American Service Insurance Co. v. United Automobile Insurance Co. ( 2011 )

FIRST DIVISION
April 18, 2011
No. 1-09-3070
IN THE APPELLATE COURT OF ILLINOIS
FIRST JUDICIAL DISTRICT
AMERICAN SERVICE INSURANCE COMPANY, ) Appeal from the
) Circuit Court of
Plaintiff-Appellant, ) Cook County.
)
v. ) No. 05 CH 17501
)
UNITED AUTOMOBILE INSURANCE COMPANY, ) The Honorable
) Kathleen M. Pantle,
Defendant-Appellee. ) Judge Presiding.
JUSTICE LAMPKIN delivered the judgment of the court, with
opinion.
Presiding Justice Hall and Justice Hoffman concurred in the
judgment and opinion.
O P I N I O N
Plaintiff, American Service Insurance Company (ASI), appeals
the trial court’s order denying its motion for summary judgment
and granting the cross-motion for summary judgment filed by
defendant, United Automobile Insurance Company (UAIC). In so
doing, the trial court determined that, because UAIC had
rescinded its policy, defendant owed no duty to defend or
indemnify a claim resulting from a February 2, 2004, car accident
in which plaintiff’s insured was injured. On appeal, plaintiff
contends the trial court erred in denying its motion for summary
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judgment because defendant improperly rescinded its policy where
defendant’s insured did not make any material misrepresentations
on her insurance application and had no duty to notify defendant
of changes to her application responses. Plaintiff further
contends defendant waived its right to rescind coverage of the
insured by failing to promptly act after learning of an accident
prior to the accident at issue. Based on the following, we
affirm.
FACTS
On April 9, 2003, Janice Baker applied for an insurance
policy with UAIC vis-a-vis Lincoln Insurance Agency, an
independent agency. The application was completed by telephone.
In the application, Baker was asked, “[I]s there any operator in
the household under 25 years of age?” Baker answered “no.” When
asked the “Names of all Operators,” Baker listed herself and her
husband, John Webb. “Operator” was not defined in the policy.
Baker testified at her deposition that she understood the term
“operator” to mean a driver. The application was signed by
Baker’s agent.
UAIC issued a policy to Baker providing bodily injury and
property damage liability from April 9, 2003, to April 9, 2004,
on a 1986 Chevrolet Monte Carlo. The policy excluded Baker’s
husband, John, from coverage. The declarations page contained
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the following disclosure:
“Coverage afforded is only with respect to the
coverages indicated herein by a specific premium charge
or charges. The limit of the company’s liability
against each such coverage shall be stated herein,
subject to all terms of this policy. Insured warrants
that there are no other drivers in the household other
than those listed in the application or endorsement.”
The policy provided coverage to Baker, as the named insured, and
“any other person using such automobile to whom the named insured
has given permission, provided the use is within the scope of
such permission.”
In addition, the conditions section of the policy provided:
“If there has been a misrepresentation or false
warranty, made with actual intent to deceive or which
materially affects either the risk or hazard assumed by
the Company, made by the insured or in his behalf in
the negotiation for this policy, or breach of condition
of such policy, and if said misrepresentation or false
warranty or breach of condition is stated in the policy
or endorsement or rider attached thereto, or in written
application for this policy, then this policy shall be
null and void and of no benefit, provided, however,
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that the Company, during the lesser of the first year
of the policy or the first term of the policy, rescinds
the policy and declares this policy void. If the
policy has been in effect more than the lesser of one
year or the first policy term, then the Company shall
not rescind this policy. Notwithstanding any other
provision in this policy, this policy shall provide no
coverage or benefit to any person who makes a
fraudulent statement or omission or engages in
fraudulent conduct with respect to any accident or loss
for which coverage or a benefit is sought under this
policy or any renewal of this policy.”
Further, the conditions section of the insurance policy
contained a paragraph entitled “Declarations,” which provided:
“By acceptance of this policy, the insured named
in item 1 [Baker] of the Declarations agrees that the
statements contained in the Application, a copy of
which is attached to and forms part of this policy,
have been made by him or on his behalf and that said
statements and the statements of the Declarations and
any subsequent Application accepted by the Company are
offered as an inducement to the Company to issue or
continue this policy and that the same are his
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agreements and representations, and that this policy is
issued and continued in reliance upon the truth of such
statements and representations and that this policy
embodies all agreements existing between himself and
the Company or any of its agents relating to this
insurance.” (Emphasis added.)
On May 4, 2003, the UAIC policy was amended to change the
covered vehicle to a 1993 Ford Thunderbird. An amended
declarations page was issued providing that “this declaration
page with ‘policy provisions’ and all other applicable
endorsements complete your policy.” Two drivers were listed,
Baker and John. Baker was listed as the principle driver and
John was listed as “excluded.”
On May 14, 2003, Baker’s son, Devin Webb, received his
learner’s driving permit. On June 10, 2003, Devin was driving
Baker’s insured vehicle with her permission and was involved in a
car accident with a light pole. The accident resulted in
property damage, but no bodily injuries. On June 17, 2003, Baker
called UAIC to report the accident. Baker and Devin agreed to
provide recorded statements to UAIC.
In her recorded statement, Baker informed UAIC that her son
was driving the insured vehicle with her permission when he was
involved in the accident. Baker said that her son had lived with
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her at 9004 S. Ada Street in Chicago, Illinois, for 7 1/2 years.
Baker said that, since “April 4, 2003,”1 Devin operated her
vehicle two times per week. Devin did not have a driver’s
license; Devin had a “blue slip.” When asked why Devin was not
disclosed to “the agent,” Baker replied that Devin is “not an
operator” but that she thought she “mentioned him.”
In his recorded statement, Devin reported living with Baker,
having a “blue slip,” and driving Baker’s car “every other day”
since April 9, 2003. Devin said he usually drove with his mother
as a passenger because of his “blue slip”; however, when the
accident occurred, Devin was driving alone.
UAIC informed Baker that Devin was a “DNOP,” or a driver not
on the policy, and there was a “coverage issue” that needed to be
resolved. It is uncontested that Baker continued to make premium
payments for her insurance.
William Raniere, in-house counsel for UAIC, testified at his
deposition that UAIC first became aware Devin lived in Baker’s
home and was 17 years old after Baker reported the June 10, 2003,
accident.
Devin obtained his driver’s license on August 14, 2003.
Sometime prior to February 1, 2004, Baker requested that the
1
We assume the date is a typographical error because the
insurance application was completed on April 9, 2003.
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insured vehicle on her policy be amended to a 1991 Ford Taurus.
Devin’s name was not added to the policy.
On February 2, 2004, Devin was involved in another accident
while driving Baker’s insured vehicle. LaTonya Terrell and Bruce
Jones, Devin’s uncle, were passengers in the car with Devin.
LaTonya sustained bodily injuries. The accident involved a
parked car, which was damaged as well.
On March 15, 2004, after Baker contacted UAIC to report the
second accident, UAIC rescinded her policy effective April 9,
2003, as a result of a material misrepresentation in the
application. Baker’s insurance premiums were returned
thereafter.
At her deposition, Baker testified that Devin did not drive
her vehicle prior to April 9, 2003. Baker attested that she was
not in the car with Devin during the June 10, 2003, accident.
Baker further testified that she and Devin were sued by the owner
of the parked car involved in the February 2, 2004, accident.
Baker said UAIC refused to defend that lawsuit and refused to
indemnify Baker for the judgment. Baker said the accident was
reported to the Illinois Secretary of State, who subsequently
suspended her driver’s license and Devin’s driver’s license for
lack of insurance coverage.
At his deposition, Devin testified that he never drove
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Baker’s car prior to receiving his learner’s permit. After
receiving his learner’s permit, Devin said he only drove the car
while Baker was a passenger. Devin testified that, after his
license was suspended following the February 2, 2004, accident,
he continued to drive when necessary and was arrested three times
for driving on a suspended license.
LaTonya was insured by ASI with coverage against uninsured
motorists. LaTonya filed an uninsured motorist claim because
Baker’s policy had been rescinded by UAIC. On October 13, 2005,
ASI filed a complaint requesting declaratory relief against
LaTonya and UAIC such that: (1) Devin was an insured under the
UAIC policy when the February 2, 2004, accident occurred; and (2)
ASI owed no duty to provide uninsured motorist coverage or any
other coverage to LaTonya as a result of the February 2, 2004,
accident.
On March 10, 2006, UAIC filed a counterclaim and third-party
complaint against ASI, LaTonya, Devin, Janice, John, Billy
Terrell, and American Ambassador Insurance, a/s/o Stephen Thomas.
UAIC requested declaratory relief such that: (1) the UAIC policy
was rescinded and thus there was no coverage for the February 2,
2004, accident; (2) a judgment against American Ambassador
Insurance, a/s/o Stephen Thomas, that UAIC was not obliged to pay
or defend any claims resulting from the February 2, 2004,
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accident; and (3) UAIC was not obliged to pay out any sums under
its policy.
On October 15, 2009, the trial court granted summary
judgment in favor of UAIC and denied summary judgment in favor of
ASI. The trial court concluded that UAIC properly rescinded its
policy where there was a material misrepresentation on Baker’s
application because Baker failed to disclose Devin as a minor
household driver. Moreover, Baker failed to comply with her duty
of good faith and fair dealing when she failed to update UAIC
with the material information that Devin obtained his driver’s
permit 35 days after the insurance application was completed.
The court further concluded that UAIC did not waive its right to
rescind the policy. This appeal followed.
DECISION
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 2002). When
cross-motions for summary judgment have been filed, the parties
agree that no genuine issue as to any material fact exists and
only a question of law is at issue; therefore, the parties invite
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the trial court to decide the issues based on the record.
Greenwich Insurance Co. v. RPS Products, Inc., 379 Ill. App. 3d
78, 84, 824 N.E.2d 1102 (2008). We review an order granting
summary judgment de novo. Morris v. Margulis, 197 Ill. 2d 28,
35, 754 N.E.2d 314 (2001).
I. Material Misrepresentation
ASI contends there could be no material misrepresentation
justifying the rescission of the insurance policy because Baker
was asked to list all operators, drivers, users, and co-owners on
her application and Devin was not an operator, driver, user, or
co-owner at the time as he did not receive his learner’s permit
until after the application was submitted and the policy was
issued.
Prior to rescinding an insurance policy, an insurer must
satisfy the following criteria set by section 154 of the Illinois
Insurance Code (Code):
“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
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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 2002).
Materiality is determined by considering whether a
reasonably careful and intelligent person would have regarded the
facts omitted as substantially increasing the chances of the
events insured against so as to cause a rejection of the
application or different conditions such as higher premiums.
Ratliff v. Safeway Insurance Co., 257 Ill. App. 3d 281, 288, 628
N.E.2d 937 (1993). A material misrepresentation may result where
an insured fails to disclose material information or provide
complete information in response to a question. Cohen v.
Washington National Insurance Co., 175 Ill. App. 3d 517, 520, 529
N.E.2d 1065 (1988). “An insurance applicant has the duty to act
in good faith, and an insurer is entitled to truthful responses
so that it may determine whether the applicant meets its
underwriting criteria. Thus, the applicant must disclose all
information and let the insurer determine the materiality of the
*** information.” Garde v. Country Life Insurance Co., 147 Ill.
App. 3d 1023, 1032, 498 N.E.2d 302 (1986). An insurance policy
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may be voided even if the insured’s misrepresentation was a
mistake or made in good faith. Ratliff, 257 Ill. App. 3d at 288.
It has been found that the nondisclosure of a 20-year-old
driver residing in the same household as the insured is a
misrepresentation materially affecting the risk assumed by the
insurer. Id. “ ‘It is a matter of common knowledge that the
rate frequency of accidents for drivers between the ages of
sixteen and twenty-four is substantially greater than that for
all drivers who are twenty-five years of age or more.’
[Citation.]” Id.In the case before us, the insurance application contained a
section entitled “Questions Pertaining To Applicant And All
Members of Household.” That section contained 12 questions. In
relevant part, the application asked “is there any operator in
the household under 25 years of age?” Baker responded, “no.”
The section also contained several blank lines to provide the
“names of all operators.” Baker was listed as an operator; John
was listed as an operator with the word “exclude” where his
driver’s license number was requested; Devin was not listed as an
operator. At the bottom of the application, a disclosure
entitled “applicant’s statement” appeared:
“The applicant hereto states that he read this
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application and attests that all answers given by him
to the questions asked herein are truthful to the best
of his knowledge and belief and that said answers were
made as inducement to the insurance company to issue a
policy, and it is a special condition of this policy
that the policy shall be null and void and of no
benefit or effect whatsoever as to any claim arising
thereunder in the event that the attestations or
statements in this application shall prove to be false
or fraudulent in nature.
It is understood that a copy of this application
shall be attached to and form a part of the policy of
insurance when issued and that it is intended that the
company shall rely on the contents of this application
in issuing any policy of insurance or renewal thereof.”
Moreover, as stated earlier, the policy provided:
“Notwithstanding any other provision in this
policy, this policy shall provide no coverage or
benefit to any person who makes a fraudulent statement
or omission or engages in fraudulent conduct with
respect to any accident or loss for which coverage or a
benefit is sought under this policy or any renewal of
this policy.”
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Although not defined in the policy, it is clear from Baker’s
recorded statement and her deposition testimony that she
understood the term “operator” to mean driver. Even assuming it
was not a material misrepresentation to omit Devin as an operator
on the April 9, 2003, application, Baker had an obligation, as a
condition of the policy, to inform UAIC once Devin did begin
driving the vehicle. See 215 ILCS 5/154 (West 2002). The
application, the policy, and the declarations page each reveal
the importance of accurate information, including the names and
ages of all eligible drivers. Moreover, the amended declarations
page issued as a result of the May 4, 2003, request to update the
vehicle information states that the “insured warrants that there
are no other drivers in the household other than those listed in
the application or endorsement.”2
In their recorded statements, both Baker and Devin
recognized that he regularly drove the vehicle after the
application was submitted. The record does not reveal the exact
date upon which Devin began driving the vehicle, whether before
the application date or immediately after; however, the record
clearly demonstrates that Devin began operating the vehicle once
2
The amended declarations page updating the insured vehicle
to a Ford Taurus, which occurred sometime before February 1,
2004, did not contain the same language.
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he obtained his learner’s permit on May 14, 2003. Baker never
contacted UAIC to update the drivers included in the policy and
did not disclose Devin as a driver on either occasion when she
deemed it necessary to alert UAIC that the insured vehicle had
been changed, on May 4, 2003, and sometime before February 1,
2004, or even after Devin had obtained his driver’s license on
August 14, 2003.
Barely one month after its completion, the application no
longer accurately reflected the eligible operators in Baker’s
household as a result of Baker’s omissions. The amended
declaration pages also failed to accurately reflect the eligible
operators. UAIC, therefore, could no longer rely on the
application’s contents. The policy terms disclaimed that the
UAIC policy was “issued and continued in reliance” on the truth
of Baker’s representations on the application and any subsequent
application. In order to allow for an accurate underwriting
process, UAIC found it necessary to ask the applicant whether
there were any operators under the age of 25 in the household.
Moreover, UAIC found it necessary to disclaim on the amended
declaration page that there were no other drivers in the
household other than those listed. “ ‘An insurer is interested
in ascertaining the true owner of a car particularly where the
policy covers any person who may be driving the car with the
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owner’s consent. *** The status, number and character of the
persons who are likely to be driving the car with the owner’s
permission are also material to risk.’ ” Safeway Insurance Co.
v. Duran, 74 Ill. App. 3d 846, 850-51, 393 N.E.2d 688 (1979)
(quoting Government Employees Insurance Co. v. Dennis, 90 Ill.
App. 2d 356, 365, 232 N.E.2d 750 (1967)). There is no doubt
Baker had been sufficiently notified that Devin’s status as an
operator, i.e., driver, was of great relevance.
As previously stated, it is well established that drivers
under the age of 25 are involved in accidents with much greater
frequency. Devin fell into the increased-risk category because
he was 17 years old when he obtained his learner’s permit. Once
Devin began operating Baker’s vehicle, the insurance policy
failed to adequately provide for UAIC’s increased risk exposure.
Raniere’s deposition testimony demonstrated that the addition of
Devin as a driver on Baker’s policy would have resulted in an
increased premium of $845.
We, therefore, conclude that Baker generated material
misrepresentations when she failed to notify UAIC that Devin was
operating the insured vehicle. The facts demonstrate that Devin
was not merely a passive user; thus, even if his use was
permitted, the insurance coverage did not extend to his regular
operation of the vehicle. The policy provided that a
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misrepresentation would cause the policy to be “null and void and
of no benefit” and that a fraudulent statement or omission in
relation to a benefit “sought under this policy or any renewal of
this policy” would result in “no coverage or benefit.”
Consequently, UAIC was within its rights to rescind Baker’s
policy.
II. Waiver of Rescission Rights
ASI contends UAIC waived any right it had to rescind Baker’s
policy because UAIC failed to promptly act on those rights when
UAIC first learned Devin was driving the insured vehicle, instead
waiting nine months until Devin’s second accident before
rescinding the policy. ASI further contends the trial court
improperly relied upon section 154 of the Code to conclude UAIC
acted to rescind the policy within the applicable one-year time
period.
Rescission is the cancellation of a contract thereby
restoring the parties to their initial status. Illinois State
Bar Ass’n Mutual Insurance Co. v. Coregis Insurance Co., 355 Ill.
App. 3d 156, 165, 821 N.E.2d 706 (2004) (citing Horan v. Blowitz,
13 Ill. 2d 126, 132, 148 N.E.2d 445 (1958)). Section 154 of the
Code provides:
“With respect to a policy of insurance as defined in
subsection (a), (b), or (c) of Section 143.13, except
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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.”
215 ILCS 5/154 (West 2002).
“[A] material representation under section 154 *** renders the
policy voidable, not void ab initio, and an insurer can waive
this right if it does not invoke it promptly.” Coregis, 355 Ill.
App. 3d at 167. In Coregis, this court noted that, while not
applicable to the facts of that case, the legislature “has since
spoken as to the outer limit of what constitutes promptness by
imposing a one-year time limit within which an insurer must act
to void a policy based upon a material misrepresentation under
section 154.” Id. at n.4.
Contrary to ASI’s argument, UAIC rescinded Baker’s insurance
policy within the proscribed time period. The policy was first
issued on April 9, 2003, and it was rescinded on March 15, 2004.
ASI’s construction of section 154 impermissibly restricts the
statute. The statute does not merely create a bar for when an
insurance policy can no longer be rescinded. As stated in
Coregis, the legislature created a time period, namely, one year,
that satisfies “prompt” rescission.
Moreover, Baker’s policy itself supports UAIC’s rescission.
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The conditions section of the insurance policy said:
“Notice to any agent or knowledge possessed by any
agent or by any other person shall not effect a waiver
or a change in any part of this policy or stop the
Company from asserting any right under the terms of
this policy; nor shall the terms of this policy be
waived or changed, except by endorsement issued to form
a part of this policy, signed by a duly authorized
representative of the Company.”
The insurance policy expressly reserved UAIC’s rescission rights
despite its knowledge in June 2003 that Devin was driving the
insured vehicle.
We, therefore, conclude that UAIC did not waive its
rescission rights.
CONCLUSION
Because Baker materially misrepresented the fact that Devin
was an operator of her insured vehicle and UAIC acted within the
one-year time limit, UAIC properly rescinded Baker’s insurance
policy. As a result, we affirm the judgment of the trial court
granting summary judgment in favor of UAIC.
Affirmed.
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REPORTER OF DECISIONS - ILLINOIS APPELLATE COURT
AMERICAN SERVICE INSURANCE COMPANY,
Plaintiff-Appellant,
v.
UNITED AUTOMOBILE INSURANCE COMPANY,
Defendant-Appellee.
No. 1-09-3070
Appellate Court of Illinois
First District, FIRST DIVISION
April 18, 2011
JUSTICE LAMPKIN delivered the judgment of the court, with opinion.
Presiding Justice Hall and Justice Hoffman concurred in the
judgment and opinion.
Appeal from the Circuit Court of Cook County.
The Hon. Kathleen M. Pantle, Judge Presiding.
COUNSEL FOR APPELLANT
Newman Raiz, LLC, Chicago, IL 60603
OF COUNSEL: James P. Newman and William H. Ransom
COUNSEL FOR APPELLEE
Shelist Law Firm LLC, Chicago, IL 60610
OF COUNSEL: Samuel A. Shelist
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