IL Supreme Court Rules on Innocent Insured Issue

The Illinois Supreme Court has ruled against a Skokie lawyer who was seeking coverage under a professional liability policy that had been invalidated by his partner’s failure to disclose potential claims on an application for coverage. The ruling stands as a warning for other firms who expect courts in the state to find coverage for them in the fine print of a policy.

Tuzzolino and Terpinas had purchased claims made lawyers professional liability insurance policies from Illinois State Bar Association Mutual Insurance Company (ISBA Mutual) since 2005. When the firm renewed their policy in 2008 partner Sam Tuzzolino completed the renewal application and checked the box stating that no member of the firm was aware of any circumstance which could give rise to a claim. Tuzzolino made this claim despite the fact that he had offered a former client $670,000 earlier that year to drop a malpractice suit against him. Tuzzolino’s partner, Will Terpinas Jr, did not sign the application attesting to a lack of knowledge of the proposed settlement. Shortly after the E&O insurance policy was renewed Terpinas received a lein letter from an attorney representing his partner and presented it to ISBA Mutual as a claim.

ISBA denied the claim noting the prior knowledge exclusion in the policy and misrepresentation on the application. Terpinas sued, arguing that he was not the one who lied on the application and cited the policies’ coverage for innocent insureds.  The initial ruling by Cook County Circuit Court Judge Rita M. Novak was for ISBA but a Appellate Court opinion in late 2003 reversed the decision in Terpinas’ favor. After an appeal to the State Supreme Court, a final ruling was made this week that upheld the original opinion that coverage could be denied.

Although this case seems fairly straightforward considering the circumstances, it brings up a common situation for law firms purchasing claims made legal malpractice insurance. If an incident happens, should a claim be filed? Most (but not all) claims made policies allow for an incident to be reported to lock in coverage if a formal demand is later brought. When an incident is reported a premium increase is likely, even if the allegations are merit-less. If an incident is not reported and later gives rise to a legal fees or a settlement, coverage could be jeopardized.

A second issue in this case is that an offer of settlement was made without ever notifying the insurer, who the firm presumably assumed would pay for it. Most good LPL policies contain clauses that allow the insured firm some control over defense and settlement. However, no insurers give the insured firm the ability to make settlements on their own before seeking reimbursement. Not notifying an insurer of an incident as soon as possible and giving them a chance to defend the insured firm can be used to deny a claim later.

Understanding the claims reporting provisions and defense responsibilities of the insurer contained in a policy is important, no two insurance forms are created equal and every one requires specific reporting procedures for claims and incidents that can become claims. Partnering with an expert insurance broker to negotiate the best terms possible is important. The team at is here to help your firm navigate the changing forms of insurance carriers offering professional liability insurance to law firms.