Renewal Omission Proves Costly: Court Allows Rescission for Undisclosed Audit
The United States District Court for the Northern District of Illinois, applying Illinois law, has held that an insurer was entitled to rescind a professional liability policy because the insured failed to disclose circumstances that might result in a claim on its renewal application. Call One, Inc. v. Berkley Ins. Co., 2025 WL 2802071 (N.D. Ill. Sept. 30, 2025). The court also found that, if rescission was not warranted, the claim would have been covered.
The insured, a telecommunications company, was sued in a qui tam action filed under seal in Illinois state court alleging that it violated the Illinois False Claims Act (“IFCA”) by failing to collect and remit certain excise taxes and fees owed by its customers. Several months later, the Illinois Office of the Attorney General served the insured with a subpoena pursuant to the IFCA seeking documents related to the insured’s collection and payment of Illinois taxes.
The professional liability insurer defended the telecommunications company in responding to the subpoena but denied defense and indemnity coverage for the qui tam action, asserting that neither the subpoena nor the sealed complaint in the qui tam action constituted a “claim” under the policy. The insured brought coverage litigation against the insurer, and the insurer later learned that the insured had been audited by the City of Chicago for unpaid taxes during the previous policy period, a fact not disclosed in its renewal application. The insurer counterclaimed to rescind the policy based on material misrepresentations in the renewal application.
The court granted the insurer’s motion for summary judgment on its rescission claim and denied the insured’s cross-motion for summary judgment. The court concluded that the renewal application required disclosure of the audit in response to a question inquiring whether the insured was “aware of any fact, circumstance or situation involving any Insureds that might reasonably be expected to result in a Claim.” The insured knew the audit could result in a claim against it because its CFO had, at the City of Chicago’s request, signed a waiver of the relevant statute of limitations period less than a year before signing the renewal application. The court further found that the insured’s misrepresentation was material as a matter of law because knowledge of the audit and the insured’s waiver of the limitations period would cause an insurer to reconsider the policy premium in light of the increased exposure. The insured’s substantial payment to resolve the audit further showed materiality and heightened risk, even though the insured’s settlement with the city did not admit wrongdoing. That the audit itself did not ultimately lead to the qui tam action or the subpoena did not alter the court’s conclusion.
In dicta, the court observed that absent rescission the qui tam action would have been a “claim,” trigging coverage. The court rejected the insurer’s arguments that coverage was precluded by public policy against insuring restitution because the claim sought compensatory relief, not disgorgement, and that the professional services exclusion and the known-loss doctrine did not apply.
