The Illinois Supreme Court’s recent ruling that the “innocent insured” doctrine couldn’t prevent an insurer from using rescission to terminate a law firm’s malpractice policy strengthened the defense for insurers and showed that firms need to be on guard against material misrepresentations on malpractice policy applications, attorneys say.
In a 6-1 decision, the state high court said the innocent insured doctrine doesn’t apply to rescission and contract formation, overturning an appellate panel’s ruling that maintained legal malpractice coverage for Will Terpinas Jr., a Chicago-area lawyer. Terpinas’ partner, Sam Tuzzolino, allegedly lied to Illinois State Bar Association Mutual Insurance Co. when renewing the policy by saying he was unaware of any potential malpractice claims against their firm.
The issues in the case could have been resolved if the policyholders had negotiated policy terms regarding misrepresentations in applications up front, said Sherilyn Pastor, the practice group leader for McCarter & English LLP’s insurance coverage group.
Another aspect of the ruling that policyholders can take as a “glimmer of hope” is that the court made it “very clear” that it was applying the ruling in the context of a situation where there is an actual intent to deceive as opposed to a negligent misrepresentation, Pastor said.