Court Opinion

ID: 2790382
Source: CourtListenerOpinion
Date Created: 2015-03-31 18:05:56.765979+00
Date Added: 2024-06-11T11:28:54.165005
License: Public Domain

Illinois Official Reports

                                          Supreme Court

     Illinois State Bar Ass’n Mutual Insurance Co. v. Law Office of Tuzzolino & Terpinas,
                                        2015 IL 117096

Caption in Supreme           ILLINOIS STATE BAR ASSOCIATION MUTUAL INSURANCE
Court:                       COMPANY, Appellant, v. LAW OFFICE OF TUZZOLINO AND
                             TERPINAS et al., Appellees.

Docket No.                   117096

Filed                        February 20, 2015

Held                         The common law doctrine of “innocent insured” could not preserve
(Note: This syllabus         legal malpractice coverage as to a member of a two-man law firm
constitutes no part of the   whose policy was properly rescinded under the Insurance Code for the
opinion of the court but     other attorney’s misrepresentation in applying for renewal of the
has been prepared by the     firm’s coverage.
Reporter of Decisions
for the convenience of
the reader.)

Decision Under               Appeal from the Appellate Court for the First District; heard in that
Review                       court on appeal from the Circuit Court of Cook County, the Hon. Rita
                             M. Novak, Judge, presiding.

Judgment                     Appellate court judgment reversed.
                             Circuit court judgment affirmed.
     Counsel on                J. Timothy Eaton, of Taft Stettinius & Hollister LLP, and Robert Marc
     Appeal                    Chemers and Scott L. Howie, of Pretzel & Stouffer, Chtrd., all of
                               Chicago, for appellant.

                               C. Jeffrey Thut, of Roach, Johnston & Thut, and Christopher M. Cano,
                               of Franco & Moroney, LLC, all of Libertyville, for appellees.

                               David S. Osborne, of Lindsay, Rappaport & Postel, LLC, of Chicago,
                               for amicus curiae Property Casualty Insurers Association of America.

     Justices                  JUSTICE FREEMAN delivered the judgment of the court, with
                               opinion.
                               Chief Justice Garman and Justices Thomas, Karmeier, Burke, and
                               Theis concurred in the judgment and opinion.
                               Justice Kilbride dissented, with opinion.

                                                OPINION

¶1         Plaintiff Illinois State Bar Association Mutual Insurance Company (ISBA Mutual) filed a
       complaint for rescission and other relief against the Law Office of Tuzzolino & Terpinas
       (firm); Sam Tuzzolino and Will Terpinas, Jr., partners in the firm; and Anthony “Antonio”
       Coletta, the plaintiff in an underlying legal malpractice action against Tuzzolino, Terpinas and
       the firm. In its complaint, ISBA Mutual sought rescission of the legal malpractice insurance
       policy it had issued to the firm, alleging that Tuzzolino’s material misrepresentation on an
       ISBA Mutual renewal application induced ISBA Mutual to issue the policy. Ruling on motions
       for summary judgment, the circuit court of Cook County granted ISBA Mutual’s motion and
       rescinded the policy. Terpinas and Coletta appealed that judgment, arguing the rescission
       should not apply to Terpinas. The appellate court agreed and reversed the judgment of
       rescission as to Terpinas. 2013 IL App (1st) 122660, ¶¶ 38, 46. This court allowed ISBA
       Mutual’s petition for leave to appeal. Ill. S. Ct. R. 303 (eff. June 4, 2008); R. 315 (eff. July 1,
       2013). We now reverse the judgment of the appellate court and affirm the judgment of the
       circuit court.

¶2                                         I. BACKGROUND
¶3         In the underlying legal malpractice action, Coletta alleged that Tuzzolino and the firm
       represented either Coletta or his home construction business in various legal matters from 2002
       to 2008, and that Tuzzolino mishandled some of those matters, including the “Baja litigation.”
       According to Coletta’s amended complaint, beginning in 1998 he invested more than $500,000
       through his construction company in a limited liability company known as Baja Chicago LLC,
       which operated a Chicago nightclub. By the time Baja Chicago LLC ceased operations in

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     2002, Coletta had lost more than $1 million, prompting him to file suit in Lake County against
     other venturers in the LLC. Tuzzolino, through the law firm he shared with Terpinas, initiated
     the lawsuit on Coletta’s behalf in 2003. However, Tuzzolino allegedly failed to timely disclose
     expert witnesses that were expected to testify as to valuation issues, which resulted in an order
     in limine barring that testimony. Tuzzolino also allegedly failed to retain an expert witness
     specializing in forensic accounting to help determine the amount of money allegedly taken or
     siphoned from the LLC by other venturers. After his valuation witnesses were barred,
     Tuzzolino allegedly advised Coletta to settle the suit for less than $30,000, an amount far less
     than Coletta’s losses on the Baja investment. The Baja litigation was dismissed with prejudice
     in November 2005. However, even after that dismissal, Tuzzolino allegedly told Coletta that
     settlement negotiations were continuing. Tuzzolino allegedly signed settlement documents on
     behalf of Coletta and his construction company without informing Coletta.
¶4       Tuzzolino also allegedly suggested that Coletta try to recover his losses by suing the
     lawyer who handled a Baja bankruptcy in 1999. Tuzzolino filed a legal malpractice action
     against the bankruptcy lawyer at the end of 2005, but the case was dismissed six months later
     (June 22, 2006) on the ground that it was barred by the statute of repose for legal malpractice
     claims. Coletta alleged Tuzzolino failed to inform him that the suit had been dismissed,
     allowing Coletta to believe it was proceeding toward trial. Coletta alleged that in February
     2008, after he learned the case had been dismissed, he confronted Tuzzolino with that
     knowledge. According to Coletta, Tuzzolino offered to pay him $670,000 to settle any
     potential claim for legal malpractice arising out of Tuzzolino’s work on the suits against the
     Baja coventurers and the bankruptcy attorney. Coletta alleges this sum was never paid.
¶5       Less than three months later, shortly before the April 30, 2008, expiration of the firm’s
     2007-08 legal malpractice policy with ISBA Mutual, Tuzzolino completed a Renewal Quote
     Invoice and Acceptance Form for the purchase of a policy meant to cover the firm during the
     2008-09 policy year. Question No. 4 on the form asked: “Has any member of the firm become
     aware of a past or present circumstance(s), act(s), error(s) or omission(s), which may give rise
     to a claim that has not been reported?” Tuzzolino checked the “no” box corresponding to this
     question. He signed his name as “owner/partner” and dated the form April 29, 2008, beneath
     the following statement:
             “I/We affirm that after an inquiry of all 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.”
     The form is stamped “received” by ISBA Mutual on May 2, 2008. ISBA Mutual issued the
     firm a Lawyers Professional Liability Insurance Policy (No. IL 111168 6), to be effective
     May 1, 2008, through May 1, 2009.
¶6       Terpinas allegedly learned of Tuzzolino’s malfeasance about a month later, on June 10,
     2008, when he received a lien letter from an attorney representing Coletta. Terpinas
     immediately reported the claim to ISBA Mutual.
¶7       In March 2009, ISBA Mutual brought suit seeking rescission and other relief against
     Tuzzolino, Terpinas, the firm, and Coletta. Count I of the complaint, as finally amended,
     sought rescission of the entire policy (IL 111168 6) on the ground that Tuzzolino’s material
     misrepresentation voided the contract. ISBA Mutual alleged it “relied to its detriment on the

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       continuing misrepresentations of material fact made by Tuzzolino, with the knowledge that
       those misrepresentations were, in fact, untrue as to his knowledge of any circumstance, act,
       error or omission that could result in a claim.” In count II, ISBA Mutual contended, in the
       alternative, that it had no duty or obligation to defend Tuzzolino or the firm in connection with
       the claims made by Coletta against them.
¶8         In January 2010 ISBA Mutual moved for summary judgment on all counts of its amended
       complaint. In June 2010 the circuit court entered summary judgment against Tuzzolino as to
       count II of the complaint, after Tuzzolino agreed to the entry of judgment against him. The
       court found that ISBA Mutual had no duty or obligation to defend Tuzzolino against Coletta’s
       claims.1
¶9         In July 2012, following a hearing on pending summary judgment motions, the circuit court
       granted ISBA Mutual’s motion, denied defendants’ motions, and rescinded the policy. The
       court also found ISBA Mutual had no duty to defend Terpinas or the firm against Coletta’s
       action.
¶ 10       Terpinas and Coletta, but not the firm, appealed that judgment, arguing that Terpinas was
       an “innocent insured” who was not to blame for Tuzzolino’s misrepresentation and the policy
       should not have been rescinded as to him. The appellate court agreed with that argument and
       reversed the judgment of rescission as to Terpinas. 2013 IL App (1st) 122660, ¶¶ 38, 46.
       Though the court held that the policy’s own innocent insured clause could not be the basis for
       avoiding rescission, it nonetheless concluded that a common law “innocent insured doctrine”
       applied to misrepresentations made on the renewal application. Id. ¶¶ 22-25, 38. The court held
       that this doctrine preserved Terpinas’s coverage even as Tuzzolino’s was properly rescinded.
       Id. ¶ 38.
¶ 11       ISBA Mutual appeals to this court. Additional pertinent background will be discussed in
       the context of our analysis.

¶ 12                                            II. ANALYSIS
¶ 13        The question presented is whether Illinois law allows rescission of an insurance policy in
       its entirety for a material misrepresentation on the written application. Plaintiff ISBA Mutual
       answers this question in the affirmative, arguing that section 154 of the Illinois Insurance Code
       (215 ILCS 5/154 (West 2008)) allows complete rescission where, as here, the
       misrepresentation materially affects the acceptance of the risk by the insurer, and thus goes to
       the formation of the contract. Defendants disagree, arguing that while rescission might be
       appropriate for Tuzzolino, it is unfair and against public policy to rescind insurance coverage
       for Terpinas, an innocent insured who had no knowledge of Tuzzolino’s misdeeds and the
       alleged misrepresentation.
¶ 14        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 material fact exists. Adams v. Northern Illinois Gas

          1
            Tuzzolino was disbarred “on consent” on November 12, 2010. In re Sam Tuzzolino,
       No. 09-CH-0076.

                                                   -4-
       Co., 211 Ill. 2d 32, 42-43 (2004). A circuit court’s entry of summary judgment is reviewed
       de novo. Standard Mutual Insurance Co. v. Lay, 2013 IL 114617, ¶ 15; Rich v. Principal Life
       Insurance Co., 226 Ill. 2d 359, 370 (2007).
¶ 15       Section 154 of the Insurance Code provides:
                    “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.” 215 ILCS 5/154 (West 2008).
¶ 16       We note, initially, that section 154 expressly refers to misrepresentations “made by the
       insured or in his behalf”—that is, not necessarily by the insured personally.
¶ 17       The section also sets forth a two-prong test for determining if the policy may be rescinded.
       First, the statement must be false, and second, it either must have been made with an actual
       intent to deceive or must “materially affect the acceptance of the risk or hazard assumed by the
       insurer.” Golden Rule Insurance Co. v. Schwartz, 203 Ill. 2d 456, 464 (2003). “The statute’s
       provisions are to be read in the disjunctive, so that either an actual intent to deceive or a
       material misrepresentation which affects either the acceptance of the risk or the hazard to be
       assumed can defeat or avoid the policy.” (Emphasis in original.) National Boulevard Bank v.
       Georgetown Life Insurance Co., 129 Ill. App. 3d 73, 81 (1984). This court has recognized that
       section 154 permits rescission for an innocent misrepresentation. “Under the statute, therefore,
       a misrepresentation, even if innocently made, can serve as the basis to void a policy.” Golden
       Rule, 203 Ill. 2d at 464. If the misrepresentation materially affects the insurer’s acceptance of
       the risk, it does not matter that one of the parties, or an insured, might not have been to blame
       for the misrepresentation. “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.”
       Ratcliffe v. International Surplus Lines Insurance Co., 194 Ill. App. 3d 18, 25 (1990).
¶ 18       ISBA Mutual asserts that the misrepresentation in the case at bar meets the section 154
       requirements: “Even if the misrepresentation had not been made with the intent to deceive, it
       materially affected the insurer’s acceptance of the risk, as ISBA Mutual would not have
       renewed the policy had Tuzzolino truthfully answered the question and disclosed his
       knowledge of a potential claim.” According to ISBA Mutual, because the misrepresentation
       materially affected its acceptance of the risk, it is grounds for rescission under the statute.
¶ 19       Defendants disagree. They do not dispute that the misrepresentation here materially
       affected the acceptance of the risk. Instead, defendants focus on the impact that rescission
       would have on Terpinas, an innocent insured who did not cooperate or contribute to a loss.
       According to defendants, it would be “patently unfair in this case to rescind insurance coverage
       to Terpinas, when he had absolutely no knowledge of his partner’s misdeeds and the alleged
       misrepresentation on the insurance renewal invoice.” Defendants invoke public policy,
       asserting that ISBA Mutual’s contention that section 154 permits the rescission of the policy
       here “is contrary to the well-established public policy of the State of Illinois.” According to

                                                   -5-
       defendants, section 154 “is not a sword to be utilized to vitiate insurance coverage; rather it is a
       shield that must be utilized to protect insureds and the public.”2
¶ 20       In keeping with their emphasis on public policy, defendants assert the appellate court
       below correctly applied the common law innocent insured doctrine in this case. The appellate
       court, which also cited policy concerns (e.g., 2013 IL App (1st) 122660, ¶¶ 35-36), concluded
       the innocent insured doctrine preserved coverage for Terpinas (id. ¶ 38). The common law
       innocent insured doctrine operates in cases where there are two or more insureds on a policy,
       and it allows an insured who is innocent of wrongdoing to recover despite the wrongdoing of
       other insureds. See Vasques v. Mercury Casualty Co., 947 So. 2d 1265, 1268 (Fla. Dist. Ct.
       App. 2007). Illinois cases applying the “innocent insured” doctrine typically involve arson or
       vandalism where an innocent insured seeks recovery under a policy that includes an exclusion
       for intentional acts. E.g., Wasik v. Allstate Insurance Co., 351 Ill. App. 3d 260, 267 (2004)
       (plaintiff, an innocent insured, was entitled to recover losses he sustained because of fire
       started by his stepson). Defendants here argue that the reasoning of these cases is nevertheless
       equally applicable to Terpinas under the circumstances in this case.
¶ 21       In analyzing the innocent insured doctrine, the appellate court below relied principally on
       Economy Fire & Casualty Co. v. Warren, 71 Ill. App. 3d 625 (1979), which defendants here
       also cite.
¶ 22       The insurer in Warren had paid a property settlement for fire damage to a home jointly
       owned by its insureds, a married couple, only to learn later that the wife had claimed to have set
       the fire deliberately. The insurer sought to rescind the settlement and recover the settlement
       proceeds it had paid to both insureds. Id. at 626. Amid claims that the wife suffered from
       mental illness, there were factual disputes as to whether she really had set the fire and even
       whether she had claimed to have done so. But it was undisputed that her husband was not to
       blame for the fire, making him an “innocent” insured. Id. at 629. Warren held that the arson of
       the wife should not be imputed to the innocent husband so as to bar his recovery of one-half the
       proceeds of the settlement.
¶ 23       Because the dispute in Warren arose after the settlement had been paid, the case involved
       rescission of the settlement agreement. But, as ISBA Mutual correctly notes, Warren is not
       therefore a rescission case that would apply to the case at bar. Warren is not about the
       rescission of an insurance policy, and consequently does not invoke section 154 of the
       Insurance Code. The insurer in Warren sought rescission of the settlement agreement on the
       ground that there was no coverage for the damages it had compensated—specifically, that one
       insured’s intentional act precluded coverage for another insured who was innocent of that act.
¶ 24       Such coverage cases usually involve the enforcement of policy exclusions, typically
       exclusions for intentional acts allegedly committed by an insured other than the one
       challenging the exclusion. The innocent insured doctrine makes sense in that context because

           2
             Defendants appear to suggest a tension between section 154 and public policy. However, as this
       court has noted, statutes themselves form an important part of Illinois’s public policy. “The public
       policy of the state is found in its constitution, its statutes, and its judicial decisions. [Citations.] In
       relation to the judicial branch, the General Assembly, which speaks through the passage of legislation,
       occupies a superior position in determining public policy.” Reed v. Farmers Insurance Group, 188 Ill.
       2d 168, 174-75 (1999). In ISBA Mutual’s view, “[s]ection 154 itself refutes the notion that the
       rescission of the ISBA Mutual policy is against public policy.”

                                                       -6-
       the insured’s innocence is relevant to whether an intentional act invokes an exclusion to
       coverage. But the innocent insured doctrine appears irrelevant to rescission, a recognized
       remedy for even innocent misrepresentations.
¶ 25        ISBA Mutual points to Home Insurance Co. v. Dunn, 963 F.2d 1023 (7th Cir. 1992), which
       observed that rescission of an insurance policy because of a misrepresentation on the
       application is distinctly different from the denial of insurance coverage because of excluded
       wrongdoing. This is a “subtle, but important” distinction, the court observed, in that excluded
       conduct might bar coverage for a claim arising from that conduct, but a misrepresentation in
       the application broadly affects the validity of the policy as a whole. Id. at 1026.
¶ 26        Rather than the innocent insured doctrine, Dunn concerned a “waiver of exclusion” clause
       in the policy that the insurer sought to rescind. That clause mirrored the innocent insured
       doctrine in that it reflected the insurer’s agreement not to enforce the policy’s “wrongful acts”
       exclusions as to any insured “ ‘who did not personally commit or personally participate in
       committing one or more of the acts, errors, omissions or personal injuries described in any such
       exclusion or condition.’ ” Id. at 1025 (quoting the insurer’s waiver-of-exclusion clause). Like
       the innocent insured doctrine, the waiver-of-exclusion clause preserved coverage for those
       insureds who were innocent of the wrongdoing.
¶ 27        Dunn involved a “crooked attorney” who obtained a legal malpractice policy for himself
       and the other attorneys associated with his firm, but “understandably” failed to disclose his
       own criminal activities on the policy application. One of the other attorneys in the firm, who
       had no involvement in the policy application or his colleague’s misrepresentation, was sued for
       legal malpractice unrelated to his colleague’s criminal activities. The insurer sought rescission
       of the policy due to the material misrepresentation on the application. The insured who was not
       involved in the misrepresentation, as well as the underlying malpractice plaintiffs, objected to
       the rescission of the policy as to that attorney, relying on the waiver-of-exclusion provision. Id.
¶ 28        But the Seventh Circuit found it irrelevant that no other attorney in the firm took part in the
       crooked attorney’s fraud, or even knew of it. “Though the other attorneys did not intend to
       deceive, the falsehood on the application is fatal. [The crooked attorney’s] misrepresentation
       caused [the insurer] to issue a policy to all the attorneys that otherwise would not have been
       forthcoming.” Id. at 1026. The version of section 154 then in effect allowed rescission of the
       policy. Id.
¶ 29        ISBA Mutual argues that the reasoning of Dunn applies to the case at bar. Though Terpinas
       might have been innocent of the misrepresentation on the renewal application, that is irrelevant
       to rescission, which focuses on the effects of the misrepresentation, rather than on the
       innocence or guilt of the individual. The important thing, ISBA Mutual asserts, is that, as a
       result of the misrepresentation, ISBA Mutual issued the policy under a false impression about
       its exposure to risk.
¶ 30        We agree with ISBA Mutual that the rationale for applying the innocent insured doctrine to
       questions of policy exclusions and insurance coverage is absent from the rescission context.
       Unlike in rescission cases, the innocence of an insured matters a great deal when another
       insured’s wrongdoing triggers a policy exclusion, and a dispute arises over whether the insurer
       has a duty to defend the innocent insured under a policy that undisputedly was in effect. That is
       the setting in which the innocent insured doctrine is relevant.

                                                    -7-
¶ 31       But issues of insurance coverage, governed by common-law rules concerning the
       interpretation of policy language, are significantly different from the question of whether an
       insurance policy should be enforced in the first place—an issue that is governed by statute, and
       is not concerned with whether an insured is innocent of a misrepresentation that prejudices the
       insurer. In the case of a misrepresentation that materially affects the acceptance of the risk, the
       issue is the effect of that misrepresentation on the validity of the policy as a whole. A
       misrepresentation on the policy application goes to the formation of the contract. The innocent
       insured doctrine, on the other hand, has a narrower focus, typically dealing with situations
       where an insured’s wrongdoing triggers a policy exclusion, and the question is whether the
       insurer has a duty to defend the innocent insured under a policy that is still in effect.
¶ 32       We agree with ISBA Mutual that the appellate court erred in applying the innocent insured
       doctrine in this case. As ISBA Mutual correctly notes, that doctrine is relevant to issues of
       policy exclusions and insurance coverage, but it is unsuited to the case at bar, which deals with
       rescission and contract formation.
¶ 33       We also agree with ISBA Mutual that the appellate court erred in partially severing the
       policy to facilitate the application of the innocent insured doctrine.
¶ 34       The policy’s severability clause states:
               “The APPLICATION, and any addendum or supplements, and the Declarations, are
               the basis 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 provision will be construed to increase the COMPANY’S
               Limit of Liability.”
¶ 35       As ISBA Mutual notes, while the severability clause creates a separate agreement with
       each insured, it states that each separate agreement is made up of the “particulars and
       statements contained in the APPLICATION,” binding on each insured. The statements
       contained in the application include the false statement that no member of the firm was aware
       of the potential for a then-unreported claim. Even if the policy is treated as a separate contract
       with each insured, there is nothing to permit the application—or the misrepresentation it
       contains—to be split off from any individual contract.
¶ 36       Defendants also argue that it is impossible to return Terpinas to his status quo existing at
       the time the contract for insurance was made. Defendants cite International Insurance Co. v.
       Sargent & Lundy, 242 Ill. App. 3d 614, 629 (1993), for the proposition that rescission of a
       contract generally requires that the parties be placed in their positions existing when the
       contract was made. Defendants assert that the status quo at the time the contract was made was
       that Terpinas was covered by a policy of professional liability insurance. In defendants’ view,
       returning Terpinas to his status quo would mean he should actually have coverage by ISBA
       Mutual.
¶ 37       ISBA Mutual disagrees, arguing that the requirement of restoring the parties to their
       pre-contract status has consistently been interpreted as requiring only that the party seeking
       rescission must return any benefits it has received. ISBA Mutual asserts that, as part of its
       claim for rescission, ISBA Mutual refunded the premium it had received for the policy,
       “restoring the status quo ante in the only respect that law or equity requires.”
¶ 38       ISBA Mutual adds that, even if it were not possible to return the parties to the status quo
       ante in some relevant respect, “defendants’ own authority refutes their contention that this

                                                    -8-
       would preclude rescission of the ISBA Mutual policy.” ISBA Mutual quotes Sargent & Lundy,
       which states:
                “Where such restoration is impossible, *** it does not necessarily preclude granting of
                rescission. Restoration of the status quo ante will not be required when restoration has
                been rendered impossible by circumstances not the fault of the party seeking rescission,
                and the party opposing the rescission has obtained a benefit from the contract.” Id.
¶ 39        ISBA Mutual asserts that defendants do not suggest that ISBA Mutual “ ‘created an
       impediment’ to the court’s ability to restore the status quo ante.” Id. at 629-30 (quoting
       Klucznik v. Nikitopoulos, 152 Ill. App. 3d 323, 328 (1987)). ISBA Mutual adds that Terpinas
       benefitted from the policy by being able to practice as a member of a limited liability company
       for several months. According to ISBA Mutual, Terpinas acknowledges in his brief that this is
       something he could do only because his firm could claim to be covered under the ISBA Mutual
       policy.
¶ 40        Finally, defendants argue that the renewal form containing the material misrepresentation
       was not an “application” under section 154. ISBA Mutual responds, initially, that defendants
       themselves, in their brief, refer to the renewal form as a “renewal application.” Moreover, the
       form refers to itself as an “application,” and it requires an attestation to the validity of answers
       on behalf of the “applicant firm.” Further proving that the form is an application, it states that
       ISBA Mutual “reserves the right to withdraw or amend the quoted terms at any time prior to
       the proposed effective date of coverage.”
¶ 41        In sum, we agree with ISBA Mutual that section 154, which establishes public policy on
       this issue, allows rescission when the relevant requirements are met, and here those
       requirements were satisfied. The circuit court correctly rescinded the ISBA Mutual policy in
       its entirety, and the appellate court erred in applying the innocent insured doctrine and partially
       severing the policy to preserve coverage for Terpinas.

¶ 42                                    III. CONCLUSION
¶ 43       We reverse the judgment of the appellate court and affirm the circuit court’s judgment
       rescinding the ISBA Mutual policy in its entirety.

¶ 44      Appellate court judgment reversed.
¶ 45      Circuit court judgment affirmed.

¶ 46       JUSTICE KILBRIDE, dissenting:
¶ 47       The majority finds the innocent insured doctrine does not apply, because “that doctrine is
       relevant to issues of policy exclusions and insurance coverage, but it is unsuited to the case at
       bar, which deals with rescission and contract formation.” Supra ¶ 32. I would apply the
       innocent insured doctrine here. Terpinas had a reasonable expectation that he maintained
       professional liability insurance based on his history with ISBA Mutual and his lack of
       culpability in the misrepresentation. Terpinas further reasonably relied on Illinois Supreme
       Court Rules 721 and 722, because the firm was organized as a limited liability entity. Public
       policy considerations also support applying the innocent insured doctrine here. Therefore I
       respectfully dissent.

                                                    -9-
¶ 48        The common law innocent insured doctrine applies when multiple 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). The doctrine operates to preserve insurance coverage if a reasonable person would not
       have understood that the wrongdoing of a coinsured would be imputed to him. State Farm Fire
       & Casualty Insurance Co. v. Miceli, 164 Ill. App. 3d 874, 881 (1987).
¶ 49        When determining if insurance coverage is appropriate, “this court can also consider a
       policyholder’s reasonable expectations and the coverage intended by the insurance policy.”
       Cummins v. Country Mutual Insurance Co., 178 Ill. 2d 474, 485 (1997). Terpinas first
       purchased professional liability insurance from ISBA Mutual in 2005. He renewed the policy
       every year through 2008, when the misrepresentation was made on the renewal application.
       ISBA Mutual does not claim Terpinas was aware of Tuzzolino’s actions, and it is undisputed
       that Terpinas informed ISBA Mutual of the potential claim on June 10, 2008, when he first
       became aware of it. Nothing in the policy explicitly stated each insured would face rescission
       of their professional liability coverage due to a misrepresentation by another member of the
       firm.
¶ 50        The policy coverage was uninterrupted until ISBA Mutual sought to rescind the contract.
       Without personal knowledge of Tuzzolino’s misrepresentation, Terpinas had a reasonable
       expectation since 2005 that he was insured and that his policy would remain in effect. Nothing
       Terpinas did, or did not do, created a reasonable expectation that his insurance policy would be
       rescinded. Had ISBA Mutual intended to impute the wrongdoing of Tuzzolino onto Terpinas,
       it should have expressly stated so in the terms of the policy. See Warren, 71 Ill. App. 3d at 629.
       Accordingly, rescission is an equitable remedy left to the discretion of the court (Springfield &
       Northeastern Traction Co. v. Warrick, 249 Ill. 470, 476 (1911)), and here the equities do not
       favor rescission.
¶ 51        The policies underlying limited liability corporations are implicated in this case.
       Recognizing a public policy concern, this court adopted Illinois Supreme Court Rules 721 (Ill.
       S. Ct. R. 721 (eff. July 1, 2003)) and 722 (Ill. S. Ct. R. 722 (eff. Mar. 15, 2004)), requiring
       attorneys in limited liability entities to maintain at least a minimum level of professional
       liability insurance coverage or face joint and several liability. These rules were intended to
       protect consumers of legal services. Forming a limited liability entity benefits owners of a firm
       by restricting their personal liability as “determined by the provisions of the statute under
       which the limited liability entity is organized.” Ill. S. Ct. R. 722(b) (eff. Mar. 15, 2004). In the
       absence of malpractice insurance, the public faces potential harm if malpractice occurs and the
       actor does not have sufficient assets to fulfill a judgment. Thus, the availability of malpractice
       coverage benefits both individual attorneys and their clients.
¶ 52        The reasoning in First American Title Insurance Co. v. Lawson, 827 A.2d 230 (N.J. 2003),
       is persuasive. In Lawson, a limited liability law firm had three partners. Two partners were
       involved in a kiting scheme, while the third was neither involved in nor aware of the scheme.
       Lawson, 827 A.2d at 233-35. The insurance carrier sought to void the malpractice coverage
       because the firm’s application materially misrepresented its knowledge of any acts, errors, or
       omission in professional services that could have reasonably been expected to result in a
       professional liability claim. Lawson, 827 A.2d at 233-35. The court found that because the firm
       was organized as a limited liability partnership, the innocent partner had every reason to expect

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       his exposure to liability would be limited in accordance with applicable law. Lawson, 827 A.2d
       at 240. The court further found that by voiding the innocent partner’s policy, he would no
       longer retain coverage for any act in unrelated matters, such as simple malpractice, during the
       period of expected coverage. Lawson, 827 A.2d at 240. The court held rescission was
       inappropriate as to the innocent partner, concluding “that harsh and sweeping result would be
       contrary to the public interest,” and “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.” Lawson, 827 A.2d at 240-41.
¶ 53       Similarly, because Terpinas’s law firm was organized as a limited liability entity, he
       reasonably expected his liability to be limited within Rules 721 and 722 and reasonably relied
       on the professional liability insurance coverage provided by ISBA Mutual to limit his personal
       liability. When attorneys do not have professional liability insurance, the public faces an
       increased risk of harm as consumers of legal services. Rescission of Terpinas’s professional
       liability insurance would expose his other clients unnecessarily under any form of malpractice.
       That result is inconsistent with the policies underlying Rules 721 and 722 that seek to protect
       consumers of legal services from financial harm.
¶ 54       In addition, I am troubled by the scope of the consequences resulting from the majority’s
       holding on other law firms and especially midsize and large firms. Under the majority’s view,
       a material misrepresentation on an insurance application could cause rescission of the policy as
       to each and every attorney, despite their reasonable expectations of continued professional
       liability insurance coverage. Furthermore, as the size of the affected firm increases, so does the
       potential harm to the public.
¶ 55       For these reasons, I respectfully dissent.

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