Insurer Sanctioned Because Reasons for Rescission Unrelated to Claim 

The First District Appellate Court, in an opinion written by Justice Howse with Justices Ellis and Cobbs concurring, upheld the judgment of the Circuit Court awarding bad faith damages against an insurer for its vexatious and unreasonable conduct in denying coverage and rescinding an auto policy. The Appellate Court found that the reasons given for the rescission were neither not timely raised nor justified. 

Robert Nixon was involved in an auto accident in 2014. His insurer, Direct Auto Insurance Company (“Direct Auto”), denied coverage and rescinded his policy. Direct Auto filed suit seeking a determination that it appropriately rescinded the automobile policy and that it had no coverage obligations to Nixon.  In response, Nixon filed a counterclaim for breach of contract and sanctions pursuant to Section 155 of the Illinois Insurance Code. The trial court found that Nixon made no omissions or misrepresentations on his application and ruled in Nixon’s favor. The trial court found Direct Auto’s actions were vexatious and unreasonable and awarded Nixon $60,000 in sanctions. Auto appealed the bad faith ruling. 

On appeal, Direct Auto stated that it had rescinded the policy because Nixon had made misrepresentations on his insurance application, including understating the number of people in his household and misstating where he planned to park his auto.  Direct Auto argued that it could not be subject to Section 155 sanctions because a bona fide dispute existed as to coverage justifying its rescission. The Appellate Court disagreed. Direct Auto had not raised the parking issue at trial, despite numerous opportunities, including in post-trial filings, so it was improperly raised on appeal. The Appellate Court also found that Direct Auto’s belief that Nixon misrepresented the number of people in his household did not present a bona fide dispute over coverage.

Because Direct Auto had no grounds to rescind the policy and deny coverage, the Appellate Court affirmed the trial court’s ruling that Direct Auto’s actions were vexatious and unreasonable. Direct Auto Ins. Co. v. Indiana Farmers Mut. Ins. Co. 2019 IL App (1st) 182326-U (Sept. 30, 2019).