Insurers Beware: The Illinois Department of Insurance Issued a Notice of Proposed Rule Regarding Knowledge of Misrepresentations and False Warranties

In August, the Illinois Department of Insurance (DOI) proposed its second rule on misrepresentations and false warranties in less than two years. Citing various concerns, the DOI withdrew its December 2014 proposed rule nearly a year ago, in October 2015. The impetus for the new proposed rule appears to be the DOI’s perception that insurers are not considering “readily available information” before seeking to rescind insurance policies.

The new proposed rule on misrepresentations would be promulgated as Ill. Admin. Code tit. 50, § 941.20. Section 941.20 provides:

If the company opts not to obtain readily available information for named insureds and drivers provided by the applicant at the time of application to underwrite the risk prior to issuing the policy, the company shall not defeat, avoid or rescind the policy of insurance based on obtaining the readily available information after a loss has occurred or a claim is filed. Readily available information is defined to be limited to the information that appears on the motor vehicle record (MVR) maintained by the Illinois Secretary of State and LexisNexis Comprehensive Loss Underwriting Exchange (C.L.U.E.) Auto Reports or the corresponding subsequent equivalent.

In contrast to its December 2014 proposed rule, the DOI’s most recent proposal clearly dictates the time frame the company has to uncover “readily available information for named insureds and drivers.” The failure to do so at the time of application puts the company at risk of losing the right to later rescind the policy based on information available at the time of application.

Insurance companies writing insurance policies in Illinois should monitor this proposed rule and consider submitting a comment. First, the phrase, “readily available information,” is inherently vague. Second, it is unclear whether this proposed rule applies solely to auto insurance policies. Please know that October 10, 2016 is the deadline for interested persons to comment on the DOI’s proposed rulemaking.

Even if the rule is adopted, however, it is just that for now — an agency rulemaking. It would not immediately apply in civil proceedings. Nevertheless, it would not be surprising for an Illinois court to defer to the DOI and require insurers confronted with a material misrepresentation to be held responsible for not only the information in its possession, but also “readily available information.” If this rule were codified in Section 154 of the Illinois Insurance Code (215 ILCS 5/154) or judicially adopted in civil proceedings, insurers certainly will be faced with estoppel and waiver defenses with increased frequency and ferocity. That would make seeking rescission a more expensive and discovery-intensive proposition.