655 F.Supp.3d 733
N.D. Ill.2023Background
- Call One, a telecommunications vendor, held Berkley professional-liability coverage renewed for June 30, 2018–June 30, 2019.
- From 2008–2018 Call One allegedly failed to collect/remit certain Illinois taxes and fees; internal employees raised concerns about accounting and underpayments.
- In March 2019 the Illinois Attorney General served a subpoena under the Illinois False Claims Act (IFCA); Berkley paid defense costs for the subpoena but later denied coverage for a related IFCA suit filed earlier by the State.
- Call One settled the IFCA action without Berkley’s participation and sued Berkley for breach of contract and bad‑faith denial of coverage; Berkley counterclaimed to rescind the 2018 policy, alleging material misrepresentations in insurance applications.
- Berkley’s counterclaim alleges Call One answered “no” in a 2011 application to whether it was aware of circumstances that could lead to a claim, failed to answer Question 5 on the 2018 renewal about changes in previously reported circumstances, and knew of the underlying problems when submitting the 2018 renewal.
- The district court evaluated whether Berkley’s rescission counterclaim survived Rule 12(b)(6) and met Rule 9(b)’s particularity requirement for fraud-based rescission theories.
Issues
| Issue | Plaintiff's Argument (Call One) | Defendant's Argument (Berkley) | Held |
|---|---|---|---|
| Whether rescission claim must satisfy Rule 9(b) when alleging intent-to-deceive | Rule 9(b) applies and Berkley fails to plead fraud with particularity | Berkley alleges both intent and materiality with sufficient particularity | Court: 9(b) applies to intent theory but Berkley pleads both theories with required particularity; survives dismissal |
| Whether misrepresentations in prior applications can rescind the 2018 policy | Prior-app misstatements cannot defeat a later renewal; only the application for that policy matters | Prior applications can be used as evidence to show the 2018 omission was false/knowing | Court: Misstatements in prior apps cannot alone rescind 2018 policy but may be considered as evidence of falsity/intent |
| Whether failing to answer Question 5 on the 2018 renewal is an actionable misrepresentation | Omission is not a misrepresentation because Call One had not previously reported claims/circumstances | An omission can be a misrepresentation if it prevents insurer from assessing risk; facts plausibly show omission concealed reportable circumstances | Court: Pleading supports that omission plausibly constituted a misrepresentation by omission; claim survives |
| Whether Berkley sufficiently alleged intent to deceive or materiality | Berkley cannot show actual intent or that the omission was material | Berkley alleges knowledge by company officers and alleges reliance/materiality — Berkley would not have renewed if aware | Court: Allegations suffice to plausibly plead either actual intent or material effect on insurer’s risk decision |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (facial plausibility standard for pleadings)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading requires plausibility, not detailed facts)
- United Cent. Bank v. Davenport Est. LLC, 815 F.3d 315 (7th Cir. 2016) (accept well‑pleaded facts as true on motion to dismiss)
- United States ex rel. Presser v. Acacia Mental Health Clinic, LLC, 836 F.3d 770 (7th Cir. 2016) (Rule 9(b) requires particularity: who, what, when, where, how)
- Methodist Med. Ctr. of Illinois v. Am. Med. Sec. Inc., 38 F.3d 316 (7th Cir. 1994) (omissions can constitute misrepresentations when they prevent insurer from assessing risk)
- Golden Rule Ins. Co. v. Schwartz, 786 N.E.2d 1010 (Ill. 2003) (materiality of misrepresentation is typically a fact question)
- Ill. State Bar Ass’n Mut. Ins. Co. v. L. Off. of Tuzzolino & Terpinas, 27 N.E.3d 67 (Ill. 2015) (elements for rescission under Illinois law)