This is an important decision of the Illinois Supreme Court in which it held that ISBA Mutual (the legal malpractice insurer for many lawyers in Illinois) could rescind a policy where one partner of a firm falsely responded to a question on the renewal application.
Although ISBA Mutual is the insurer for most Illinois lawyers it is also highly litigious, often bringing coverage lawsuits against lawyers based on their answers to questions in the renewal application. Legal malpractice policies are claims made policies under which the insurer agrees to insure the lawyer or law firm (or both) for any claims made during a one-year period. The insurer typically sends a questionnaire to the lawyer in which it requests that the lawyer identify any claims that are outstanding or have not been reported to the insurer. In the case, the parties alleged that a former client named Colleta had a legal malpractice claim against Tuzzolino. The opinion’s summary is as follows:
“¶ 5 Less than three months later, shortly before the April 30, 2008, expiration of the firm’s 2007-08 legal malpractice policy with ISBA Mutual, Tuzzolino completed a Renewal Quote Invoice and Acceptance Form for the purchase of a policy meant to cover the firm during the 2008-09 policy year. Question No. 4 on the form 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 checked the “no” box corresponding to this question. He signed his name as “owner/partner” and dated the form April 29, 2008, beneath the following statement:
“I/We affirm that after an inquiry of all the members of the applicant firm that all the information contained herein is true and complete to the best of my/our knowledge and that it shall be the basis of the policy of insurance and deemed incorporated therein upon acceptance of this application by issuance of a policy.”
The form is stamped “received” by ISBA Mutual on May 2, 2008. ISBA Mutual issued the firm a Lawyers Professional Liability Insurance Policy (No. IL 111168 6), to be effective May 1, 2008, through May 1, 2009.
¶ 6 Terpinas allegedly learned of Tuzzolino’s malfeasance about a month later, on June 10, 2008, when he received a lien letter from an attorney representing Coletta. Terpinas immediately reported the claim to ISBA Mutual.
¶ 7 In May 2009 ISBA Mutual brought suit seeking rescission and other relief against Tuzzolino, Terpinas, the firm, and Coletta. Count I of the complaint, as finally amended, sought rescission of the entire policy (IL 111168 6) on the ground that Tuzzolino’s material misrepresentation voided the contract. ISBA Mutual alleged it “relied to its detriment on the continuing misrepresentations of material fact made by Tuzzolino, with the knowledge that those misrepresentations were, in fact, untrue as to his knowledge of any circumstance, act, error or omission that could result in a claim.” In count II, ISBA Mutual contended, in the alternative, that it had no duty or obligation to defend Tuzzolino or the firm in connection with the claims made by Coletta against them.”
ISBA mutual obtained summary judgment in the trial court on the ground that the misrepresentation was material but the appellate court reversed on the ground that Terpinas was innocent of any wrongdoing. The Supreme Court reversed the appellate court and ISBA Mutual won the case.
What does ISBA Mutual mean by the term “material?” ISBA Mutual is saying that had it known that there was a pending claim or a possible claim it would have declined to cover the law firm or would have charged a higher premium. It is hard to disagree with that.
The Supreme Court held that the innocent insured doctrine did not apply to the so-called innocent law partner or the law firm. The court made clear that ISBA Mutual had met the requirements of Section 154 of the Illinois Insurance Code which allows rescission where there was a “material misrepresentation” on the written application.
This issue has come up before many times. I have written about this issue on other occasions. As a lawyer you must take the time to make sure that the written application for insurance coverage is accurate and truthful. If you don’t you have breached the contract with the insurance company and, if the error is big enough, opened yourself up to a rescission lawsuit.
Edward X. Clinton, Jr.