Illinois Appellate Court Penalizes Insurer for Not Re-Asking Questions in Renewal Application the Insured Already Answered Incorrectly in Prior Application
In Illinois State Bar Association Mutual Insurance Co. v. Brooks, Adams & Tarulis, 2014 IL App (1st) 132608, the Illinois Appellate Court held, in relevant part, that the Illinois State Bar Association Mutual Insurance Company (“ISBA”) could not rescind a renewal policy based on a misrepresentation in the initial policy application when there was no incorporation of the initial application of insurance into the renewal policy.
As background, Douglas Tibble learned of a claim by Tango Music, LLC (“Tango”) in November 2002. In December 2007, Tibble’s firm, Brooks, Adams & Tarulis (“BAT”) applied for malpractice insurance from the ISBA, but failed to inform ISBA of the Tango claim/lawsuit against Tibble. Notably, the Appellate Court deemed that omission to be an acceptable answer to the subject question which inquired about claims made in the past five years. Based on BAT’s answers on the application, the ISBA issued a malpractice insurance policy to BAT for the 2007-2008 policy period. That policy was then renewed for the 2008-2009. After three additional legal malpractice claims were made against Tibble in a three month period in 2009, the ISBA filed this rescission action with respect to both policies. The circuit court entered judgment in favor of the ISBA.
On appeal, and in relevant part, the Appellate Court reversed the trial court, holding that the ISBA could not rescind the 2008-2009 policy based on misrepresentations in the application for the 2007-2008 policy. Essentially, the Appellate Court opined that the alleged misrepresentation in the application for the 2007-2008 policy did not infect the application for the 2008-2009 policy. The Appellate Court found compelling that the ISBA did not incorporate into the 2008-2009 policy the representations from the prior application.
The Appellate Court’s approach to the renewal policy raises a number of important questions. What if the renewal application simply asked the insured questions about developments subsequent to the inception of the first policy issued by the insurer? Why is it necessary that the insurer either incorporate by reference all of the insured’s answers on prior applications or re-ask questions from the prior applications? Why can the insurer not rely on the insured to tell the truth the first time and then be required to supplement its answers should the insured learn of a change in circumstances? These questions and more reflect the reality that insurers are generally at the mercy of their insureds when assessing risk and determining whether to issue policies of insurance.