Appeals panel reverses ruling over Skokie firm's malpractice insurance

The Illinois State Bar Association Mutual Insurance Company will need to represent one of the partners in a Skokie law firm being sued for malpractice, an appeals panel held last month.

Ruling in favor of lawyer Will Terpinas Jr. in his dispute with ISBA Mutual, a panel of the First District Appellate Court determined that Terpinas' coverage was not voided by the intentional failure of the other partners at his firm to disclose to the insurer that a former client was suing him when he applied for coverage.

The decision overturned the judgment of Cook County Circuit Court Judge Rita M. Novak, who had ruled in favor of the insurer, agreeing with the company’s argument that the misrepresentations expressed by lawyer Sam Tuzzolino on his application for malpractice liability insurance voided coverage for the entire law firm of Tuzzolino and Terpinas.

The appellate court opinion, which came down Nov. 22, was authored by Justice Jesse Reyes. Justices Shelvin Louise Marie Hall and Bertina E. Lampkin concurred.

The case stemmed from a dispute between Tuzzolino and a former client, Antonio Colletta.

Colletta alleged that about seven years ago, Tuzzolino mishandled litigation he was bringing to collect $1 million from former business partners in a bankrupt venture known as Baja Chicago LLC.

According to the panel's opinion, in response to Colletta’s initial malpractice suit, Tuzzolino persuaded the businessman to drop the suit against him and instead allow himto bring a malpractice action against the lawyer who handled Baja’s bankruptcy case.

Tuzzolino, however, did not file that action as Colletta had directed, and the case was dismissed. When Colletta learned of the dismissal in 2008, Tuzzolino offered Colletta a $670,000 settlement.

Shortly after offering the settlement, Tuzzolino applied for insurance coverage through ISBA Mutual, seeking to renew a policy the firm had held with the bar-related insurance company since 2005.

On the renewal form, Tuzzolino expressly asserted that the firm did not face “a past or present circumstance which may give rise to a claim that has not been reported.”

Terpinas did not sign the form.

A month later, Terpinas received a lien letter from a lawyer Tuzzolino had hired to represent him against Colletta’s pending malpractice action.

Terpinas then notified the insurance company, and ISBA Mutual moved to rescind coverage of the firm and the partners, individually, noting Tuzzolino’s misrepresentations regarding the Colletta litigation.

Terpinas had argued that he was an “innocent insured” who had no knowledge of Colletta’s pending malpractice litigation, and no knowledge of Tuzzolino’s alleged failures in representing Colletta in the litigation that sparked the malpractice claims.

Therefore, Terpinas asserted, ISBA Mutual needed to still cover him, while rescinding coverage to Tuzzolino.

The trial court, however, sided with the insurance company, ruling that, under Illinois law, such policies can only be rescinded for an entire firm, and not for individual partners, even if other partners had limited or no knowledge of the actions of other partners.

Terpinas appealed, and last month, the appellate court sided with him, granting that the “innocent insured doctrine preserves coverage” for Terpinas.

The court noted that denial of coverage would not only harm the lawyers, but also the “initially wronged party,” such as Colletta.

“Thus, while the insurers and insureds may argue over who is the truly ‘innocent’ party for the purposes of equities, such a focus misses impact on the underlying malpractice litigation,” Reyes wrote for the panel.

The appellate court also found that the severability clause in the policy contract “operated to create separate and distinct contracts.”

With this in mind, the appeals panel determined that the circuit judge erred in granting summary judgment, and reversed the lower court’s ruling.