Lawsuit No Bar To Policy Enforcement

February 10, 2015 / Writing and Speaking

The 1st District Appellate Court recently held that an application for legal malpractice coverage representing that no claim against the applicant’s attorneys had been made within the preceding five years was not false even though a lawsuit had been filed within that time.

The insurer in Illinois State Bar Association Mutual Insurance Co. v. Brooks, Adams and Tarulis, 2014 IL App (1st) 132608 (1st Dist., Dec. 23, 2014), was represented by Pretzel & Stouffer Chtd. Flaherty & Youngerman P.C. represented the insured law firm.

Douglas C. Tibble, while a partner with McBride, Baker and Coles, failed to timely remedy the dismissal of a lawsuit he was handling for want of prosecution. The client, Tango Music LLC, advised Tibble that it would seek redress against the firm in 2002. According to an expert in the case, Tango alerted Tibble later that year. The firm notified its malpractice carrier at that time, but Tango did not file suit until 2005.

In 2003, Tibble left that firm and became affiliated with Brooks, Adams and Tarulis. In late 2007, the firm decided to change its malpractice coverage carrier to Illinois State Bar Association Mutual Insurance Co. A firm partner inquired of Tibble about claims within the previous five years, and Tibble did not mention the 2005 Tango lawsuit. The firm thus submitted an application in December 2007 representing that no “claim” had been made against the firm or its attorneys within the prior five years.

ISBA then issued a malpractice policy providing coverage for claims made and reported between Dec. 30, 2007, and Dec. 30, 2008. In early December 2008, the firm submitted a renewal application, and ISBA issued a second policy to cover claims made between Dec. 30, 2008, and Dec. 30, 2009.

In 2009, several lawsuits were filed against the firm, which promptly notified ISBA. In August of that year, ISBA filed the instant lawsuit seeking rescission of the policies for both 2008 and 2009, based on the alleged misrepresentation in the application for the 2008 policy.

The trial court held that the firm falsely answered the question about the absence of claims within the prior five years in connection with the application for the 2008 policy. It thus allowed rescission of both the 2008 and 2009 policies, and ordered the firm to reimburse ISBA for all sums the ISBA paid toward the firm’s defense.

2009 Application

In an opinion by Justice P. Scott Neville Jr., the 1st District reversed. He initially addressed the 2009 policy. He noted that, while the ISBA introduced at trial the application for the 2008 policy, it did not introduce the application for the 2009 policy. ISBA’s underwriter for the 2009 policy, moreover, admitted that she knew of no misrepresentation in the application for the 2009 policy.

ISBA nevertheless argued that the misrepresentation in the application for the 2008 policy infected the application for the 2009 policy, even though the 2009 policy did not incorporate the representations from the application for the 2008 policy.

This argument, according to Neville, did not square with the rescission section of the Illinois Insurance Code, 215 ILCS 5/154, which requires, for an insurer to void a policy, that the misrepresentation be stated in the policy or in the written application for the policy.

Neville said the code does not make a misrepresentation, in one application nullify all subsequent contracts between the parties. Because the ISBA demonstrated no misrepresentation in the application for the 2009 policy or other statutory grounds for voiding that policy, he found that the trial court erred in allowing rescission for that year.

2008 Application

As for the 2008 policy, the application, which contained the representation of no claim within the prior five years, did not contain a definition of “claim.” The policy, however, defined that term as a “demand … for money or services, or the service of a suit … that seeks damages arising out of a wrongful act.”

Neville examined case law from other states holding that the date a claim is made, or at least first made, can be prior to the filing of an actual lawsuit. Suggesting that the ISBA policy may be ambiguous as to what a claim is, Neville found that Tango made its claim in 2002, not in 2005 when Tango filed suit. (He did not address whether the same claim could be made at two different times.)

Because the claim was made more than five years before the firm submitted its application in December 2007, Neville said the firm made no misrepresentation. If the ISBA wanted to know about lawsuits filed against the firm within five years, he further indicated that the ISBA needed to ask the specific question.

The court, therefore, reversed the judgment, held that no misrepresentations occurred and found in favor of the firm.

Key Points

  • A misrepresentation in a policy application for one policy period does not negate coverage under Section 154 of the Insurance Code for a subsequent policy period, unless incorporated into the subsequent application or policy.
  • According to this court, depending on the wording of a policy application, a prior claim against the insured counts as a claim that needs to be disclosed to the insurer only if it is first made within the time parameters requested in the application.
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