Illinois Supreme Court Holds “Innocent Insured Doctrine” Inapplicable In Rescission Context

The Supreme Court of Illinois has held that an insurer properly rescinded a legal malpractice insurance policy in its entirety based on a material misrepresentation contained in the policy application.  Ill. State Bar Ass’n Mut. Ins. Co. v. Law Office of Tuzzolino and Terpinas, 2015 IL 117096, (Ill. Feb. 20, 2015).  In so holding, the court concluded that the “innocent insured doctrine” is inapplicable in the context of rescission, and that the insurance policy was properly rescinded as to all insureds.

The insured law firm purchased a legal malpractice insurance policy from the insurer.  In completing the policy application on behalf of the firm, one insured attorney did not disclose an ongoing dispute with a client involving various allegations of malpractice.  One month after the policy incepted, a legal malpractice claim was filed against the firm relating to the same facts and circumstances not disclosed on the policy application.  The firm tendered the claim to the insurer, and the insurer brought suit seeking rescission of the entire policy on the basis of the misrepresentation in the application.  The trial court granted summary judgment in favor of the insurer and rescinded the entire policy.  The appellate court reversed, holding that the “innocent insured doctrine” applied and rescission was improper as to the attorney that did not fill out the policy application and was unaware of the misrepresentation.  The insurer appealed.

The Illinois Supreme Court reversed, concluding that rescission of the entire policy was proper under Illinois law.  In so holding, the court concluded that the “innocent insured doctrine” was inapplicable in the context of rescission.  The court noted that the “innocent insured doctrine” is typically invoked in cases involving the enforcement of a policy exclusion for intentional or fraudulent acts caused by a single insured under a policy providing coverage to multiple insureds.  According to the court, “[i]n 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” and “goes to the formation of the contract.”  On the other hand, the court noted that the “innocent insured doctrine” typically applies to a determination of whether an insurer owes a coverage obligation to an innocent insured “under a policy that is still in effect.”  The court stated that the “innocent insured doctrine” is thus “relevant to issues of policy exclusions and insurance coverage, but it is unsuited to the case at bar, which deals with rescission and contract formation.”  Finally, the court concluded that a severability clause in the policy was also inapplicable, as each insured was still bound by false statements contained in the single policy application.