Illinois Supreme Court Rejects “Partial Rescission” Rule Based on “Innocent Insured” Doctrine, Adopting Position Urged by LPP as Counsel for Amicus Curiae Property Casualty Insurers Association of America 

On February 20, 2015, the Illinois Supreme Court held that there is no public policy in Illinois prohibiting the rescission of an insurance policy as to insureds who were ignorant of misrepresentations made on the application. Illinois State Bar Ass'n Mut. Ins. Co. v. Law Office of Tuzzolino and Terpinas, 2015 IL 117096. The so-called “partial rescission” rule, based upon the “innocent insured” doctrine, adopted by the Appellate Court in this case, would have essentially required insurers to prove that every member of an insured organization was complicit in making the misrepresentation at issue before it would be entitled to full rescission.

Where the insured is a large organization, such as a law firm with hundreds of lawyers, such a doctrine would render the remedy of rescission all but useless.  The ability to rescind coverage as to the one “guilty” individual insured would not eliminate the exposure, because of the application of vicarious liability, negligent failure to supervise and other theories which would be used by the plaintiff’s bar to work around the “guilty” individual to reach the other partners or the firm as an entity.  The exposure from the duty to defend, moreover, would be virtually unaffected by the application of rescission as to only one of many defendants.  Even if it would be possible in theory to prove that literally every individual insured was culpable for the misrepresentation, the expense of deposing hundreds of individual insureds would alone render the remedy illusory.  Only New Jersey has applied such a rule to date.

In light of the significance of the Appellate Court’s ruling to the insurance industry as a whole, the Property Casualty Insurers Association of America retained LPP to appear as amicus curiae in the Supreme Court.  David Osborne prepared the amicus brief on behalf of PCI, urging the Supreme Court to reverse the Appellate Court and preserve the longstanding remedy of rescission.  LPP’s amicus brief argued that this remedy forms the basis of the bargain in an insurance policy, and that its adoption would have far-reaching negative consequences for both the industry and its policyholders.

The Supreme Court’s opinion follows that reasoning precisely, rejecting the suggestion that “public policy” requires the protection of “innocent insureds” in this context.  The governing statute, it explained, applies to misrepresentations on applications of insurance “‘made by the insured or in his behalf’—that is, not necessarily by the insured personally.”  So long as the misrepresentation materially affects the risk assumed by the insurer, “it does not matter that one of the parties, or an insured, might not have been to blame for the misrepresentation.”  As the Supreme Court confirmed, the doctrine of rescission “focuses on the effects of the misrepresentation, rather than on the innocence or guilt of the individual.”  Because the insurer in that case “issued the policy under a false impression about its exposure to risk,” it was entitled to rescind the policy in its entirety.