Law Firm’s Policy Rescinded For Misrepresentation in Application

The Supreme Court of Illinois held that the insurer was entitled to rescind a law firm’s malpractice policy based on material misrepresentations in the firm’s renewal application. The main issue in this case was whether the policy could be rescinded despite one of the firm’s attorneys being unaware of the misrepresentation.

The appellate court had ruled that, under the innocent insured doctrine, the insurer was required to maintain coverage for the innocent partner despite the misrepresentation on the application when renewing the policy. This court reversed the appellate court, holding that the innocent insured doctrine was not applicable to rescission actions. The court noted that the doctrine is relevant to policy exclusions and insurance coverage, but not applicable to rescission and contract formation.

The alleged misrepresentation consisted of one of the firm’s partners stating that he was unaware of any potential claims against the firm, despite an existing a claim for malpractice. The malpractice claim had existed for a time before the renewal application was filed and the attorney that filled out the application had actually already offered over $600,000 to settle the malpractice claim before renewing the firm’s malpractice insurance policy.

The innocent partner argued that he had no knowledge of the alleged malpractice claim and was thus an innocent insured, and that the policy should not be rescinded due to his innocence. The court noted that “innocence of an insured matters a great deal when another insured’s wrongdoing triggers a policy exclusion, and a dispute arises over whether the insurer has a duty to defend the innocent insured under a policy that undisputedly was in effect… [but] In the case of a misrepresentation that materially affects the acceptance of the risk, the issue is the effect of that misrepresentation on the validity of the policy as a whole.” Accordingly, the court found that the entire policy was void ab initio.

Illinois State Bar Association Mut. Ins. Co. v. Law Office of Tuzzolino and Terpinas, Supreme Court of Illinois Docket No. 117096, February 20, 2015