No Rescission of Renewal Policy Where Original Application Not Incorporated into Application for Renewed Policy

Applying Illinois law, a state appellate court has reversed the rescission of a renewed insurance policy, holding that a misrepresentation in an original application does not justify rescission of a renewal of the policy where neither the renewal application nor the resulting policy incorporated the initial application.  Illinois State Bar Ass’n Mut. Ins. Co. v. Brooks, Adams & Taurulis, 2014 WL 7273947 (Ill. App. Ct. Dec. 23, 2014).  In addition, the court reversed the rescission of the original policy, holding that a client asserted a claim against an insured attorney when the client requested relief for alleged misconduct, not when the client subsequently filed a lawsuit against the attorney.

In November 2002, a music company notified its attorney that it would seek redress after the insured attorney’s alleged negligence caused the dismissal of the client’s breach of contract action.  More than two years later, the client sued the attorney and his law firm for legal malpractice.  Prior to that suit, the attorney changed law firms, and when the new firm completed an application to change its malpractice insurance in December 2007, the firm represented that no claims had been made against its members in the last five years.  A year later, the firm applied for and obtained a renewal of the policy.  During that policy period, three individuals filed claims against the firm.  The insurer brought a coverage action seeking rescission of both policies based on misrepresentations in the firm’s application for the original policy.  The trial court held that both policies were rescinded.

On appeal, the firm first argued that no evidence justified rescission of the renewal policy.  Citing Illinois statutory law and the general principle that “public policy disfavors insurance forfeiture,” the court agreed, concluding that it could not “add language to the Code to make one misrepresentation defeat all subsequent insurance contracts, when the insured made no misrepresentation in its application for the subsequent insurance.”

The court also reversed the trial court and held that the firm made no misrepresentation in the original application because the client brought its claim against the attorney more than five years before the firm completed the application.  In reaching that conclusion, the court found that the policy defined “claim” consistently with “common practice in the insurance industry” and, construing any ambiguity in the policy and the application against the insurer, reasoned that the client’s notice of a possible malpractice action constituted a claim.  The court added that the insurer could have posed alternate or additional questions on the application to obtain information regarding claims older than five years or lawsuits instituted during that period.

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