This is a tough decision by the Illinois Supreme Court because its effect is that lawyers working for a firm whose managers misrepresented a fact on an application for professional liability insurance will cause every insured - every lawyer in the firm - to lose coverage. The court's most compelling point is this:

In the case of a misrepresentation that materially affects the acceptance of the risk, the issue is the effect of that misrepresentation on the validity of the policy as a whole. A misrepresentation on the policy application goes to the validity of the policy as a whole. The innocent insured doctrine, on the other hand, has a narrower focus, typically dealing with situations where an insured’s wrongdoing triggers a policy exclusion, and the question is whether the insurer has a duty to defend the innocent insured under a policy that is still in effect.

An exclusion might be, for example, a failure to cooperate with the insurer, or failure to give timely notice of a claim.  A misrepresentation in the application is material if acceptance would have had a material effect on whether to issue the policy in the first place. 

Kevin LaCroix points out that claims made policies look back over a period of time and that there is something incongruous about voiding an entire policy - leaving innocents uninsured - because a single potential claim was omitted on renewal by one member of the firm.  Denial of coverage on the omitted claim could be justified but not voiding the policy in his view.
- gwc

Legal Malpractice Insurance: Policy Rescission for Application Misrepresentation Applies Even to Innocent Insured

By Kevin LaCroix on February 24, 2015Posted in D & O Insurance
Under the applicable Illinois statute, an insurer may seek to rescind a policy if it was procured by an application misrepresentation if the misrepresentation was “made with the actual intent to deceive or materially affects either the acceptance of the risk or the hazard assumed by the company.” But even if rescission is otherwise warranted, may the insurer rescind the policy even as to an “innocent insured” who was unaware of the application misrepresentation? 
That was the question raised before the Illinois Supreme Court in Illinois State Bar Association Mutual Insurance Company v. Law Offices of Tuzzolino and Terpinas. In a February 20, 2015 opinion (here), the Court rejected the ruling of the intermediate appellate court, which had applied the “innocent insured” doctrine to preserve coverage for a law firm partner who was unaware of the a misrepresentation in the law firm’s legal malpractice insurance renewal application, and held that the insurer was entitled to rescind the policy as to all insured persons, even the innocent insured. As discussed below, I have a problem with the circumstances this case presents. 

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