Illinois Court Holds That Material Misrepresentation on Renewal Application Makes Policy Voidable, Not Void
Reprinted courtesy of the ABA lpl eAdvisory
Editors Kathleen Ewins and Glenn Fischer

ISBA Mut. Ins. Co. v. Coregis Ins. Co., 1-03-2283 (Dec. 16, 2004)

Illinois Appellate Court affirms summary judgment for insurer who reserved rights in a case involving insured’s conversion of client funds.

Attorney Hubka, insured with Coregis since 1993, represented a client in a personal injury case, in association with another attorney, Nathan, who was insured by ISBA Mutual. Although the client was to receive a settlement of $225,000.00, Hubka converted the funds. In May 1995, the Illinois attorney disciplinary authority filed a complaint against Hubka, in response to which Hubka admitted that he never disbursed the settlement funds to the client.

In October 1995, Hubka submitted a renewal application to Coregis stating that he was “unaware of any circumstances, act or omission . . . which may result in a claim,” despite the pendency of disciplinary charges against him. Coregis renewed the policy effective November 1995.

In January 1996, the client sued Hubka and Nathan. In August 1996, the Illinois Supreme Court suspended Hubka and in September 1996, Coregis notified Hubka that is would not renew his policy, although Coregis did offer him the option to purchase an extended reporting endorsement. Also in September, Hubka tendered his defense to Coregis. Coregis assigned defense counsel to Hubka, but also sent him a reservation of rights letter.

After the client filed for summary judgment against Hubka, Coregis filed a declaratory judgment action seeking a finding of no coverage. The client then sought summary judgment against Nathan, and ISBA Mutual paid the entire claim as Nathan’s insurer.

ISBA and Nathan then filed a declaratory judgment action of their own, claiming that Coregis: waived its right to rescind Hubka’s policy, was estopped from raising policy defenses because it failed to inform Hubka of the conflict of interest, and Coregis owed a duty to indemnify Hubka.

On cross motions for summary judgment, the trial court found in favor of Coregis and ruled that Hubka made material misstatements on his renewal application, rendering the policy void ab initio. ISBA and Nathan appealed.

The appellate court affirmed judgment in favor of Coregis, but found that the policy was voidable, rather than void ab initio. Yet, the court also found that Coregis had effectively reserved its rights and properly informed Hubka of same, and it did not waive its right to rescind because of its delay in filing a declaratory judgment action or by offering Hubka an extended reporting endorsement. Accordingly, Coregis was within it rights to rescind the policy renewal it issued to Hubka.

The ABA lpl eAdvisory is published by the ABA Standing Committee on Lawyers’ Professional Liability. Copyright ©2004 American Bar Association. Editors: Kathleen Ewins (kewins@longlevit.com) and Glenn Fischer (fischerg@staff.abanet.org). For additional information, or to obtain a subscription to the ABA lpl eAdvisory, you can contact the National Legal Malpractice Data Center, ABA Standing Committee on Lawyers’ Professional Liability on their website at http://www.abanet.org/legalservices/lpl/. This website is also accessible from the Resources Section (National) of the Legal Mutual website at http://www.legalmutual.com.

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