Three months after the purported offer, Tuzzolino completed a renewal application for the firm’s LPL policy. Question No. 4 on the application asked: “Has any member of the firm become aware of a past or present circumstance(s), act(s), error(s) or omission(s), which may give rise to a claim that has not been reported?” Tuzzolino answered “no.”
The insurer issued the LPL policy, after which Terpinas first learned of Tuzzolino’s alleged malfeasance when he received a lien letter from an attorney representing Coletta. Terpinas immediately reported the claim to the insurer, which brought suit to rescind the policy. The circuit court granted rescission, and the appellate court reversed the judgment as to Terpinas. The insurer appealed to the Illinois Supreme Court.
The Illinois Supreme Court reversed, noting that Illinois cases applying the innocent insured doctrine “usually involve the enforcement of policy exclusions, typically exclusions for intentional acts allegedly committed by an insured other than the one challenging the exclusion.” According to the court, the innocent insured doctrine “makes sense in that context because the insured’s innocence is relevant to whether an intentional act invokes an exclusion to coverage. But the innocent insured doctrine appears irrelevant to rescission, a recognized remedy for even innocent misrepresentations.” In other words:
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. A misrepresentation on the policy application goes to the formation of the contract. The innocent insured doctrine, on the other hand, has a narrower focus, typically dealing with situations where an insured’s wrongdoing triggers a policy exclusion, and the question is whether the insurer has a duty to defend the innocent insured under a policy that is still in effect.
The court also stated that the appellate court “erred in partially severing the policy to facilitate the application of the innocent insured doctrine” based on the policy provision that the “particulars and statements contained in the APPLICATION will be construed as a separate agreement with and binding on each INSURED.”
Moreover, “while the severability clause creates a separate agreement with each insured, it states that each separate agreement is made up of” the “statements contained in the APPLICATION,” including the false statement that no member of the firm was aware of the potential for a then-unreported claim.
Keywords: Insurance, coverage, litigation, Illinois, lawyers professional liability policy, LPL policy, application, innocent insured doctrine, rescission
Paul T. Curley is with Kaufman Borgeest & Ryan LLP, Westchester County, NY.