Insured Has Post-Application Duty to Disclose
May 18, 2011
The Illinois Appellate Court 1st District recently held that a failure to disclose a change in material information reported in an application for automobile insurance coverage, where the information on the application itself was truthful, gave rise to an insurer's right to rescind the policy based on material misrepresentation. American Service Insurance Co. v. United Automobile Insurance Co., No. 1-09-3070, 2011 WL 1501566 (1st Dist. April 18, 2011).
The appellant, ASI, an uninsured motorist carrier, was represented by Newman, Raiz LLC of Chicago. The Shelist Law Firm LLC of Chicago represented UAIC, the rescinding carrier.
The Application
Janice Baker applied for automobile coverage with UAIC on April 9, 2003. In her application she represented that only her husband and herself were "operators" of the vehicle for which coverage was sought and that there were no operators in the household under age 25.
UAIC issued the policy to Baker specifically excluding her husband from coverage. The policy included a "warranty" by Baker that there were no other drivers in the household other than her and her husband and a statement that UAIC had "continued" reliance on the truth of the representations made. It also included a provision authorizing UAIC to rescind the policy within one year based on any material misrepresentations.
Additional Operator's First Accident
On May 14, 2003, Baker's son, Devin, who was 17 years old, received his learner's driving permit. Less than a month later, in June 2003, while driving alone with Baker's permission, he was involved in a one-car accident. Baker reported the accident and UAIC took a statement concerning it from both Baker and Devin. When asked why Devin was not disclosed at the time of the application, Baker said he was "not an operator" at that time and that she thought she had mentioned him. Baker continued to make premium payments thereafter.
Additional Operator's Second Accident
In February 2004, Devin was involved in another accident while driving with passengers. One of the passengers, who had uninsured motorist coverage with ASI, was injured. Baker subsequently reported this accident to UAIC, at which time it rescinded her policy effective April 9, 2003, based on material misrepresentations and it returned her premiums.
The passenger injured in the February 2004 accident filed a uninsured motorist claim with ASI based on the fact that UAIC had rescinded Baker's policy. UAIC thereafter brought this coverage action against ASI seeking a declaration that Devin was an insured under the UAIC policy when the February 2004 accident occurred and that ASI owed no duty to provide uninsured motorist coverage to the passenger. UAIC filed a counterclaim seeking a declaration of its right to rescind.
The evidence generated in the coverage action was unclear as to exactly when Devin first began driving. The evidence was clear, however, that he drove the insured vehicle on a regular basis after he received his learner's permit in May 2003.
On cross motions for summary judgment, the trial court concluded that UAIC properly rescinded its policy based on Baker's failure to disclose Devin as a minor household driver and that UAIC had not waived its right to rescind after the February 2004 accident. It therefore granted summary judgment in favor of UAIC and against ASI. ASI took this appeal.
Material Misrepresentation Justifying Rescision
In an opinion by Justice Bertina E. Lampkin, the 1st District affirmed. Her analysis with respect to whether Baker made a misrepresentation focused on Section 154 of the Illinois Insurance Code, 215 ILCS 5/154, which states that an insured's misrepresentation will not defeat or avoid a policy unless the misrepresentation is in writing and is either made with intent to deceive or is material.
Lampkin also emphasized that Baker had been notified that Devin's status as an operator, or driver, was of great relevance to UAIC. For example, the application and the declarations page revealed the importance of accurate information, including the names and ages of all eligible drivers. Baker also had been asked in the application whether there was any operator in the household under age 25, to which she responded "no." The section also contained several blank lines to provide the names of all operators, and while Baker and her husband were listed, Devin was not.
In early May 2003, Lampkin observed, although prior to the date Devin received his learner's permit, the UAIC policy had been amended to change the covered vehicle, which resulted in an amended declarations page being issued with updated information. Baker warranted at that time that there were "no other drivers in the household other than those listed in the application or endorsement."
Lampkin further noted that once Devin began driving, the risks under the policy increased because it is well established that drivers under the age of 25 are involved in accidents with much greater frequency. In fact, the evidence established that the addition of Devin as a driver on the policy would have increased the premium by $845.
Lampkin therefore concluded that Baker had an obligation to inform UAIC once Devin began driving and that her failure to do so "generated material misrepresentations." The policy, moreover, provided that a misrepresentation would cause the policy to be null and void. Consequently, UAIC was within its rights to rescind the policy.
No Waiver of Rescission
Lampkin then turned to the question whether UAIC had waived its right to rescind by not acting promptly when it first learned Devin was a driver and instead waiting nine months until Devin's second accident in February 2004.
She again turned to Section 154 of the Insurance Code which, under Illinois State Bar Ass'n Mutual Insurance Co. v. Coregis Insurance Co., 355 Ill. App. 3d 156, 821 N.E.2d 706 (2004), has been interpreted as imposing a one-year time limit within which an insurer must act to void a policy based on material misrepresentation. Under Coregis, Lampkin said, the one-year period satisfies "prompt" rescission.
In addition, the UAIC policy itself contained anti-waiver language by which UAIC had reserved its right to rescind despite its knowledge in June 2003 that Devin was driving the insured vehicle.
The court, therefore, held that UAIC properly rescinded and it affirmed summary judgment in its favor.
Justices Shelvin L. Hall and Thomas E. Hoffman concurred.
Key Points
1) A change in the truthful information provided by an insured on an insurance application can give rise to a duty to disclose which, if breached, may justify rescission by the insurer under Section 154, even though the changed information is not expressly requested by the insurer following submission of the application.
2) An insurer does not waive its right to rescind under Section 154 of the Insurance Code even though it does not immediately rescind upon learning of the misrepresentation, so long as it rescinds within a year after issuance of the policy.
