Seventh Circuit Holds Insured’s Material Misrepresentations in Application Warrant Rescission of Policy

Applying Illinois law, the United States Court of Appeals for the Seventh Circuit has held that a medical service provider’s material misrepresentations regarding its use of non-traditional and experimental weight loss drugs and procedures warranted rescission of its professional liability coverage. Essex Ins. Co. v. Galilee Med. Cntr.¸ 2016 WL 851688 (7th Cir. Feb. 10, 2016).

The insurer had issued a professional liability policy to the medical service provider, which provided coverage for the entity as well as for its physicians acting within the scope of their duties as such. In order to obtain such coverage, the medical service provider had completed a number of applications, which asked multiple questions about its use of non-traditional and experimental weight loss drugs and procedures. The insured answered that it did not use drugs for weight reduction for patients nor did its practice include weight reduction or control other than by diet and exercise. The applications stated that the insured would rely on the answers provided in the application when issuing the policy. Subsequently, an affiliate of the insured and one of its physicians were sued for alleged medical negligence based on mesotherapy treatments, a non-surgical procedure designed to dissolve fat deposits in patients. The insurer denied coverage and sought a judicial declaration of rescission of the policy.

Following the grant of summary judgment in favor of the insurer, the Seventh Circuit affirmed. In doing so, the Court rejected the insureds’ contention that they did not make misrepresentations in their application because the word “use” includes only the act of giving the procedure and the physician involved performed the procedure at his home office and only recommended the treatment while acting as a physician for the insured. The Court also rejected the insureds’ argument that the word “use” is ambiguous and should be construed in the insureds’ favor. The Court stated: “We will not permit defendants, who did not pay for coverage for suits arising out of weight loss procedures, to circumvent their duty to make truthful representations to their insurer by reading ambiguity into a clear insurance policy application.” The Court further rejected the notion that any misrepresentations were not sufficiently material to warrant rescission, finding that the misrepresentations involving the scope of the physician’s medical practice significantly increased the medical service provider’s exposure and thus the insurer’s risk. Accordingly, the Court concluded that such misrepresentations were plainly material under Illinois’s objective test.