2013 I LApp (1st) 122660
SI XTH DIVI SI ON November

22, 2013

No. 1-12-2660
I L L I NOI S STATE BAR ASSOCI ATI ON MUTUA L I NSURANCE COMPANY,

Plaintiff-Appellee , v. L AW OFF I CE OF TU Z Z OL I NO AND TERPI

NAS, an I llinois Partnership, SAM TUZ Z OL I NO, WI L L TERPI NAS, J R., and ANTON I O COL L ETTA, Def endants-A

ppellants. ) ) ) ) ) ) ) ) ) ) ) ) Appea l from the Circuit Court of Cook County
No. 09 CH 11297
Honora ble Rita M. Novak, J udg e Presiding
.

J USTI CE REYES delivered the judg ment of the c ourt, with opinion. J ustice Ha ll and J ustice L ampkin concur red in the judg ment and opinion.
OP INION ¶ 1 Def

endants Will Terpinas, J r. (Te rpinas), a nd Antonio Coll etta (Colletta) ( collectively , defe ndants) appe al the trial c ourt' s entry of summary

judgme nt in favor of

the plaintiff, I SBA Mutual Insuranc e Company (plaintiff). A fter c onsideringcross-motions for summar y judgme nt, the trial cour

t rescinde d Terpina s' contra ct with plaintiff. Def endants a rgue the tria l court improperly

resc inded the contr act be cause the innocent insure d clause in the insurance policy and the common law innoce nt insured doctrine prese rve Te rpinas' cover ag e. F or the following
rea sons, the judgme nt of the circ uit court of Cook County is rever sed.1-12-2660

¶ 2 BA CKGROUND ¶ 3 I . Under lying Ma lprac tice L itigation ¶ 4 Prior to this l itigation, Te rpinas and Sam Tuzzoli no (Tuzzol ino) operated, as pa rtners, the L aw Of fice of Tuzzol ino & Te rpinas (f irm). B etwee n the year s of 2002 and 2008, Tuzzoli no repr esente d Colletta in severa l matters on beha lf of the f irm. In one of the se matters, Colletta soug ht to recove r over

$1 milli on from his forme r par tners in a business ve nture known a s Ba ja Chicag o, L L C. Coll etta, howe ver, be lieved Tuzzol ino mishandled the Ba ja litigation and f

iled a malprac tice suit ag ainst him. Tuz zoli no responde d by attempting to pe rsuade Colletta to settle the malpra ctice suit. Tuzzol ino sugg ested Colletta should drop his curr ent lawsuit and file a separ ate malpr actice claim ag ainst the attorney who handled B aja Chica g o' s bankruptcy . Colletta ag ree d, settling his pendinglitigation with Tuzz olino and hiring Tuzz olino to file the new bankruptc y

malprac tice suit. Tuzz olino, however , failed to file the complaint within the time require d under the statute of re pose and the case was c onsequently dismiss ed. ¶ 5 Over

the next 18 mont hs, Tuzz olino led Coll etta to believe the bankr uptcy malprac tice litigation re mained pending . Colletta, after chec king the court file, le arne d the ca se had in fa ct been dismissed and c onfronted T uzz olino with the discovery . In response , Tuzz olino offer ed Colletta $670,000 to settle any ensuingclaims Colletta might have ag ainst him. ¶ 6 I I . The Insuranc e Policy ¶ 7 Followinghis settlement offer with Coll etta, Tuzzol ino attempted to rene w the firm' s
curr ent malpra ctice insura nce policy ; the firm had be en insured by plaintiff since 2005. O n April 29, 2008, Tuzz olino submi tted a re newa l quote and ac cepta nce f orm to plaintiff on beha lf of
21-12-2660

himself, Terpina s, and the fir m. Question 4 on the rene wal for m asked, " [h] as any

member of

the firm bec ome awa

re of a past or pr esent c ircumstance (s) whic h may g ive rise to a c laim that has not been r eporte d? " T uzz olino checke d the box m arke d "no." He then sig ned the f orm under the following languag e: "I /we af firm af ter a n inquiry of all of the me mbers of the applicant f irm that all the information containe d here in is true and complete to the best of my /our knowledg e and that it shall be the basis of the policy of insuranc e and de emed incor porate d there in upon
acc eptanc e of this application by issuance of

a policy ." Terpina s did not sign the re newa l form as he was not re quired to do so. Tuzz olino therea fter se nt the form to plaintiff, whic h rec eived it on May 2, 2008. ¶ 8 Of re levanc e to this appea l, the malprac tice insuranc e policy contained a

n innocent insured cla

use and a sever ability

clause . The innoce nt insured clause provided: "Whene ver c overa g e under this poli cy

will be excluded or lost beca use of the insured' s failure to provide timely notice, the c ompany

ag ree s that such insuranc e as would otherwise be aff

orded unde r this policy , should be applica ble with respe ct to any insured who do not per sonally fail to g ive timely

notice af ter ha ving know ledg e of the conduct that f

orms the basis of the c laim. All insured cover ed by this provision m ust immediately

comply with all policy

provisions reg ardingrepor ting the c laim upon lear ning of the unre ported c laim." The seve rability

clause provided: "T he APPL I CATI ON, and a ny addendum or

supplements and the De clar ations,
31-12-2660

are the basis of the Policy . They are to be consider ed as inc orporated in and constituting part of this Policy . The pa rticulars a nd statements containe d in the APPL I CATI ON will be construe d as a se parate agree ment with and binding on e ach I NSURED. Nothing in this APP L I CATI ON will be construe d to increa se the COMPANY' S L imit of L iability ." ¶ 9 Over

a month afte r the c ompletion of the rene wal for m, Terpinas r ece ived a lien letter dated June 10, 2008 from an attorney hired to re prese nt Tuzz olino in the impending malpra ctice claims ag ainst him. According to Terpinas, this was the first time he bec ame a war e of the claims ag ainst his partner. T erpina s contends, while he may have ha d g ener al conve rsations with Tuzz olino about Coll etta' s case s, Tuzz olino never r evea led to him any thing a bout the Colletta malprac tice suits. Terpinas the ref ore r eporte d this newfound information to plainti ff immediately

following his rece ipt of the lien letter. ¶ 10 I I I . Plaintiff's Complaint ¶ 11 On Marc h 12, 2009, plaintiff filed a complaint for r escission and other relief ag ainst Tuzz olino, Terpinas, the f irm, and Colletta. Count Iof the c omplaint sought re scission of the entire insura

nce policy

on the g rounds that Tuzz olino's withholding of information amounted to a materia l misreprese ntation that voided the contra ct ab initio . Count I Iof the c omplaint requested decla ratory relief finding plaintiff had no duty or oblig ation to defe nd Tuzz olino or the firm in
connec tion with the malpractice claims filed by Colletta. In his response to the c omplaint,

1 Terpina s broug ht a counter claim see king a decla ratory judgme nt that the insurance policy

Plaintiff amended the complaint on August 25, 2009 by attachinga copy

of the law suit 1 Colletta filed ag ainst Tuzz olino, Terpinas, a nd the firm. 41-12-2660

cover ed him with respec t to Col letta' s malprac tice suit. ¶ 12 I V. Entry of Summary

J udg ment ¶ 13 On J anuar

y 25, 2010, plaintiff moved for summary judgme nt on all counts ag ainst the defe ndants. On June 9, 2010, the trial court ente red summar y judgme nt ag ainst Tuzz olino with reg ards to count I I , finding plaintiff had no duty or oblig ation to defe nd Tuzz olino in C olletta' s action ag ainst him. I n its written order, the trial court r eser ved rulingon summary

judgme nt as to the other de fenda

nts. Subsequently , the firm, Te rpinas, and Colletta filed a joint mot ion for summary judgme nt. Terpinas a dditionally filed a se parate cr oss-motion for summary judgme nt on his counterc laim. ¶ 14 After

extensive briefing , a hea ringwas he ld reg ardingthe pendingsummary judgme nt motions on J uly

27, 2012. In considering the motions, the trial court stated " [t ]here is no I llinois
case law exactly

on point," and thus proc eede d to rely on "g ener al principles of resc ission law in I llinois " a nd a Seventh Circuit dec ision int erpr etingI llinois law, Home I nsurance Co. v. D unn , 963 F. 2d 1023 ( 7th Cir. 1992). The trial c ourt rea soned " resc ission is a doctr ine that essentially vitiates an entire contra ct" and " rende rs the contr act une nforc eable ." I t then acknow ledg ed " there may be some a

pplication of the doc trine of pa rtial resc ission, but t hat doctrine essentially applies wher e *** ther e' s an agree ment which basic ally has sepa rate contra cts that constitute a portion of the whole a g ree ment." T he trial c ourt then conc luded, " [t ]hi s is one contra ct, and I think it's an indivisi ble contra ct." In so concluding , the trial cour t rejec ted the def

endants' argument that the
sever ability

clause operated to make the c ontrac t divisi ble. Acc ordingto the trial court, " the
sever ability

clause and its plain languag e would pre vent a c onstruction that would apply ag ainst
51-12-2660

one of the insureds or one member of the insureds, the insure d firm, bec ause that provision its elf talks about it being binding a s to eac h insured." ¶ 15 Additionally , the trial cour t considere d the " historic application of *** the insurance code in I llinois " a

nd opined the re levant sec tion, section 154 of the Insuranc e Code (215 I L CS 5/ 154 (West 2008)), wa s "de signe d to preve nt material misrepr esentations in an insurance contra ct." The trial c ourt adde d that "[section 154] applies even a s ag ainst innocent misrepre sentations beca use the ve ry

notion of section 154 is that as it applies to cer tain insurance car

riers, it allows the ca rrier to evaluate the risks that it intends to ins ure a g ainst." Thus, a ccor ding to the tr ial court, " [pl aintiff] was entitled to evaluate those risks base d on the application that was prese nted to it." ¶ 16 Finally , the trial cour t addre ssed an out-of

-state de cision, First American Title Insurance Co. v. Lawson , 827 A.2d 230 (N.J. 2003), in which the Supreme Court of New Jersey

held par tial
resc ission could apply

to protect a

n innocent insured who was una war e of the misrepre sentation on the insuranc e applica

tion. I n the opinion of the trial cour t, however , " Lawson appea r[ed] t o be contra ry to the vast majority

of ca ses that have construed the reme dy or applied the reme dy

of
resc ission in a sim ilar conte x t." The trial court instea d found two out-of- state fe dera l district court de cisions, Minnesota Lawyers Mutual InsuranceCo. v. Hancoc k, 600 F. Supp. 2d 702 (E.D. Va . 2009), and INA Underwriters InsuranceCo. v. D.H. Forde&Co. , 630 F. Supp. 76 (W.D.N.Y. 1985), to be pe rsuasive. The trial court a g ree d with these two ca ses that " the equities
are lined with the car

rier, be cause *** the ca

rrier is allocatingrisks in acc ordanc e with *** the repr esentations that are made in the policies" ; the trial court f urther be lieved a c ourt revie wing
61-12-2660

I llinois prec edent would c ome to the same c onclusion. Acc ording ly , the trial cour t rescinde d the insurance policy

in its entirety

and found " [pl aintiff] has no duty to defe nd [Terpinas] or [ the firm] in [ Colletta's malpr actice action]." F ollowing the e ntry of summary

judgme nt, Terpinas and Colletta filed a timely notice of a

ppeal. 2 ¶ 17 ANALYSI S ¶ 18 Def

endants a rgue the tria l court er

red in e nteringsummary

judgme nt ag ainst them. Summary judgme nt is appropriate when " the pleading s, depositions, and admissions on file, toge ther with the a ffidavits, if any , show that there is no ge nuine issue as to any materia l fac t and that the moving pa

rty is entitled to a judgme nt as a matter of law." 735 I L CS 5/ 2-1005(c ) (West 2010). The pur

pose of summary

judgme nt is not t o try

a question of f

act, but to deter

mine whether a g enuine issue of

triable fa ct exist s. Adams v. Northern Illinois Gas Co. , 211 I ll. 2d 32, 42-43 (2004) . In deter

mining whe ther a

question of fa ct exist s, "a court must construe the pleading s, depositions, admissi ons, and af fidavits strictly

ag ainst the movant and libera lly in favor of the oppone nt." W

illiams v. Mancheste r , 228 I ll. 2d 404, 417 (2008). Summary judgme nt is "a dr astic mea ns of disposing of

litigation," and thus, should only be aw arde d when the moving pa

rty ' s rig ht to judgment as a matter of la

w is "c lear

and fr ee f

rom doubt." Id . We g ener ally revie w g rants of summar y judgme nt de novo
. Id
. ¶ 19 Plaintiff argues de novo revie w would be inappr opriate in this case beca use, in g ranting summary judgme nt, the trial court ultimately resc inded the contr act. As pla intiff acc urate ly
The lawfirm, as a

separ ate e ntity , has not appe aled a nd, other than briefly

mentioning so 2 in the headingof sec tion I I , the def endants do not ar g ue in their brie fs that the law f irm' s insurance cover ag e has be en pre serve d. 71-12-2660

notes, resc ission is an equitable reme dy which " ' lies larg ely

within the court' s discretion.' " Luciani v. Bestor , 106 I ll. App. 3d 878, 882 (1982) (quoting Bec hard v. Bolton , 24 N.W.2d 422, 423 (Mich. 1946)) . The de cision to apply resc ission in t his case, how ever , turns on the answe r to multipl e questions of law , namely the interpre tation of the policy languag e, the f

ormation of the ag ree ment, and the a

pplication of the innoce nt insured doctrine . "[W] here the exercise of discretion has be en fr

ustrated by

the application of an er

roneous r ule of law , revie w is require d to permit the exercise in a manner consistent with the law." (Interna l quotation marks omitted.) Loyola Academ

y v. S&S Roof Maintenance , Inc. , 146 I ll. 2d 263, 274 (1992) (quoting People v

. Brockm an , 143 I ll. 2d 351, 363 (1991)). Our ultimate reviewof the issues in this case is there fore de novo
. ¶ 20 I . Innocent Insured ¶ 21 Def

endants c ontend the innoce nt insured clause in the written policy and the c ommon law innocent insured doc trine pre serve Terpina s' cover ag e. We addr ess ea ch of the se ar g uments in turn. ¶ 22 A. Contractua l I nnocent Insured Clause ¶ 23 Acc ordingto defe ndants, the languag e conta ined in the innocent insure d clause of the contra ct ac ts to preserve Terpina s' cover ag e. An insura nce policy

is a contra ct, and the g ener al rules g overningthe interpre tation of contra cts also g overn the interpre tation of insuranc e policies. Standard Mutual Insurance Co. v. Lay , 2013 I L114617, ¶ 24. I f the policy languag e is unambig uous, the policy

will be applied as written unless it contrave nes public policy
. Id. We revie w the interpr etation of c ontrac tual languag e de novo
. Gallagher v. Lenart , 226 I ll. 2d 208,
81-12-2660

219 (2007). ¶ 24 Def

endants point to section V.I of the policy , entitled "I

nnocent Insured." Under the plain languag e of the policy , this section applies " [w] heneve r cove rag e *** would be e x cluded or lost becauseof the INSURED'S failure to provide timely notice ." ( Emphasis added.) Def endants contend this section oper ates he re be cause "[i]t is undisputed that [ Terpina s' ] coverag e wa s lost beca use Tuzzol ino failed to re port the Coletta claim on the r enew al applica tion." We ar e not persua ded by

defe ndants' argument. ¶ 25 Def

endants attempt to chara cter ize the rea son for Te rpinas' loss of cover ag e as a "f ail[ure] to report" in an ef

fort to invoke the innoce nt insured clause of the c ontrac t. This argument ignor es the distinction betwee n the nondisclosure of a malpra ctice c laim under a n exis ting insurance policy

and the nondisclosure of a ma lprac tice cla im on the rene wal application for a new policy . I f this case mere ly involved the forme r, Ter pinas would rema in cover ed; the re cord indicates Te rpinas provide d notice as soon a s he bec ame c og nizant of his partner' s malfea sance and plaintiff doe s not assert that Te rpinas is not cover ed under the languag e of the ag ree ment. This case , howeve r, involves the latter . Consequently , plaintiff cha rg es that no such policy

exis ts in the first place beca

use Tuzzol ino's misre prese ntation in procuringthe agree ment voided it ab initio . Acc ording ly , the cr ucial inquiry

in this case is not whether the languag e of the policy
cover s Terpina s, but whether the common law innoce nt insured doctrine permits the policy to
rema in in place a s to Terpinas. 3
Def endants re ly

on Great Ame rican InsuranceCo. v. Christy , 53 A.3d 538 (N.H . 2012), 3 a ca se fr om the Supreme Court of Ne w Hampshire , in arguing that the innocent insured c lause protec ts Terpinas in this matter. In Christ y , the cour

t did not rely

on common law doctr ine but, 91-12-2660

¶ 26 B. Common L aw Doc trine ¶ 27 Def

endants a dditionally

argue the c ommon law innocent insured doc trine protec ts Terpina s in this case. The c ommon law innocent insured doc trine applies in a situation whe re two or more insure ds have a n insurance policy

and one of

the insureds c ommits an ac t that would normally void the insurer' s contrac tual obligations. S ee Economy Fire &Casualty Co. v. W arren , 71 I ll. App. 3d 625, 629 (1979); W est Bend M

utual Insurance Co. v. Salem i , 158 I ll. App. 3d 241, 248 (1987). I n this sit uation, the innocent insure d doctrine pr eser ves cove rag e for the innocent insure ds where "a rea sonable pe rson would not understand that the wrong doing of a co-insure d would preve nt rec overy under the policy ." State Farm Fire &Casualty Insurance Co. v. Mic eli , 164 I ll. App. 3d 874, 881 (1987); see also Salemi , 158 I ll. App. 3d at 248-49. Courts have f reque ntly applied the r

ule in the situation where one prope rty owner sets fire to mutually owned pr operty

without the co-owne r' s knowledg e; in that instance, the innocent prope rty owner may still collect his or he r portion of the insura nce pr ocee ds. See, e.g. , W arren , 71 I ll. App. 3d at 629; Salemi , 158 I ll. App. 3d at 244; W asik v. Allstate InsuranceCo. , 351 I ll. App. 3d 260, 261 (2004). The instant case pr esents the que stion of whether the innocent insure d doctrine pr otects an innoce nt co-insure d wher e a ma terial misrepr esenta

tion was made during the formation of the

rathe r, found the la

ng uag e of the innocent insured pr ovision of the policy indicated that " the parties intende d to disti ng uish actual fr om imputed knowledg e and not to pena liz e insureds who did not have ac tual knowledg e of wrong ful ac ts." Id. at 544. In Christ y , howeve r, the policy languag e wa s noticeably

more c omplex and spec ifically provided that the insure r " must provide cover ag e to those insureds who did not ' persona lly commit or persona lly

participate' in the act, err or or omission." Id. The languag e in the policy at issue her e spec ifically limit s its protections to the situation where the insured fa ils to report a potential malpra ctice c laim in a timely manner . We theref ore do not find Christ

yto be par

ticularly rele vant in decidingthe instant case
. 101-12-2660

policy
. ¶ 28 Def

endants a rgue Economy

Fire &Casualty Co. v. W arren , the first ca se to apply the innocent insured doc trine, controls. In W arren , a husband a

nd wife c o-owne d a re sidence
cover ed by

a fire insurance policy

with the insurer. W

arren , 71 I ll. App. 3d at 626. After a seeming ly

acc idental fire cause d damag e to the re sidence , the husband a nd wife se ttled with the insurer f or $20,514.05. Id. L ater , howeve r, the wife reve aled that she set fire to the residenc e by placinga lit piece of

paper in a waste basket. Id. The husband ma intained he ha d no knowledg e of his wife' s actions. Id. at 627. Consequently , the insurer sued the husband a

nd wife se eking
resc ission of the settlement ag ree ment in its entirety and re stitut ion of the proc eeds pa id. Id. at 626. The trial c ourt found the se ttlement was proc ured by fra ud and re scinded the a g ree ment in full. Id. On appe al, the husband a rgued his innocenc e of a

ny wrong doing e ntitled him t o half the proce eds of the se ttlement. Id. at 627. This court a g ree d, finding "[t]he trial court er red in
awa rdingthe plaintiff an e quitable lien on the full amount of the insura nce se ttlement." Id. at 629. The c ourt rea soned, " [w] e do not think the rea sonable pe rson in the position of [ the husband] would have supposed that the wrong doing of his co-insured w ould be imputed to him." Id. As a re sult, the husband was e ntitled to keep $10,278.98 of the se ttlement proce eds. Id. 4 ¶ 29 Plaintiff contends W arren is disti ng uishable fr om this case as W arren "did not conc ern the formation of a policy ." A ccor ding to plaintiff, W arren might apply

"if Terpina s had bee n

Other c ourts have use d simil ar r easoningin finding c overa g e for an innoce nt insured. 4 See, e.g. , Holloway v. Sack s and Sacks, Esqs. , 275 713 N.Y.S.2d 162, 164 (N.Y. A pp. Div. 2000) (re fusingto impute the misconduct of an a ssociate to the r est of the f irm where there was no evidenc e the f

irm had ac tual or construc tive knowledg e of the associate ' s wrong doing)
. 111-12-2660

denied a defe nse bec ause Tuzzolino's alleg ed [malpractice ] was excluded from cove rag e;" howeve r, bec ause the contra ct was void ab initio due to the misrepr esentation made in procur ing the policy , W

arren should not apply . Plaintiff's attempt at disti ng uishing W arren fails for two
rea sons. ¶ 30 First, plaintiff' s argument err oneously casts W arren as a c ase in whic h the insurer soug ht to deny cover ag e under

the policy

afte r havinglear

ned of the wife' s actions. To the c ontrary , the insurer in W

arren sued to resc ind the settlement ag ree ment and soug ht restitution of the proce eds paid to the husband a

nd wife that were procur ed by the wife ' s fra

ud. Id. at 626. L ikewise, the trial court grante d resc ission of the settlement ag ree ment beca use it was proc ured by

said fra ud. Id. Thus, the fa cts of W

arren are simil ar to those of the instant case : rather

than see k to deny
cover ag e under

the policy , the insurer

soug ht to rescind the c ontrac t in its entirety following its discovery of the c ollective fa ilure of the insure ds to revea l the rele vant misconduct. ¶ 31 Second, plaintiff incor rec tly asser ts the misreprese ntation made by Tuzz olino voided the contra ct ab initio . To the contra ry , "a materia l misreprese ntation *** rende rs the policy voidable, not void ab initio ." Illinois Stat e Bar Ass'n Mutual Insurance Co. v. Coregis InsuranceCo. , 355 I ll. App. 3d 156, 167 (2004). This is an important distinction because "a contra ct that is void ab initio is treated a s though it neve r existed." Id. at 164. " [I ]f a contra ct is merely voidable, a pa

rty
can e ither opt to void the contrac t based upon that de fec t or choose, instea d, to waive that de fec t and ratify the contra ct despite it." Id. at 164-65. ¶ 32 Plaintiff alternatively relies on a

Seventh Circuit decision interpr etingI llinois law, Home InsuranceCo. v. Dunn , 963 F.2d 1023 ( 7th Cir. 1992). In Dunn , an attorne y acquir ed a
121-12-2660

malprac tice insuranc e policy providing cover ag e for

himself and the 12 other

lawyers a ssociated with his firm. Id. at 1024. Unbeknownst to the other 12 lawyers in the f irm, the attorney

had been e mbezz ling f

unds belong ing to the f

irm' s clients; the attorney did not disclose this information to the insurer prior to obtainingthe malpra ctice insura nce. Id. Upon lear

ning of the embezzlement, the insurer filed a suit seekingto void the policy
. Id. The pa rties then filed c rossmotions for summary

judgme nt and the trial c ourt ruled in fa vor of the de fenda

nts, finding the twelve other

lawyers we re innoc ent insureds. Id. On appe al, the Seventh Circuit re verse d, finding I llinois law re quires re scission of the policy in its entirety
. Id. at 1026. In so concluding , the Dunn court re lied on Ratcliffe v. International Surplus Li nes InsuranceCo. , 194 I ll. App. 3d 18 (1990), a

nd quoted the followinglanguag e:

" A mater ial misrepre sentation will void the contrac t even thoug h made through mistake or g ood faith . . . . In other wor ds, it is unnecessar y for the insure r to prove that a misrepre sentation was made with the intent to deceive if it was mater ial to the risk assumed." (Interna l quotation marks ommitt ed.) Dunn , 963 F.2d at 1026 (quoting Ratcliffe , 194 I ll. App. 3d at 25). Thus, acc ordingto the Dunn court, the 12 othe r lawyers' "ignoranc e of [the] fraud [was] irrele vant." Dunn , 963 F.2d at 1026. ¶ 33 The fa cts of Dunn are very simil ar to the instant ca se and, if Dunn was bindingauthority , it would likely

defe at def

endants' appea l. Never

theless, Dunn does not control her e. F irst, as a fede ral de cision interpre ting I llinois law, it amounts to at most persuasive a uthority , that is "unle ss it runs contrary

to previously

decide d state ca ses which, if c orre ctly rea soned, will not be
131-12-2660

overturne d." Falk v. Northern Trust Co. , 327 I ll. App. 3d 101, 108 (2001). Second, the case Dunn relied on, Ratcliffe , did not address nor involve the application of the innocent insured doctrine. See g ener ally Ratcliffe v. International Surplus Li nes InsuranceCo. , 194 I ll. App. 3d 18 (1990). In Ratcliffe , the insureds' argument was that no misrepr esentation occurr ed at a ll. Id. at 25. The c ourt in Ratcliffe conseque ntly did not address W

arren or any

other c ase a

pplying the 5 innocent insured doc trine. Third, the Dunn court tre ated the policy as void ab initio , which, as noted above , runs contra

ry to I llinois case law. Compare Dunn , 963 F.2d at 1026, with Coregis , 355 I ll. App. 3d at 164-65. Not surprising ly , Dunn has not bee n cited or f ollowed by

any I llinois decision to date. ¶ 34 Reg ardle ss, acc ordingto plaintiff, Dunn should control as it "r ecognizes the disti nction betwee n wrong doing that invokes a policy exclusion and wrong doing in the ve ry procur ement of the policy ." T his argument mirrors plaintiff' s previous attempt at distinguishing W arren . Yet, as stated ea rlier, while W

arren may

not have involved wr ong doing in the pr ocure ment of a policy , it did involve wrong doing in the pr ocure ment of a settlement agree ment . An insuranc e policy and a settlement a g ree ment are at their c ore both c ontrac ts gove rned by the same g ener al principles of contra ct law. See Hobbs v. Hartford Insurance Co. of the Midwest , 214 I ll. 2d 11, 17 (2005)

In Ratcliffe , the applica

nts argued ther e wa s no misreprese ntation on the policy 5 application bec ause the y

subjectively

did not believe the r eleva nt construction dispute they failed to disclose would have g iven rise to a c laim. Ratcliffe , 194 I ll. App. 3d at 24-25. The c ourt disag ree d and found that, reg ardle ss of their subjec tive belief, the applicants we re r equire d to disclose those " circ umstances known *** which [objectively ] m ight ha ve g iven rise to a c laim ag ainst them." Id. at 26-27. In this case, ther e is no dispute that a misrepr esentation occurr ed. The re levant inquiry

that Ratcliffe did not consider is whethe r the pa rty innocent to the misrepre sentation should remain c overe d under c ommon law doctrine. 141-12-2660

(" An insuranc e policy

is a contra ct, and the g ener al rules g overningthe interpre tation of other ty pes of c ontrac ts also gove rn the interpr etation of insura nce policie s.") ; Haisma v. Edgar , 218 I ll. App. 3d 78, 87 (1991) (" A settlement agree ment is considere d a contr act, a nd construction and enf orce ment of settlement agree ments are g overne d by principles of c ontrac t law." ). Thus, for Dunn to preva il over W arren , plaintiff must demonstrate why a misrepr esentation made in obtaining a

n insurance policy

should result in a diffe rent a pplication of the innoce nt insured doctrine a s a misrepre sentation made in obtaininga settlement a g ree ment. After an examination of public policy

in I llinois and other

states, we se e no re ason why W arren should not apply

to these fa cts. ¶ 35 Plaintiff ge nera lly notes that insurers a

re innoc ent par

ties as well and " to require insurers to honor ag ree ments premised on de ceptive a ccounts of pote ntial expos ure w ould threate n the very conce pt of insuranc e cove rag e." Plaintiff cer tainly is not incorrec t to state that insurers a re likewise innoce nt of wrong doing in these case s. Nonethele ss, the stated policy of I llinois is to "f avor[] coverag e under

an insuranc e policy

whene ver the fac ts justi fy such cove rag e." Inter-I nsurance Ex change of Chicago Motor Club v. MilwaukeeMutual Insurance Co. , 61 I ll. App. 3d 928, 931 (1978). Mor eover , the I llinois supreme c ourt has g ener ally interpre ted the purpose of

the re levant sec tion of the Insuranc e Code, sec tion 154, to favor innoce nt insureds. Section 154 states:

"N o misrepre sentation or fa lse war ranty made by the insured or

in his behalf in the neg otiation for a policy

of insuranc e, or br eac h of a c ondition of such policy shall defe at or avoid the policy

or pre vent its attachingunless such misrepre sentation, false war ranty
151-12-2660

or condition shall have be en stated in the policy or endor sement or r ider attached the reto, or in the written a

pplication there for. No suc h misrepre sentation or fa lse war ranty shall defe at or avoid the policy unless it shall have bee n made with ac tual intent to deceive or materia lly

aff ects e ither the a cce ptance of the risk or the hazard a ssumed by the company
. Wit h respe ct to a policy

of insuranc e as de fined in subsec tion (a), (b), or ( c) of Section 143.13, except life, ac cident and he alth, fidelity and sure ty , and oce an mar ine policies, a policy or policy rene wal shall not be re scinded a fter the policy has bee n in effe ct for one y ear or one policy

term, whiche ver is less. This Section shall not apply to policies of marine or transportation insurance." 215 I L CS 5/ 154 (West 2008). In revie wingsection 154, our supre me cour t declar ed " section 154 is repr esentative of statutes which ' are designed to re lieve ag ainst the rig orous conse quence s of the common-la w rules a s to
war ranties a nd misrepre sentations conce rninginsurance , particula rly if made in g ood faith with no intent to deceive and in re lation to a matter whic h does not incre ase the risk or contribute to the loss.' " Golden Rule I

nsurance Co. v. Sc hwartz , 203 I ll. 2d 456, 464 (2003) (quoting43 Am. J ur. 2d Insuranc e § 1034 (1982) ). In interpre ting I llinois law, the Seve nth Circuit has likewise stated " the purpose be hind section 154 is to protect insureds f rom insuranc e compa

nies seeking to void their policies." National Fidelity Life Insurance Co. v. Karaganis , 811 F.2d 357, 363 (7th Cir. 1987). ¶ 36 I t is not di fficult to see why these policy

conce rns ar e par

ticularly important in the specific context of leg al malpra ctice insura nce. B y the 1980' s, the occ urre nce of malprac tice suits aga inst attorney s increa sed shar ply . See F redr ic L . Goldfein, Legal Malpractice I nsurance , 161-12-2660

61 Temp. L . Rev. 1285, 1285-86 (1988) . Not surprising ly , the nee d for pr ofessional liability insurance has incre ased a s well, prompting some states to even make it a mandatory condition to prac ticing la

w. See id. at 1296. Of c ourse, while ma lprac tice insuranc e undoubtedly serve s an important purpose in protec ting a ttorney s subject to incre ased r isk and liability , as with other insurer- insured situations, a denial of cover ag e does not only

neg atively

aff ect the pote ntial insured. Without coverag e, many defe ndants bec ome unable to pa y out the settlements or judgme nt awar ds, in effe ct har ming the initially

wrong ed par

ty (in this case, Coletta)
. Cf. Erie InsuranceExc hange v. Lake , 671 A.2d 681 (Pa. 1996) ( even where insurance contra ct was f ound void ab initio , the policy

could not be re scinded a s to the harmed, innoc ent third party ). Thus, while the insurer s and insureds may argue over

who is the truly

"innoc ent" party

for the pur

poses of equities, such a

focus misses impact on the unde rlying ma lprac tice litigation. ¶ 37 Cases fr om other jurisdictions refle ct these policy conce rns. In particula

r, def endants c ite First American Title Insurance Co. v. Lawson , 827 A.2d 230 (N.J. 2003). InLawson , two partne rs of a

three -per son law firm e ng ag ed in a " kiting" scheme , improperly transfe rring

money from var ious client acc ounts into t he ac counts of other clients and of the firm itself. Lawson , 827 A.2d at 233. While in the midstof the kiting scheme , one of the partne rs who par ticipated in the fra ud applied to re instate the malpra ctice insura nce f or the fir m and its members. Id. at 234. On the application, this partne r wa rra nted he is " ' not awar e of a ny circ umstances or

any alleg ations or conte ntions as to any

incident, which may

result in a cla im being ma de ag ainst the firm or a ny of its past or pre sent owner s, partner s, share holders, cor porate office rs or e mploy ees or its prede cessor s in business.' " Id. The third par tner of the firm did not participate in the
171-12-2660

misappropriation of c lient funds and appa rently had no knowledg e of his par tners' impropriety

at the time the application for insuranc e wa s filed. Id. at 240. Upon discove ry of the kiting scheme , the insurer

filed a de clar atory

action to void the policy

ag ainst the firm and a ll of its partne rs. Id. at 235. Afte r a tria l and subsequent a ppeal, the Supre me Court of Ne w J erse y held the third partne r' s cover ag e should not have be en re scinded. Id. at 241. The c ourt rea soned the fac ts of the ca se " require us to consider [the third partner ] an innocent partne r for purposes of balanc ing the equities attenda nt in these circ umstances." Id. at 240. Acc ordingto the court, "voidingthe policy

in respec t of [the third partner] would mean that he no longe r would possess
cover ag e for

any of his actions in unrelated matters, includingsimple malpractice , that might have oc curr ed duringthe per iod of anticipate d cover ag e," and such a "sw eepingresult would be contra ry to the public interest." Id. Specifica lly , the cour t noted "it would be inc onsistent with the policies under lying our Rules of Court that seek to prote ct consumer s of leg al servic es by requiringattorney s to maintain adequate insuranc e in this setting." Id. at 240-41. ¶ 38 Lawson , of cour se, does not re flec t the public policy of I llinois . Neve rtheless, g iven the exis ting c ase la

w re g arding

the innocent insure d doctrine, I llinois courts' overa ll inclination to protec t the insured, and the persua sive authority from other

jurisdictions, we find that the innocent insured doc trine pre serve s cover ag e for Terpina s under these fac ts. ¶ 39 I I . Severa bility Clause ¶ 40 The pa

rties furthe r dispute the ef fec t of the seve rability

clause and whe ther Tuzzoli no' s misrepre sentation barr ed the se vera bility clause from oper atingin the first place
. Whil e we have 6
Neither party challeng es the va lidity

of the seve rability

clause itself. 6 181-12-2660

alre ady found that the innoce nt insured doctrine applies in this case, this issue war rants discussion as the trial cour t believed it could not par tially resc ind the contra ct bec ause the contra ct was indivisible. In I llinois , the long -standingg ener al rule ha s been that "r escission, if made, must be full, and e mbrac e the e ntire contra ct." Bowen v. Sc huler , 41 I ll. 192, 196 (1866). This rule, howe ver, " does not apply to a contra ct of whic h the par ts are so se vera

ble as to for

m independe nt contrac ts." Kaplan v. Keith , 60 I ll. App. 3d 804, 808 (1978). De fenda nts thus argue the seve rability

clause of the policy

operates to form sepa

rate contra cts. In deter

mining whe ther a contr act is divisible, as in other aspe cts of contr act inter preta tion, a court attempts to effec tuate the intent of the pa

rties. Bjork v. Drape r , 381 I ll. App. 3d 528, 544 (2008). We there fore examine the languag e of the policy . See Gallagher , 226 I ll. 2d at 233. ¶ 41 Def

endants dire ct us to the sever ability clause , which states, " The pa rticulars a nd statements containe d in the APPL I CATI ON will be construe d as a se parate agree ment with and binding on e ach I

NSURED." A ccor ding to de fenda nts, the I llinois Supreme Court interpr eted simil ar c ontrac tual languag e to " provide[] eac h insured with sepa rate cover ag e, as if e ach w ere separ ately insured with a distinct policy ." United States Fidelity &Guaranty Co. v. Globe Indem nity Co. , 60 I ll. 2d 295, 299 (1975). Plaintiff does not nec essar ily challeng e this interpre tation, but argues while " the clause cre ates sepa rate ag ree ments with eac h of [the insureds]," ea ch of the se sepa rate ag ree ments still "inc orporat[ es] the statements in the application, includingthe fa lse one at issue in this case ." Plaintiff c ites no authority for this
asser tion and does not offe r any explanation as to why

the innocent insure d doctrine w ould stil l not protect Te rpinas under W arren . 191-12-2660

¶ 42 Moreove r, plaintiff' s argument nece ssarily presuppose s that the sever ability clause split the contra ct into disti nct agree ments. This contradicts plaintiff' s ultim ate c onclusion that the clause could not operate to cure any defe ct in the formation because "a materia l misrepre sentation voids the entire policy , eff ectively preve nting it from c oming into exist ence as to any party ." I n any event, the la

tter asse rtion still relies on the mistake n belief that the policy was void ab initio . Be cause the misrepre sentation did not void the policy ab initio , it follows that the seve ranc e cla

use still operated to c reate sepa rate contra cts until the contrac t is fully
resc inded. See Coregis , 355 I ll. App. 3d at 164-65. ¶ 43 Finally , it is i mportant to note that the cour t in W arren did not consider whe ther the contra ct was se vera

ble in applying the innocent insured doc trine. See W arren , 71 I ll. App. 3d at 627-29. B y

implication, this sug g ests that when a pplying the innocent insured doc trine, the c ourt does not nec essar ily

require a divisible contrac t in order to par tially resc ind a contra ct. ¶ 44 Acc ording ly , we f ind the sever ability

clause operated to cre ate se parate and distinct contra cts, allowingthe trial cour t to partially

resc ind the contra ct. Fur ther, e ven assumingthe
sever ability

clause did not sever the c ontrac t, there is no indication fr om W arren that such is a require ment in applying the innocent insured doc trine. ¶ 45 CONCLUSI ON ¶ 46 For

the fore g oing r easons, the judg ment of the c ircuit court of Cook County

is rever sed with judgment to be e ntere d in acc ordanc e with the views e x presse d here in.

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