Illinois Appellate Court Holds Insurer Has No Duty to Defend Pending Determination of Rescission Action
Insurance Law Update
In Certain Underwriters at Lloyd’s, Individually and Severally Subscribing to Policy Certificate Number 03HPOM210 v. Professional Underwriters Agency, Inc. et al., 848 N.E.2d 597, 302 Ill. Dec. 298 (2006), the Appellate Court for the Second District of Illinois held an insurer’s
obligation to defend a third-party action may be delayed until the conclusion of a rescission action pending between the insurer and insured. Certain Underwriters at Lloyd’s filed an action for declaratory relief against an insurance agency and its principals. Underwriters sought rescission of the parties’ insurance contract due to alleged material misrepresentations in the defendants’ application for insurance.
A third-party action was subsequently filed against the defendants, but Underwriters refused to provide a defense, relying on its pending rescission action. Citing the Illinois Supreme Court’s decision in State Farm Fire & Casualty Co. v. Martin, 186 Ill.2d 367 (1999), Underwriters argued an insurer’s duty to defend is suspended upon the insurer’s filing of an action seeking a declaration of no coverage.
The defendants claimed a judicial finding of rescission must be secured before an insurer can refuse to defend. The court held Underwriters’ obligation to defend could not be triggered until the rescission action concluded. However, the court noted if Underwriters does not prevail on the rescission claim, it will be liable for all of the insureds’ defense costs in the underlying action.