Insurer Can Rely on Prior Insurance Applications in Support of Rescission Claim Based on Omission in Current Policy’s Application
An Illinois federal district court, applying Illinois law, has held that an insurer adequately stated a claim for rescission of a professional services policy where underlying litigation revealed that the insured allegedly knew of the potential for a claim to arise and failed to report it in a related question in its application for insurance. Call One Inc. v. Berkley Ins. Co., 2023 WL 1863048 (N.D. Ill. Feb. 9, 2023). Relying on the insured’s first application for insurance in 2011, in which the insured stated that it did not know of any circumstances that might give rise to a claim, the court held that the insured’s omission of a response in its 2018 application regarding whether there had been a change in circumstances was a misrepresentation warranting rescission.
From 2008 to 2018, the insured, a telecommunications business, failed to collect and remit taxes and fees owed by its customers as required for telecommunications businesses under Illinois law. In 2019, the state attorney general served a subpoena on the insured in connection with the insured’s collection and payment of Illinois taxes. The insured tendered the subpoena to the insurer, which accepted coverage. The insurer later learned of a pending lawsuit against the insured in connection with the insured’s failure to collect and remit taxes and fees in compliance with Illinois law. The insurer denied coverage, asserting that the insured had made false representations in its policy applications.
In the ensuing coverage litigation, the court denied the insured’s motion to dismiss. The insurer argued that the insured misrepresented that it was unaware of any circumstances that could result in liability. In support of its argument, the insurer pointed to prior applications. First, the insurer alleged that, in 2011, the insured responded “no” to a question asking whether the insured was aware of any circumstance that might reasonably be expected to result in a claim. Then, in 2015 and 2017 applications, the insured answered “no” when asked “[w]ithin the last 12 months, has there been any change in the status of any . . . circumstances reported in any application previously submitted to the Insurer?” In the 2018 application, the insured did not answer that question.
The insured argued that the failure to respond to the question was merely an omission, not a misrepresentation. The court disagreed, holding that an incomplete answer or failure to disclose material information is considered a misrepresentation when the omission prevents the insurer from adequately assessing the risk involved. The court held that was the case here, because the 2015 and 2017 applications did not report any change to the status of circumstances reported in a prior application. In so ruling, the court focused on the fact that the insured failed to answer the question even though, in 2015 and 2017, the insured’s senior leadership allegedly knew of their failure to comply with Illinois law.