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Golden Rule Insurance Company v. Schwartz

May 30, 2001

GOLDEN RULE INSURANCE COMPANY, PLAINTIFF/COUNTER-DEFENDANT-APPELLANT/CROSS-APPELLEE,
v.
MARK SCHWARTZ, DEFENDANT/ COUNTER-PLAINTIFF-APPELLEE/CROSS-APPELLANT.



The opinion of the court was delivered by: Justice Wolfson

Not Released For Publication

GOLDEN RULE INSURANCE COMPANY, PLAINTIFF/COUNTER-DEFENDANT-APPELLANT/CROSS-APPELLEE,
v.
MARK SCHWARTZ, DEFENDANT/ COUNTER-PLAINTIFF-APPELLEE/CROSS-APPELLANT.

The opinion of the court was delivered by: Justice Wolfson

Appeal from the Circuit Court of Cook County.

Honorable Sidney A. Jones, III, Judge Presiding.

 The first question we must answer is metaphysical in nature but of practical importance to the parties in this medical insurance coverage dispute: Can someone be held responsible for making a misrepresentation if he does not know his words are untrue? We are required by prior decisions to say the answer is yes in this case.

BACKGROUND

Golden Rule Insurance Company (Golden Rule) filed this declaratory judgment action in Lawrence County in July 1985, alleging it was entitled to rescind the health insurance policy it issued to Mark Schwartz (Mark). Mark filed a counterclaim.

The case was transferred to Cook County in 1997. The trial court granted summary judgment in favor of Mark on the declaratory judgment action and on count one of his counterclaim, in which Mark alleged Golden Rule was not entitled to offset damages with medical payments made by other insurance companies.

The trial court later found Mark was entitled to sanctions under section 155 of the Illinois Insurance Code (Code) and granted his summary judgment motion on this issue. However, the trial court ruled Shwartz was not entitled to pro se attorney fees under Section 155.

At the same time, the trial court found Mark was entitled to recover the premiums he paid for comparable replacement coverage, but was not entitled to 9% prejudgment interest on his damages pursuant to section 357.9 of the Code. The trial court granted summary judgment in favor of Golden Rule on the section 357.9 prejudgment interest issue.

What is referred to by the parties as a "bench trial" was held to determine damages, though it does not appear from the record that any of the formalities generally associated with a trial were followed. Judgment was entered in favor of Mark in the amount of $447,074. The award was broken down as follows:

(a) Covered medical expenses incurred as of 10/1/99: $254,285.66

(b) Interest on said medical expenses: $90,801.32

(c) Section 155 penalty: $25,000.00

(d) Net premiums owed for replacement coverage: $65,994.00

(e) Interest on said premiums to November 3, 1999: $11,093.00.

Though the parties raised the issue of attorney's fees, the trial court reserved ruling pending this appeal. The trial court included Supreme Court Rule 304(a) language in the order, making it immediately appealable.

Golden Rule appeals both the trial court's decision granting Mark summary judgment and its award of damages, contending: (1) Golden Rule was entitled to rescind the policy due to material misrepresentations made by Mark in his application for insurance; (2) Golden Rule was entitled to rescind the policy because Mark did not sign the application as required by the Illinois Insurance Code; (3) section 155 sanctions should not have been awarded; (4) even if Mark was entitled to section 155 sanctions, the trial court did not calculate the sanctions properly; (5) the trial court incorrectly assessed the insurance premiums awarded as part of Mark's damages.

Mark filed a cross-appeal, contending the trial court erred in finding he was not entitled to prejudgment interest under section 357.9 of the Code. Mark also contends the trial court erred in refusing to award him pro se attorney fees as sanctions under section 155 of the Code.

We reverse in Golden Rule's appeal and remand for further proceedings, and affirm in Mark's appeal.

FACTS

In Spring of 1985, Mark was a 23-year-old full-time medical student. When his father, Spencer Schwartz (Spencer), realized his family's health insurance policy was going to lapse, he asked his insurance broker about new coverage. The broker, Myron Scharff (Scharff), sent Spencer separate Golden Rule applications for Mark and for the rest of Spencer's family. Scharff told Spencer his son would have to be covered under a separate Golden Rule policy because he was too old to be covered as a dependent under a family policy.

Spencer filled out the applications, and sent them back to Scharff signed. The insurance company returned the applications because they were mailed too long after they had been completed. Scharff contacted Spencer and told him new applications would have to be submitted. Scharff filled out the new applications while Spencer answered the questions via telephone. One of the questions asked, "Are any persons named *** covered by *** any type of Life, Disability or Medical Insurance?" Spencer answered no on both his application and the application for Mark. The application explained the effect of other insurance plans on the Golden Rule policy:

"This policy will not be issued as a supplement to other health plans that you may have at the time of application. Medical payment provisions under liability policies and small cancer only policies do not affect our underwriting. A misstatement in the application about other medical insurance may cause us to void the policy. If, after the policy is issued, you are covered by other plans, the benefits paid under these other plans may be used to help satisfy the deductible and 20% coinsurance *** Other plans are all policies and plans that provide benefits for hospital, surgical, or medical expenses, including individual and family policies, group programs, union programs, automobile medical payments insurance, Medicare and others."

Spencer authorized Scharff to sign the applications. The application includes the following statement just above the signature line:

"I represent that the statements and answers in this application are true and complete to the best of my knowledge and belief. I agree that *** the statements and answers given in this application and any amendments to it will form the basis of any insurance issued."

Scharff signed Spencer's name on the family application and signed Mark's name on his application.

Golden Rule issued health insurance policies to Spencer and Mark in March 1985. A few weeks later, Mark was on vacation in New York when he was in an auto accident. He was seriously injured and was hospitalized for over a month.

When Spencer began to look at Mark's insurance policies, he realized Mark was covered not only by the new Golden Rule policy, but also was an "eligible dependent" under a policy Spencer held with Mutual of Omaha. The Mutual of Omaha policy was a group policy held through the American Bar Endowment. The ABE policy was issued to Spencer in 1973. The policy was an excess major medical insurance policy, with a deductible of $10,000. It covered eligible dependents up to age 19, unless they were full-time students. If dependents were full-time students, they were covered until they were 25 years old.

Spencer submitted claims on his son's behalf to both Mutual of Omaha and Golden Rule. Golden Rule denied coverage and rescinded the policy. Soon after, it filed this declaratory judgment suit, alleging Mark's failure to disclose the Mutual of Omaha policy was a material misrepresentation justifying rescission of the policy.

Mutual of Omaha paid Mark's medical expenses until his coverage under that policy lapsed. Under New York law, Mark was entitled to payment from Home Insurance, a no-fault carrier. Mark was also covered by an "Auto Med Pay" provision in Spencer's auto insurance policy, issued by Travelers Insurance. Mark is currently covered under a Blue Cross/Blue Shield policy. At the time of the bench trial, the insurance carriers had provided coverage as follows:

Mutual of Omaha: $118,592.73

Blue Cross/Blue Shield:$105,898.76

Home Insurance: $50,000.00

Travelers Insurance: ...


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