Insurer May Rescind Law Firm’s Policy Based on One Partner’s Misrepresentation on Renewal Application, Illinois Supreme Court Holds

The Illinois Supreme Court, reversing an appellate court’s decision, has ruled that an insurance company could rescind the professional liability insurance policy it had issued to a law firm based on one partner’s misrepresentation on a renewal application, rejecting another partner’s contention that the “innocent insured doctrine” prevented rescission as to him.  

The Case

Illinois State Bar Association Mutual Insurance Company (“ISBA Mutual”) filed a complaint for rescission and other relief against the Law Office of Tuzzolino & Terpinas; Sam Tuzzolino and Will Terpinas, Jr., partners in the firm; and Anthony Coletta, the plaintiff in an underlying legal malpractice action against Mr. Tuzzolino, Mr. Terpinas, and the firm. In its complaint, ISBA Mutual sought rescission of the legal malpractice insurance policy it had issued to the firm, alleging that Mr. Tuzzolino’s material misrepresentation on an ISBA Mutual renewal application had induced ISBA Mutual to issue the policy.

Ruling on motions for summary judgment, the trial court granted ISBA Mutual’s motion and rescinded the policy.

Mr. Terpinas and Mr. Coletta appealed that judgment, arguing that Mr. Terpinas was an “innocent insured” who was not to blame for Mr. Tuzzolino’s misrepresentation and that the policy should not have been rescinded as to him. The appellate court concluded that a common law “innocent insured doctrine” applied to misrepresentations made on the renewal application and that this doctrine preserved Mr. Terpinas’ coverage even as Mr. Tuzzolino’s had been properly rescinded.

ISBA Mutual appealed to the Illinois Supreme Court.

The Illinois Supreme Court’s Decision

The Illinois Supreme Court reversed, concluding that Illinois statutory law allowed rescission of an insurance policy in its entirety for a material misrepresentation on the written application.

In its decision, the court explained that the innocent insured doctrine typically applied to situations where an insured’s wrongdoing triggered a policy exclusion and the question was whether the insurer had a duty to defend the innocent insured under a policy that was in effect. By contrast, the court said, a misrepresentation on a policy application went “to the formation of the contract,” and the innocent insured doctrine was unsuited to issues of rescission and contract formation.

The court concluded that the trial court correctly had determined that Illinois law allowed rescission of the ISBA Mutual policy in its entirety, and that the appellate court had erred in applying the innocent insured doctrine and partially severing the policy to preserve coverage for Mr. Terpinas.

The case is Illinois State Bar Ass’n Mut. Ins. Co. v. Law Office of Tuzzolino & Terpinas, No. 117096 (Ill. Feb. 20, 2015).