IL App. Rescission (1st Dist.)

Omission That Resulted in Reduced Premium Didn’t Automatically Establish That Misrepresentation Was Material.

The Illinois Appellate Court for the First District, applying Illinois law, affirmed the judgment of the circuit court and held that an increase premium, standing alone, without any actual evidence of an increased risk to the insured, is insufficient to justify rescission of an automobile insurance policy.

Andrew Koziol was in a car accident while driving a 2008 Dodge Charger that was insured by Direct Auto Insurance Company (“DAI”).  Koziol made a claim under his policy with DAI.  DAI subsequently denied coverage and rescinded Koziol’s policy based on an alleged material misrepresentation made by Koziol when completing the application for insurance.  As a result, Koziol filed a breach of contract action against DAI.  DAI filed a competing declaratory judgment action seeking a declaration that it did not owe coverage to Koziol, and the cases were eventually consolidated.  DAI alleged that the material misrepresentation made the policy void ab initio under section 15/154 of the Illinois Insurance Code.  According to DAI, Koziol failed to disclose the existence of a 2002 Ford Explorer XLS that was registered to, and kept at, his home address by his parents at the time his insurance application was submitted.  DAI also contends that Koziol falsely responded to the following question on his insurance application: “Any other cars in the household other than those listed on the application?”  Koziol answered “no.”  In his answer to DAI’s complaint, Koziol denied that he knowingly and intentionally provided a false answer to DAI to obtain insurance coverage for less money.  DAI filed a motion for summary judgment and asserted that had Koziol’s omission been disclosed, the policy would have been issued with a substantially higher premium and, thus, the misrepresentation renders the policy null and void under Section 154.

Under Illinois law, for there to be a material misrepresentation that would allow for rescission under Section 154, the trial court had to determine (1) whether the statement was false and (2) whether Koziol intended to deceive DAI on his insurance application or whether the statement materially affected the acceptance of the risk or hazard assumed by DAI.  The trial court denied DAI’s motion for summary judgment finding that at a minimum there was a material issue of fact regarding whether Koziol had intent to deceive when he omitted his parents’ vehicle from the application.  DAI filed a motion for reconsideration which was denied.  Subsequently, the trial court entered a written stipulation and judgment order.  DAI appealed.

On appeal, DAI contended that the trial court improperly denied its motion for summary judgment and reconsideration.  Under Illinois law, “[a] material misrepresentation in an application for insurance is a statement of something as a fact which is untrue and affects the risks undertaken by the insurer.”  Whether an insured’s statements are material is determined by “whether reasonably careful and intelligent persons would have regarded the facts stated as substantially increasing the chances of the events insured against, so as to cause a rejection of the application.”  The appellate court found that there was “no nexus shown between [the] undisputed facts and DAI’s unsupported conclusion that they substantially increased the insurer’s acceptance of the risk.”  Important to the appellate court’s analysis, DAI had not presented evidence that it would not have issued the policy if the additional vehicle had been disclosed.  The appellate court concluded that the omission of the additional vehicle was not a material misrepresentation as contemplated by Section 154 of the Insurance Code.  The appellate court went on to further hold that “an increase in premium, standing alone, without any actual evidence of an increased risk to the insure[r], is insufficient to justify rescission of an automobile insurance policy under section 5/154 of the Code.”  Direct Auto Ins. Co. v. Koziol, 2018 IL App (1st) 171931 (Aug. 3, 2018).