Court Construes Coverage Denial Based On Policy Conditions As A Rescission

By Don R. Sampen, published, Chicago Daily Law Bulletin, January 4, 2022

The 1st District Appellate Court recently held that an insurer’s denial of coverage based on conditions in an automobile policy regarding the truth of the insured’s representations, constituted an attempted “rescission” and thus was time-barred by the Illinois Insurance Code.

The case is United Equitable Insurance Co. v. Thomas, 2021 IL App (1st) 201122 (Nov. 22). The insurer, UEIC, was represented by Shelist & Pena LLC of Chicago. Robbins, Salomon & Patt Ltd. represented the insured, Anthony Thomas, and his passenger, Shyeata Rascoe.

Thomas obtained insurance coverage from UEIC for his vehicle in March 2016 for a six-month term, and the policy was renewed for two more like terms. During the third term, he was involved in an accident while driving with Rascoe as a passenger. Based on her injuries, Thomas and Rascoe made a claim for coverage under the uninsured motorist coverage part of the policy.

At the time the policy was initially issued, Thomas represented, through his broker, that the vehicle was not used for delivery or commercial purposes. Two conditions in the policy, conditions 4 and 20, recited that UEIC relied on the truth of Thomas’ representations, including the truth of the representations for renewal purposes.

In addition, condition 4 declared the policy null and void if any misrepresentation were made. It further stated, however, that UEIC would not declare the policy void from its inception due to a material misrepresentation once the policy was in effect for one year or one policy term, whichever was less.

This latter language tracked the requirements of the Illinois Insurance Code for rescission, as applicable to automobile policies, under 215 ILCS 5/154.

By April 2016, Thomas had become an Uber driver, and over the next 3½ years, he completed more than 4,700 trips as an Uber driver. Nonetheless, at the time of the accident, Rascoe was a private passenger and Thomas was not driving the vehicle for Uber.

Upon receipt of the UM claim, UEIC denied coverage and subsequently filed this declaratory judgment action. Upon cross-motions for summary judgment, the trial court found in favor of coverage, and UEIC brought this appeal.

Analysis

In an opinion by Justice Aurelia Pucinski, the 1st District affirmed. She acknowledged that Thomas failed to disclose to UEIC that he was using the insured vehicle for ridesharing purposes, following renewal and contrary to his representation.

She observed, however, that a material misrepresentation renders the policy voidable under section 154, not void ab initio, and that an insurer can waive its right to rescind if it does not invoke it within the one year or one policy term time limit.

Thus, she wrote, UEIC attempted to rescind too late under both section 154 and under the corresponding language of condition 4.

UEIC argued, however, that it was not seeking rescission. Rather, it denied a claim for violation of conditions 4 and 20 of the policy, based on Thomas’ misrepresentation.

Pucinski disagreed. She said UEIC’s reliance on conditions 4 and 20 amounted to an attempt to void and rescind the policy due to the misrepresentation. Section 154, moreover, superseded condition 4 to the extent that condition purported to allow UEIC to declare a policy void based on a misrepresentation in connection with the renewal of the policy.

UEIC also contended that exclusions applicable to use of the vehicle for “public livery or conveyance” purposes as included in other parts of the policy ought to apply here. Specifically, the coverage parts for “medical payments” and “physical damage” contained such exclusions.

Pucinski rejected this argument, however, because Thomas and Rascoe were not seeking coverage under those coverage parts.

She also acknowledged the validity of UEIC’s coverage concerns regarding an insured’s use of a vehicle for commercial ride-sharing purposes. But in her view, the policy language did not explicitly limit coverage to vehicles not used for ride-sharing. And UEIC had not sought rescission within the time requirements of section 154.

The 1st District therefore affirmed in favor of coverage.

Key Point

An insurer’s attempt to deny coverage under an automobile policy based on a policy “condition” that conditions coverage on the truthfulness of the insured’s representations, may be regarded as an attempted rescission to which section 154 of the Illinois Insurance Code applies.