Illinois State Bar Association Mutual Insurance Company v. Law Office of Tuzzolino and Terpinas
2015 IL 117096
| Ill. | 2015Background
- ISBA Mutual issued a lawyers professional liability policy (May 1, 2008–May 1, 2009) to the Law Office of Tuzzolino & Terpinas after Sam Tuzzolino signed a renewal application stating no member was aware of a circumstance that might give rise to a claim.
- Coletta later sued the firm and partners for legal malpractice based on alleged mishandling of prior litigation; Terpinas reported the claim to ISBA Mutual on June 10, 2008 after learning of it.
- ISBA Mutual sued to rescind the entire policy, alleging Tuzzolino’s false answer to the renewal question was a material misrepresentation under section 154 of the Illinois Insurance Code.
- The trial court granted summary judgment for ISBA Mutual and rescinded the policy in full; the appellate court reversed as to Terpinas, applying a common-law “innocent insured” doctrine to preserve his coverage.
- The Illinois Supreme Court granted review and held that section 154 permits rescission of the policy in its entirety for a material misrepresentation on the application, rejecting application of the innocent insured doctrine to rescission.
Issues
| Issue | Plaintiff's Argument (ISBA Mutual) | Defendant's Argument (Terpinas) | Held |
|---|---|---|---|
| Whether a material misrepresentation on an application permits rescission of the entire policy | Section 154 allows rescission where a misrepresentation materially affected acceptance of the risk, even if innocently made | Rescission as to an innocent co-insured is unfair and contrary to public policy; innocent insured doctrine should preserve coverage | Rescission of the whole policy is permitted under section 154 when misrepresentation materially affected the insurer’s acceptance of risk |
| Whether the common-law innocent insured doctrine prevents rescission of coverage for an innocent co-insured | Irrelevant: rescission addresses contract formation and the insurer’s mistaken acceptance of risk | Doctrine should protect innocent insureds from losing coverage due to another insured’s misrepresentation | The innocent insured doctrine is inapplicable to rescission; it addresses exclusions and coverage disputes, not contract formation |
| Whether the policy’s severability clause allows severing the application/misrepresentation to preserve coverage for an innocent insured | Misrepresentation on the application infects each insured agreement; the application cannot be split off to save coverage | Severability creates separate agreements and equitable restoration is required; rescission should not be applied to innocent insured | Severability did not permit partial rescission; the application statements are binding on each insured and do not allow splitting the misrepresentation away from individual contracts |
| Whether rescission can be granted where full status-quo restoration may be impossible | Section 154 and rescission law permit rescission; insurer refunded premiums and restoration is satisfied where required | Rescission unjust because innocent insured reasonably expected coverage and rescission cannot truly restore status quo | Restoration of premiums sufficed; inability to restore every aspect does not bar rescission where impossibility is not caused by rescinding party |
Key Cases Cited
- Golden Rule Insurance Co. v. Schwartz, 203 Ill. 2d 456 (Ill. 2003) (section 154 permits rescission for material or intentional misrepresentations, including innocent misrepresentations that affect acceptance of risk)
- National Boulevard Bank v. Georgetown Life Insurance Co., 129 Ill. App. 3d 73 (Ill. App. Ct. 1984) (statutory misrepresentation standard read in the disjunctive: intent to deceive or materiality to acceptance/hazard)
- Ratcliffe v. International Surplus Lines Insurance Co., 194 Ill. App. 3d 18 (Ill. App. Ct. 1990) (material misrepresentation can void a policy without proof of intent)
- Home Insurance Co. v. Dunn, 963 F.2d 1023 (7th Cir. 1992) (distinguishes rescission for application misrepresentations from denial of coverage under exclusions; misrepresentation affects validity of entire policy)
- Economy Fire & Casualty Co. v. Warren, 71 Ill. App. 3d 625 (Ill. App. Ct. 1979) (innocent insured doctrine preserves recovery from excluded losses for an innocent co-insured; case involves settlement rescission context)
- First American Title Insurance Co. v. Lawson, 827 A.2d 230 (N.J. 2003) (limited liability entity context: court declined to rescind innocent partner’s coverage where public policy and reasonable expectations favored preserving coverage)