The Voiding Of A Policy For Misrepresentation Is Controlled By The Insurance Code
In State Farm Co. v. American Service Ins. Co., 332 Ill. App. 3d 31, 773 N.E.2d 666 (1st Dist. 2002), American Service Ins. Co. issued an automobile insurance policy which listed the applicant as the principal driver and two additional regular drivers. The policy did not list the applicants unlicenced minor son as a driver of the vehicle. A pedestrian was struck and injured by the insured vehicle and brought suit against the applicant and the applicants minor son. American Service Insurance investigated the matter and found that the 14 year old minor son was operating the vehicle and thereafter sent a letter to the insured stating that the insured had a material misrepresentation by failing to declare the son as a resident driver on the application and therefore American was rescinding the insurance policy. American sent a draft to the insured representing the premiums paid which was cashed by the insured. American did not defend the insured in the suit brought by the pedestrian.The suit brought by the pedestrian proceeded to arbitration wherein an award in an amount of $20,000 was entered in favor of the pedestrian. The pedestrian recovered $20,000 from State Farm under their UM coverage. State Farm then proceeded to bring a declaratory judgment action against American Service alleging that American Service breached its duty to defend its insured and failed to file a reservation of rights or a declaratory judgment action. State Farm claimed that American was now estopped from denying coverage under its policy.
American had asserted that it had a right to declare the policy “null and void from its inception” due to a material misrepresentation by the applicant. The court reviewed estoppel law and held that the application of the estoppel doctrine is not appropriate if the insurer had no duty to defend, or if the insurer’s duty to defend was not properly triggered. Where there is no insurance policy in existence, there is no duty to defend the insured. Employers Ins. Co. of Wausau v. Ehlco Liquidating Trust, 187 Ill.2d 127, 150-51, 708 N.E.2d 1122 (1999). Despite State Farm’s argument that American Service Ins. Co. was relying on a provision allowing the voiding of a policy, this is not a policy of defense. American’s rescission argument does not involve a question of coverage but instead, it raises an issue of whether an insurance policy was in existence at the time of the loss. As a result, application of the estoppel doctrine was not appropriate to this case. American Service relied upon the following clause when it voided the policy: “Fraud Misrepresentation.. [i]n the event that any representation contained in the application is false, misleading or materially effects the acceptance.. of the risk.. this policy shall be null and void and of no benefit whatsoever from its inception.” 332 Ill. App. 3d at 38, 773 N.E.2d at 672.
Although the policy contains a misrepresentation clause, the Illinois Insurance Code contains an applicable section at 215 ILCS 5/154. That section provides in part that no misrepresentation will void a policy unless the misrepresentation was stated in the policy or endorsement, or in the written application for the policy period. The statute further provides that “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 effects either the acceptance of the risk or the hazard assumed by the company.” The court held that this statutory provision superceded the contractual language. As a result, American did not have the power to void the policy as stated within its misrepresentation clause.
Pursuant to Section 154, American could only void the policy if a misrepresentation or false warranty was made in a written application and was made with the actual intent to deceive American or materially effected American’s acceptance of the risk or the hazard assumed. Upon reviewing the record, the court found that it was undisputed that the applicant failed to disclose the minor as a “resident driver” or “regular operator” of the insured auto. However, numerous other factual questions remained including whether the failure to disclose the minor was a “misrepresentation” or “false warranty.” It was also unclear whether the applicant intended to deceive American or whether it effected the acceptance of the risk or the hazard assumed. The intent of the insured in cashing the premium refund check was also unclear. As a result, the court found an issue of material fact regarding whether American could void the policy as defined under Section 154 of the Insurance Code.
