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Illinois State Bar Association Mutual Insurance Co. v. Law office of Tuzzolino & Terpinas

Supreme Court of Illinois

February 20, 2015

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

Appeal from the Appellate Court for the First District.

SYLLABUS

The common law doctrine of " innocent insured" could not preserve legal malpractice coverage as to a member of a two-man law firm whose policy was properly rescinded under the Insurance Code for the other attorney's misrepresentation in applying for renewal of the firm's coverage.

J. Timothy Eaton, of Taft Stettinius & Hollister LLP, and Robert Marc 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.

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

Page 68

FREEMAN, J.

[¶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 Ruling on motions for summary judgment, the circuit court of Cook County granted ISBA Mutual's motion and rescinded the policy.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, 377 Ill.Dec. 299, 1 N.E.3d 1186. 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 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

Page 69

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 May 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 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

Page 70

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. ¶ ¶ ...


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