertaking. Accordingly, the Seventh Circuit affirmed the District Court’s order because it found that Galilee’s misrepresentations were material and warranted rescission of the policy.