                                  Illinois Official Reports

                                          Appellate Court



     Illinois State Bar Ass’n Mutual Insurance Co. v. Law Office of Tuzzolino & Terpinas,
                                  2013 IL App (1st) 122660




Appellate Court              ILLINOIS STATE BAR ASSOCIATION MUTUAL INSURANCE
Caption                      COMPANY, Plaintiff-Appellee, v. LAW OFFICE OF TUZZOLINO
                             AND TERPINAS, an Illinois Partnership, SAM TUZZOLINO, WILL
                             TERPINAS,        JR.,    and       ANTONIO      COLLETTA,
                             Defendant-Appellants.


District & No.               First District, Sixth Division
                             Docket No. 1-12-2660


Filed                        November 22, 2013



Held                         Defendant attorney’s coverage under the legal malpractice insurance
(Note: This syllabus         policy issued by plaintiff to defendant law partnership and defendant
constitutes no part of the   partners was preserved by the innocent insured doctrine, where the
opinion of the court but     record showed that defendant=s culpable partner failed to disclose on
has been prepared by the     a renewal form circumstances he was aware of that might give rise to a
Reporter of Decisions        malpractice claim against the partnership and the partners, since the
for the convenience of       severability clause operated to create separate and distinct contracts
the reader.)                 that the trial court could partially rescind.



Decision Under               Appeal from the Circuit Court of Cook County, No. 09-CH-11297; the
Review                       Hon Rita M. Novak, Judge, presiding.




Judgment                     Reversed.
     Counsel on               C. Jeffrey Thut, of Roach, Johnston & Thut, of Libertyville, for
     Appeal                   appellants.

                              Robert Marc Chemers and Scott L. Howie, both of Pretzel & Stouffer,
                              Chtrd., of Chicago, for appellee.



     Panel                    JUSTICE REYES delivered the judgment of the court, with opinion.
                              Justice Hall and Justice Lampkin concurred in the judgment and
                              opinion.

                                               OPINION


¶1         Defendants Will Terpinas, Jr. (Terpinas), and Antonio Colletta (Colletta) (collectively,
       defendants) appeal the trial court’s entry of summary judgment in favor of the plaintiff, ISBA
       Mutual Insurance Company (plaintiff). After considering cross-motions for summary
       judgment, the trial court rescinded Terpinas’ contract with plaintiff. Defendants argue the trial
       court improperly rescinded the contract because the innocent insured clause in the insurance
       policy and the common law innocent insured doctrine preserve Terpinas’ coverage. For the
       following reasons, the judgment of the circuit court of Cook County is reversed.

¶2                                            BACKGROUND
¶3                                   I. Underlying Malpractice Litigation
¶4          Prior to this litigation, Terpinas and Sam Tuzzolino (Tuzzolino) operated, as partners, the
       Law Office of Tuzzolino & Terpinas (firm). Between the years of 2002 and 2008, Tuzzolino
       represented Colletta in several matters on behalf of the firm. In one of these matters, Colletta
       sought to recover over $1 million from his former partners in a business venture known as Baja
       Chicago, LLC. Colletta, however, believed Tuzzolino mishandled the Baja litigation and filed
       a malpractice suit against him. Tuzzolino responded by attempting to persuade Colletta to
       settle the malpractice suit. Tuzzolino suggested Colletta should drop his current lawsuit and
       file a separate malpractice claim against the attorney who handled Baja Chicago’s bankruptcy.
       Colletta agreed, settling his pending litigation with Tuzzolino and hiring Tuzzolino to file the
       new bankruptcy malpractice suit. Tuzzolino, however, failed to file the complaint within the
       time required under the statute of repose and the case was consequently dismissed.
¶5          Over the next 18 months, Tuzzolino led Colletta to believe the bankruptcy malpractice
       litigation remained pending. Colletta, after checking the court file, learned the case had in fact
       been dismissed and confronted Tuzzolino with the discovery. In response, Tuzzolino offered
       Colletta $670,000 to settle any ensuing claims Colletta might have against him.


                                                   -2-
¶6                                       II. The Insurance Policy
¶7         Following his settlement offer with Colletta, Tuzzolino attempted to renew the firm’s
       current malpractice insurance policy; the firm had been insured by plaintiff since 2005. On
       April 29, 2008, Tuzzolino submitted a renewal quote and acceptance form to plaintiff on
       behalf of himself, Terpinas, and the firm. Question 4 on the renewal form asked, “[h]as any
       member of the firm become aware of a past or present circumstance(s) which may give rise to
       a claim that has not been reported?” Tuzzolino checked the box marked “no.” He then signed
       the form under the following language:
               “I/we affirm after an inquiry of all of the members of the applicant firm that all the
               information contained herein is true and complete to the best of my/our knowledge and
               that it shall be the basis of the policy of insurance and deemed incorporated therein
               upon acceptance of this application by issuance of a policy.”
       Terpinas did not sign the renewal form as he was not required to do so. Tuzzolino thereafter
       sent the form to plaintiff, which received it on May 2, 2008.
¶8         Of relevance to this appeal, the malpractice insurance policy contained an innocent insured
       clause and a severability clause. The innocent insured clause provided:
                   “Whenever coverage under this policy will be excluded or lost because of the
               insured’s failure to provide timely notice, the company agrees that such insurance as
               would otherwise be afforded under this policy, should be applicable with respect to any
               insured who do not personally fail to give timely notice after having knowledge of the
               conduct that forms the basis of the claim. All insured covered by this provision must
               immediately comply with all policy provisions regarding reporting the claim upon
               learning of the unreported claim.”
       The severability clause provided:
                   “The APPLICATION, and any addendum or supplements and the Declarations, are
               the basis of the Policy. They are to be considered as incorporated in and constituting
               part of this Policy. The particulars and statements contained in the APPLICATION will
               be construed as a separate agreement with and binding on each INSURED. Nothing in
               this APPLICATION will be construed to increase the COMPANY’S Limit of
               Liability.”
¶9         Over a month after the completion of the renewal form, Terpinas received a lien letter
       dated June 10, 2008 from an attorney hired to represent Tuzzolino in the impending
       malpractice claims against him. According to Terpinas, this was the first time he became aware
       of the claims against his partner. Terpinas contends, while he may have had general
       conversations with Tuzzolino about Colletta’s cases, Tuzzolino never revealed to him anything
       about the Colletta malpractice suits. Terpinas therefore reported this newfound information to
       plaintiff immediately following his receipt of the lien letter.

¶ 10                                   III. Plaintiff’s Complaint
¶ 11      On March 12, 2009, plaintiff filed a complaint for rescission and other relief against
       Tuzzolino, Terpinas, the firm, and Colletta. Count I of the complaint sought rescission of the
                                                  -3-
       entire insurance policy on the grounds that Tuzzolino’s withholding of information amounted
       to a material misrepresentation that voided the contract ab initio. Count II of the complaint
       requested declaratory relief finding plaintiff had no duty or obligation to defend Tuzzolino or
       the firm in connection with the malpractice claims filed by Colletta. 1 In his response to the
       complaint, Terpinas brought a counterclaim seeking a declaratory judgment that the insurance
       policy covered him with respect to Colletta’s malpractice suit.

¶ 12                                  IV. Entry of Summary Judgment
¶ 13        On January 25, 2010, plaintiff moved for summary judgment on all counts against the
       defendants. On June 9, 2010, the trial court entered summary judgment against Tuzzolino with
       regards to count II, finding plaintiff had no duty or obligation to defend Tuzzolino in Colletta’s
       action against him. In its written order, the trial court reserved ruling on summary judgment as
       to the other defendants. Subsequently, the firm, Terpinas, and Colletta filed a joint motion for
       summary judgment. Terpinas additionally filed a separate cross-motion for summary judgment
       on his counterclaim.
¶ 14        After extensive briefing, a hearing was held regarding the pending summary judgment
       motions on July 27, 2012. In considering the motions, the trial court stated “[t]here is no
       Illinois case law exactly on point” and thus proceeded to rely on “general principles of
       rescission law in Illinois” and a Seventh Circuit decision interpreting Illinois law, Home
       Insurance Co. v. Dunn, 963 F.2d 1023 (7th Cir. 1992). The trial court reasoned “rescission is a
       doctrine that essentially vitiates an entire contract” and “renders the contract unenforceable.” It
       then acknowledged “there may be some application of the doctrine of partial rescission, but
       that doctrine essentially applies where *** there’s an agreement which basically has separate
       contracts that constitute a portion of the whole agreement.” The trial court then concluded,
       “[t]his is one contract, and I think it’s an indivisible contract.” In so concluding, the trial court
       rejected the defendants’ argument that the severability clause operated to make the contract
       divisible. According to the trial court, “the severability clause and its plain language would
       prevent a construction that would apply against one of the insureds or one member of the
       insureds, the insured firm, because that provision itself talks about it being binding as to each
       insured.”
¶ 15        Additionally, the trial court considered the “historic application of *** the insurance code
       in Illinois” and opined the relevant section, section 154 of the Illinois Insurance Code (215
       ILCS 5/154 (West 2008)), was “designed to prevent material misrepresentations in an
       insurance contract.” The trial court added that “[section 154] applies even as against innocent
       misrepresentations because the very notion of section 154 is that as it applies to certain
       insurance carriers, it allows the carrier to evaluate the risks that it intends to insure against.”
       Thus, according to the trial court, “[plaintiff] was entitled to evaluate those risks based on the
       application that was presented to it.”


           1
            Plaintiff amended the complaint on August 25, 2009 by attaching a copy of the lawsuit Colletta
       filed against Tuzzolino, Terpinas, and the firm.
                                                     -4-
¶ 16       Finally, the trial court addressed an out-of-state decision, First American Title Insurance
       Co. v. Lawson, 827 A.2d 230 (N.J. 2003), in which the Supreme Court of New Jersey held
       partial rescission could apply to protect an innocent insured who was unaware of the
       misrepresentation on the insurance application. In the opinion of the trial court, however,
       “Lawson appear[ed] to be contrary to the vast majority of cases that have construed the remedy
       or applied the remedy of rescission in a similar context.” The trial court instead found two
       out-of-state federal district court decisions, Minnesota Lawyers Mutual Insurance Co. v.
       Hancock, 600 F. Supp. 2d 702 (E.D. Va. 2009), and INA Underwriters Insurance Co. v. D.H.
       Forde & Co., 630 F. Supp. 76 (W.D.N.Y. 1985), to be persuasive. The trial court agreed with
       these two cases that “the equities are lined with the carrier, because *** the carrier is allocating
       risks in accordance with *** the representations that are made in the policies”; the trial court
       further believed a court reviewing Illinois precedent would come to the same conclusion.
       Accordingly, the trial court rescinded the insurance policy in its entirety and found “[plaintiff]
       has no duty to defend [Terpinas] or [the firm] in [Colletta’s malpractice action].” Following the
       entry of summary judgment, Terpinas and Colletta filed a timely notice of appeal. 2

¶ 17                                           ANALYSIS
¶ 18       Defendants argue the trial court erred in entering summary judgment against them.
       Summary judgment is appropriate when “the pleadings, depositions, and admissions on file,
       together with the affidavits, if any, show that there is no genuine issue as to any material fact
       and that the moving party is entitled to a judgment as a matter of law.” 735 ILCS 5/2-1005(c)
       (West 2010). The purpose of summary judgment is not to try a question of fact, but to
       determine whether a genuine issue of triable fact exists. Adams v. Northern Illinois Gas Co.,
       211 Ill. 2d 32, 42-43 (2004). In determining whether a question of fact exists, “a court must
       construe the pleadings, depositions, admissions, and affidavits strictly against the movant and
       liberally in favor of the opponent.” Williams v. Manchester, 228 Ill. 2d 404, 417 (2008).
       Summary judgment is “a drastic means of disposing of litigation,” and thus, should only be
       awarded when the moving party’s right to judgment as a matter of law is “clear and free from
       doubt.” Id. We generally review grants of summary judgment de novo. Id.
¶ 19       Plaintiff argues de novo review would be inappropriate in this case because, in granting
       summary judgment, the trial court ultimately rescinded the contract. As plaintiff accurately
       notes, rescission is an equitable remedy which “ ‘lies largely within the court’s discretion.’ ”
       Luciani v. Bestor, 106 Ill. App. 3d 878, 882 (1982) (quoting Bechard v. Bolton, 24 N.W.2d
       422, 423 (Mich. 1946)). The decision to apply rescission in this case, however, turns on the
       answer to multiple questions of law, namely, the interpretation of the policy language, the
       formation of the agreement, and the application of the innocent insured doctrine. “[W]here the
       exercise of discretion has been frustrated by the application of an erroneous rule of law, review
       is required to permit the exercise in a manner consistent with the law.” (Internal quotation

           2
            The law firm, as a separate entity, has not appealed and, other than briefly mentioning so in the
       heading of section II, the defendants do not argue in their briefs that the law firm’s insurance coverage
       has been preserved.
                                                       -5-
       marks omitted.) Loyola Academy v. S&S Roof Maintenance, Inc., 146 Ill. 2d 263, 274 (1992)
       (quoting People v. Brockman, 143 Ill. 2d 351, 363 (1991)). Our ultimate review of the issues in
       this case is therefore de novo.

¶ 20                                      I. Innocent Insured
¶ 21       Defendants contend the innocent insured clause in the written policy and the common law
       innocent insured doctrine preserve Terpinas’ coverage. We address each of these arguments in
       turn.

¶ 22                             A. Contractual Innocent Insured Clause
¶ 23       According to defendants, the language contained in the innocent insured clause of the
       contract acts to preserve Terpinas’ coverage. An insurance policy is a contract, and the general
       rules governing the interpretation of contracts also govern the interpretation of insurance
       policies. Standard Mutual Insurance Co. v. Lay, 2013 IL 114617, ¶ 24. If the policy language
       is unambiguous, the policy will be applied as written unless it contravenes public policy. Id.
       We review the interpretation of contractual language de novo. Gallagher v. Lenart, 226 Ill. 2d
       208, 219 (2007).
¶ 24       Defendants point to section V.I of the policy, entitled “Innocent Insured.” Under the plain
       language of the policy, this section applies “[w]henever coverage *** would be excluded or
       lost because of the INSURED’S failure to provide timely notice.” (Emphasis added.)
       Defendants contend this section operates here because “[i]t is undisputed that [Terpinas’]
       coverage was lost because Tuzzolino failed to report the Colletta claim on the renewal
       application.” We are not persuaded by defendants’ argument.
¶ 25       Defendants attempt to characterize the reason for Terpinas’ loss of coverage as a “fail[ure]
       to report” in an effort to invoke the innocent insured clause of the contract. This argument
       ignores the distinction between the nondisclosure of a malpractice claim under an existing
       insurance policy and the nondisclosure of a malpractice claim on the renewal application for a
       new policy. If this case merely involved the former, Terpinas would remain covered; the
       record indicates Terpinas provided notice as soon as he became cognizant of his partner’s
       malfeasance and plaintiff does not assert that Terpinas is not covered under the language of the
       agreement. This case, however, involves the latter. Consequently, plaintiff charges that no
       such policy exists in the first place because Tuzzolino’s misrepresentation in procuring the
       agreement voided it ab initio. Accordingly, the crucial inquiry in this case is not whether the
       language of the policy covers Terpinas, but whether the common law innocent insured doctrine
       permits the policy to remain in place as to Terpinas. 3


           3
            Defendants rely on Great American Insurance Co. v. Christy, 53 A.3d 538 (N.H. 2012), a case
       from the Supreme Court of New Hampshire, in arguing that the innocent insured clause protects
       Terpinas in this matter. In Christy, the court did not rely on common law doctrine but, rather, found the
       language of the innocent insured provision of the policy indicated that “the parties intended to
       distinguish actual from imputed knowledge and not to penalize insureds who did not have actual
                                                       -6-
¶ 26                                     B. Common Law Doctrine
¶ 27       Defendants additionally argue the common law innocent insured doctrine protects
       Terpinas in this case. The common law innocent insured doctrine applies in a situation where
       two or more insureds have an insurance policy and one of the insureds commits an act that
       would normally void the insurer’s contractual obligations. See Economy Fire & Casualty Co.
       v. Warren, 71 Ill. App. 3d 625, 629 (1979); West Bend Mutual Insurance Co. v. Salemi, 158 Ill.
       App. 3d 241, 248 (1987). In this situation, the innocent insured doctrine preserves coverage for
       the innocent insureds where “a reasonable person would not understand that the wrongdoing of
       a coinsured would prevent recovery under the policy.” State Farm Fire & Casualty Insurance
       Co. v. Miceli, 164 Ill. App. 3d 874, 881 (1987); see also Salemi, 158 Ill. App. 3d at 248-49.
       Courts have frequently applied the rule in the situation where one property owner sets fire to
       mutually owned property without the co-owner’s knowledge; in that instance, the innocent
       property owner may still collect his or her portion of the insurance proceeds. See, e.g., Warren,
       71 Ill. App. 3d at 629; Salemi, 158 Ill. App. 3d at 244; Wasik v. Allstate Insurance Co., 351 Ill.
       App. 3d 260, 261 (2004). The instant case presents the question of whether the innocent
       insured doctrine protects an innocent co-insured where a material misrepresentation was made
       during the formation of the policy.
¶ 28       Defendants argue Economy Fire & Casualty Co. v. Warren, the first case to apply the
       innocent insured doctrine, controls. In Warren, a husband and wife co-owned a residence
       covered by a fire insurance policy with the insurer. Warren, 71 Ill. App. 3d at 626. After a
       seemingly accidental fire caused damage to the residence, the husband and wife settled with
       the insurer for $20,514.05. Id. Later, however, the wife revealed that she set fire to the
       residence by placing a lit piece of paper in a waste basket. Id. The husband maintained he had
       no knowledge of his wife’s actions. Id. at 627. Consequently, the insurer sued the husband and
       wife seeking rescission of the settlement agreement in its entirety and restitution of the
       proceeds paid. Id. at 626. The trial court found the settlement was procured by fraud and
       rescinded the agreement in full. Id. On appeal, the husband argued his innocence of any
       wrongdoing entitled him to half the proceeds of the settlement. Id. at 627. This court agreed,
       finding “[t]he trial court erred in awarding the plaintiff an equitable lien on the full amount of
       the insurance settlement.” Id. at 629. The court reasoned, “[w]e do not think the reasonable
       person in the position of [the husband] would have supposed that the wrongdoing of his
       co-insured would be imputed to him.” Id. 4 As a result, the husband was entitled to keep
       $10,278.98 of the settlement proceeds. Id.

       knowledge of wrongful acts.” Id. at 544. In Christy, however, the policy language was noticeably more
       complex and specifically provided that the insurer “must provide coverage to those insureds who did
       not ‘personally commit or personally participate’ in the act, error or omission.” Id. The language in the
       policy at issue here specifically limits its protections to the situation where the insured fails to report a
       potential malpractice claim in a timely manner. We therefore do not find Christy to be particularly
       relevant in deciding the instant case.
           4
           Other courts have used similar reasoning in finding coverage for an innocent insured. See, e.g.,
       Holloway v. Sacks & Sacks, Esqs., 275 713 N.Y.S.2d 162, 164 (N.Y. App. Div. 2000) (refusing to
                                                        -7-
¶ 29        Plaintiff contends Warren is distinguishable from this case as Warren “did not concern the
       formation of a policy.” According to plaintiff, Warren might apply “if Terpinas had been
       denied a defense because Tuzzolino’s alleged [malpractice] was excluded from coverage”;
       however, because the contract was void ab initio due to the misrepresentation made in
       procuring the policy, Warren should not apply. Plaintiff’s attempt at distinguishing Warren
       fails for two reasons.
¶ 30        First, plaintiff’s argument erroneously casts Warren as a case in which the insurer sought to
       deny coverage under the policy after having learned of the wife’s actions. To the contrary, the
       insurer in Warren sued to rescind the settlement agreement and sought restitution of the
       proceeds paid to the husband and wife that were procured by the wife’s fraud. Id. at 626.
       Likewise, the trial court granted rescission of the settlement agreement because it was
       procured by said fraud. Id. Thus, the facts of Warren are similar to those of the instant case:
       rather than seek to deny coverage under the policy, the insurer sought to rescind the contract in
       its entirety following its discovery of the collective failure of the insureds to reveal the relevant
       misconduct.
¶ 31        Second, plaintiff incorrectly asserts the misrepresentation made by Tuzzolino voided the
       contract ab initio. To the contrary, “a material misrepresentation *** renders the policy
       voidable, not void ab initio.” Illinois State Bar Ass’n Mutual Insurance Co. v. Coregis
       Insurance Co., 355 Ill. App. 3d 156, 167 (2004). This is an important distinction because “a
       contract that is void ab initio is treated as though it never existed.” Id. at 164. “[I]f a contract is
       merely voidable, a party can either opt to void the contract based upon that defect or choose,
       instead, to waive that defect and ratify the contract despite it.” Id. at 164-65.
¶ 32        Plaintiff alternatively relies on a Seventh Circuit decision interpreting Illinois law, Home
       Insurance Co. v. Dunn, 963 F.2d 1023 (7th Cir. 1992). In Dunn, an attorney acquired a
       malpractice insurance policy providing coverage for himself and the 12 other lawyers
       associated with his firm. Id. at 1024. Unbeknownst to the other 12 lawyers in the firm, the
       attorney had been embezzling funds belonging to the firm’s clients; the attorney did not
       disclose this information to the insurer prior to obtaining the malpractice insurance. Id. Upon
       learning of the embezzlement, the insurer filed a suit seeking to void the policy. Id. The parties
       then filed cross-motions for summary judgment and the trial court ruled in favor of the
       defendants, finding the 12 other lawyers were innocent insureds. Id. On appeal, the Seventh
       Circuit reversed, finding Illinois law requires rescission of the policy in its entirety. Id. at 1026.
       In so concluding, the Dunn court relied on Ratcliffe v. International Surplus Lines Insurance
       Co., 194 Ill. App. 3d 18 (1990), and quoted the following language:
                “A material misrepresentation will void the contract even though made through
                mistake or good faith . . . . In other words, it is unnecessary for the insurer to prove that
                a misrepresentation was made with the intent to deceive if it was material to the risk
                assumed.” (Internal quotation marks omitted.) Dunn, 963 F.2d at 1026 (quoting
                Ratcliffe, 194 Ill. App. 3d at 25).

       impute the misconduct of an associate to the rest of the firm where there was no evidence the firm had
       actual or constructive knowledge of the associate’s wrongdoing).
                                                      -8-
       Thus, according to the Dunn court, the 12 other lawyers’ “ignorance of [the] fraud [was]
       irrelevant.” Dunn, 963 F.2d at 1026.
¶ 33       The facts of Dunn are very similar to the instant case and, if Dunn was binding authority, it
       would likely defeat defendants’ appeal. Nevertheless, Dunn does not control here. First, as a
       federal decision interpreting Illinois law, it amounts to at most persuasive authority, that is
       “unless it runs contrary to previously decided state cases which, if correctly reasoned, will not
       be overturned.” Falk v. Northern Trust Co., 327 Ill. App. 3d 101, 108 (2001). Second, the case
       Dunn relied on, Ratcliffe, did not address or involve the application of the innocent insured
       doctrine. See generally Ratcliffe v. International Surplus Lines Insurance Co., 194 Ill. App. 3d
       18 (1990). In Ratcliffe, the insureds’ argument was that no misrepresentation occurred at all.
       Id. at 25. 5 The court in Ratcliffe consequently did not address Warren or any other case
       applying the innocent insured doctrine. Third, the Dunn court treated the policy as void
       ab initio, which, as noted above, runs contrary to Illinois case law. Compare Dunn, 963 F.2d at
       1026, with Coregis, 355 Ill. App. 3d at 164-65. Not surprisingly, Dunn has not been cited or
       followed by any Illinois decision to date.
¶ 34       Regardless, according to plaintiff, Dunn should control as it “recognizes the distinction
       between wrongdoing that invokes a policy exclusion and wrongdoing in the very procurement
       of the policy.” This argument mirrors plaintiff’s previous attempt at distinguishing Warren.
       Yet, as stated earlier, while Warren may not have involved wrongdoing in the procurement of
       a policy, it did involve wrongdoing in the procurement of a settlement agreement. An
       insurance policy and a settlement agreement are at their core both contracts governed by the
       same general principles of contract law. See Hobbs v. Hartford Insurance Co. of the Midwest,
       214 Ill. 2d 11, 17 (2005) (“An insurance policy is a contract, and the general rules governing
       the interpretation of other types of contracts also govern the interpretation of insurance
       policies.”); Haisma v. Edgar, 218 Ill. App. 3d 78, 87 (1991) (“A settlement agreement is
       considered a contract, and construction and enforcement of settlement agreements are
       governed by principles of contract law.”). Thus, for Dunn to prevail over Warren, plaintiff
       must demonstrate why a misrepresentation made in obtaining an insurance policy should result
       in a different application of the innocent insured doctrine as a misrepresentation made in
       obtaining a settlement agreement. After an examination of public policy in Illinois and other
       states, we see no reason why Warren should not apply to these facts.
¶ 35       Plaintiff generally notes that insurers are innocent parties as well and “to require insurers to
       honor agreements premised on deceptive accounts of potential exposure would threaten the
       very concept of insurance coverage.” Plaintiff certainly is not incorrect to state that insurers are
           5
            In Ratcliffe, the applicants argued there was no misrepresentation on the policy application
       because they subjectively did not believe the relevant construction dispute they failed to disclose would
       have given rise to a claim. Ratcliffe, 194 Ill. App. 3d at 24-25. The court disagreed and found that,
       regardless of their subjective belief, the applicants were required to disclose those “circumstances
       known *** which [objectively] might have given rise to a claim against them.” Id. at 26-27. In this case,
       there is no dispute that a misrepresentation occurred. The relevant inquiry that Ratcliffe did not consider
       is whether the party innocent to the misrepresentation should remain covered under common law
       doctrine.
                                                       -9-
       likewise innocent of wrongdoing in these cases. Nonetheless, the stated policy of Illinois is to
       “favor[ ] coverage under an insurance policy whenever the facts justify such coverage.”
       Inter-Insurance Exchange of Chicago Motor Club v. Milwaukee Mutual Insurance Co., 61 Ill.
       App. 3d 928, 931 (1978). Moreover, the Illinois Supreme Court has generally interpreted the
       purpose of the relevant section of the Insurance Code, section 154, to favor innocent insureds.
       Section 154 states:
                    “No misrepresentation or false warranty made by the insured or in his behalf in the
                negotiation for a policy of insurance, or breach of a condition of such policy shall
                defeat or avoid the policy or prevent its attaching unless such misrepresentation, false
                warranty or condition shall have been stated in the policy or endorsement or rider
                attached thereto, or in the written application therefor. No such misrepresentation or
                false warranty shall defeat or avoid the policy unless it shall have been made with
                actual intent to deceive or materially affects either the acceptance of the risk or the
                hazard assumed by the company. With respect to a policy of insurance as defined in
                subsection (a), (b), or (c) of Section 143.13, except life, accident and health, fidelity
                and surety, and ocean marine policies, a policy or policy renewal shall not be rescinded
                after the policy has been in effect for one year or one policy term, whichever is less.
                This Section shall not apply to policies of marine or transportation insurance.” 215
                ILCS 5/154 (West 2008).
       In reviewing section 154, our supreme court declared “section 154 is representative of statutes
       which ‘are designed to relieve against the rigorous consequences of the common-law rules as
       to warranties and misrepresentations concerning insurance, particularly if made in good faith
       with no intent to deceive and in relation to a matter which does not increase the risk or
       contribute to the loss.’ ” Golden Rule Insurance Co. v. Schwartz, 203 Ill. 2d 456, 464 (2003)
       (quoting 43 Am. Jur. 2d Insurance § 1034 (1982)). In interpreting Illinois law, the Seventh
       Circuit has likewise stated “the purpose behind section 154 is to protect insureds from
       insurance companies seeking to void their policies.” National Fidelity Life Insurance Co. v.
       Karaganis, 811 F.2d 357, 363 (7th Cir. 1987).
¶ 36       It is not difficult to see why these policy concerns are particularly important in the specific
       context of legal malpractice insurance. By the 1980s, the occurrence of malpractice suits
       against attorneys increased sharply. See Fredric L. Goldfein, Legal Malpractice Insurance, 61
       Temp. L. Rev. 1285, 1285-86 (1988). Not surprisingly, the need for professional liability
       insurance has increased as well, prompting some states to even make it a mandatory condition
       to practicing law. See id. at 1296. Of course, while malpractice insurance undoubtedly serves
       an important purpose in protecting attorneys subject to increased risk and liability, as with
       other insurer-insured situations, a denial of coverage does not only negatively affect the
       potential insured. Without coverage, many defendants become unable to pay out the
       settlements or judgment awards, in effect harming the initially wronged party (in this case,
       Colletta). Cf. Erie Insurance Exchange v. Lake, 671 A.2d 681 (Pa. 1996) (even where
       insurance contract was found void ab initio, the policy could not be rescinded as to the harmed,
       innocent third party). Thus, while the insurers and insureds may argue over who is the truly

                                                   - 10 -
       “innocent” party for the purposes of equities, such a focus misses impact on the underlying
       malpractice litigation.
¶ 37       Cases from other jurisdictions reflect these policy concerns. In particular, defendants cite
       First American Title Insurance Co. v. Lawson, 827 A.2d 230 (N.J. 2003). In Lawson, two
       partners of a three-person law firm engaged in a “kiting” scheme, improperly transferring
       money from various client accounts into the accounts of other clients and of the firm itself.
       Lawson, 827 A.2d at 233. While in the midst of the kiting scheme, one of the partners who
       participated in the fraud applied to reinstate the malpractice insurance for the firm and its
       members. Id. at 234. On the application, this partner warranted he is “ ‘not aware of any
       circumstances or any allegations or contentions as to any incident, which may result in a claim
       being made against the firm or any of its past or present owners, partners, shareholders,
       corporate officers or employees or its predecessors in business.’ ” Id. The third partner of the
       firm did not participate in the misappropriation of client funds and apparently had no
       knowledge of his partners’ impropriety at the time the application for insurance was filed. Id. at
       240. Upon discovery of the kiting scheme, the insurer filed a declaratory action to void the
       policy against the firm and all of its partners. Id. at 235. After a trial and subsequent appeal, the
       Supreme Court of New Jersey held the third partner’s coverage should not have been
       rescinded. Id. at 241. The court reasoned the facts of the case “require us to consider [the third
       partner] an innocent partner for purposes of balancing the equities attendant in these
       circumstances.” Id. at 240. According to the court, “voiding the policy in respect of [the third
       partner] would mean that he no longer would possess coverage for any of his actions in
       unrelated matters, including simple malpractice, that might have occurred during the period of
       anticipated coverage,” and such a “sweeping result would be contrary to the public interest.”
       Id. Specifically, the court noted “it would be inconsistent with the policies underlying our
       Rules of Court that seek to protect consumers of legal services by requiring attorneys to
       maintain adequate insurance in this setting.” Id. at 240-41.
¶ 38       Lawson, of course, does not reflect the public policy of Illinois. Nevertheless, given the
       existing case law regarding the innocent insured doctrine, Illinois courts’ overall inclination to
       protect the insured, and the persuasive authority from other jurisdictions, we find that the
       innocent insured doctrine preserves coverage for Terpinas under these facts.

¶ 39                                      II. Severability Clause
¶ 40       The parties further dispute the effect of the severability clause and whether Tuzzolino’s
       misrepresentation barred the severability clause from operating in the first place. 6 While we
       have already found that the innocent insured doctrine applies in this case, this issue warrants
       discussion as the trial court believed it could not partially rescind the contract because the
       contract was indivisible. In Illinois, the long-standing general rule has been that “rescission, if
       made, must be full, and embrace the entire contract.” Bowen v. Schuler, 41 Ill. 192, 196 (1866).
       This rule, however, “does not apply to a contract of which the parts are so severable as to form

           6
               Neither party challenges the validity of the severability clause itself.

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       independent contracts.” Kaplan v. Keith, 60 Ill. App. 3d 804, 808 (1978). Defendants thus
       argue the severability clause of the policy operates to form separate contracts. In determining
       whether a contract is divisible, as in other aspects of contract interpretation, a court attempts to
       effectuate the intent of the parties. Bjork v. Draper, 381 Ill. App. 3d 528, 544 (2008). We
       therefore examine the language of the policy. See Gallagher, 226 Ill. 2d at 233.
¶ 41       Defendants direct us to the severability clause, which states, “The particulars and
       statements contained in the APPLICATION will be construed as a separate agreement with
       and binding on each INSURED.” According to defendants, the Illinois Supreme Court
       interpreted similar contractual language to “provide[ ] each insured with separate coverage, as
       if each were separately insured with a distinct policy.” United States Fidelity & Guaranty Co.
       v. Globe Indemnity Co., 60 Ill. 2d 295, 299 (1975). Plaintiff does not necessarily challenge this
       interpretation, but argues while “the clause creates separate agreements with each of [the
       insureds],” each of these separate agreements still “incorporat[es] the statements in the
       application, including the false one at issue in this case.” Plaintiff cites no authority for this
       assertion and does not offer any explanation as to why the innocent insured doctrine would still
       not protect Terpinas under Warren.
¶ 42       Moreover, plaintiff’s argument necessarily presupposes that the severability clause split
       the contract into distinct agreements. This contradicts plaintiff’s ultimate conclusion that the
       clause could not operate to cure any defect in the formation because “a material
       misrepresentation voids the entire policy, effectively preventing it from coming into existence
       as to any party.” In any event, the latter assertion still relies on the mistaken belief that the
       policy was void ab initio. Because the misrepresentation did not void the policy ab initio, it
       follows that the severance clause still operated to create separate contracts until the contract is
       fully rescinded. See Coregis, 355 Ill. App. 3d at 164-65.
¶ 43       Finally, it is important to note that the court in Warren did not consider whether the
       contract was severable in applying the innocent insured doctrine. See Warren, 71 Ill. App. 3d
       at 627-29. By implication, this suggests that when applying the innocent insured doctrine, the
       court does not necessarily require a divisible contract in order to partially rescind a contract.
¶ 44       Accordingly, we find the severability clause operated to create separate and distinct
       contracts, allowing the trial court to partially rescind the contract. Further, even assuming the
       severability clause did not sever the contract, there is no indication from Warren that such is a
       requirement in applying the innocent insured doctrine.

¶ 45                                      CONCLUSION
¶ 46      For the foregoing reasons, the judgment of the circuit court of Cook County is reversed
       with judgment to be entered in accordance with the views expressed herein.

¶ 47      Reversed.




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