Be Careful When Trying to Rescind in Illinois

Increase in Premium Without Actual Evidence of an Increased Risk Defeats Rescission

Rescission is an equitable remedy that allows an insurer who is deceived into issuing an insurance policy to declare it void from its inception. However, the law of rescission is applied differently in different states. For example, in Illinois, in Direct Auto Insurance Company v. Andrew Koziol, No. 1-17-1931, 2018 IL App (1st) 171931, Appellate Court Of Illinois First Judicial District Fifth Division (August 3, 2018) Direct Auto Insurance Company (DAI) appealed from orders of the trial court which denied its motions for summary judgment and reconsideration, and entered judgment in favor of defendant Andrew Koziol based on stipulated facts in a declaratory judgment action.


DAI filed a declaratory judgment action to determine whether it owed coverage to Koziol for a claim arising out of an accident on July 21, 2013, when a vehicle operated by Koziol came into contact with a utility pole. The car that Koziol was driving, a 2008 Dodge Charger, was insured by DAI under a policy taken out by Koziol on April 8, 2013.

DAI filed a declaratory judgment action seeking a declaration that it did not owe coverage to Koziol based on an alleged material misrepresentation on his application for insurance coverage with DAI that was discovered during its investigation of the accident. DAI alleged in its complaint that the material misrepresentation made the policy void ab initio.

DAI filed a motion for summary judgment, raising many of the same allegations it stated in its initial complaint. In the motion, DAI argued that during the course of the claims investigation into Koziol’s accident, DAI learned that 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 of his electronic insurance application which was submitted through his agent, Insure on the Spot. Additionally, DAI contended in its motion 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.”

The DAI policy also contained a statement regarding “fraud and misrepresentation.”

Rosa Miranda, DAI’s Underwriting Manager, submitted an affidavit in support of the motion for summary judgment in which she averred that “had DAIC been advised that Koziol had additional vehicles residing at his household at the time of his application, such information would have affected the rating or the acceptability of the risk under the policy.” DAI contended that had Koziol’s omission been disclosed, the policy would have been issued with a substantially higher premium (specifically a $477 increase).

In his response to DAI’s motion for summary judgment, Koziol contended that the decision in Direct Auto Ins. Co. v. Beltran, 2013 IL App (1st) 121128 applied. He contended that his parents resided in the same building, not the same unit and that the information had been clearly disclosed and that they were specifically excluded from the policy. Koziol further noted that DAI only claimed that this information would have raised his insurance rate, not erase liability for coverage for the vehicle that DAI insured.

In its written memorandum opinion and order of September 15, 2016, the trial court cited the two-prong test from Beltran, 2013 IL App (1st) 121128, for determining whether, under section 5/154, the policy may be rescinded where there has been a misrepresentation. Under the test, the trial court was required to determine whether the statement was false and whether Koziol intended to deceive DAI on his insurance application or the statement materially affected the acceptance of the risk or hazard assumed by the insurer.  The trial court concluded that at minimum, there was a material issue of fact regarding whether Koziol had intent to deceive when he omitted his parents’ vehicle from the application to insure his 2008 Charger.

The trial court concluded that because DAI presented no evidence as to how the additional people residing with Koziol along with the additional vehicle actually increases the risk being insured against and Miranda’s affidavit was insufficient, that DAI had failed to demonstrate that there was a material misrepresentation.

Subsequently, DAI and Koziol agreed to resolve the consolidated action without a full trial. On July 28, 2017, the trial court entered a written stipulation and judgment order.  Judgment was entered in favor of Koziol on DAI’s declaratory judgment and Koziol’s remaining counter-complaint. The parties further agreed and stipulated, and the trial court found, that the value of Koziol’s claim was $11,573.55, and judgment was entered in favor of Koziol and against DAI for that amount.


Entry of Judgment for Koziol

DAI next contends that the trial court erred in entering judgment for Koziol based on its interpretation of the Beltran decision. DAI restates its argument raised on its motion to reconsider before the trial court, namely that there would have been a 35% increase in premium had the 2002 Ford been disclosed on the insurance application, thus Koziol’s misrepresentation was material and authorized rescission under the Code.

Section 154 of the Code states as follows, in pertinent part: “No misrepresentation or false warranty made by the insured or in his behalf in the negotiation for a policy of insurance, or breach of a condition of such policy shall defeat or avoid the policy or prevent its attaching unless such misrepresentation, false warranty or condition shall have been stated in the policy or endorsement or rider attached thereto, or in the written application therefor. No such misrepresentation or false warranty shall defeat or avoid the policy unless it shall have been made with actual intent to deceive or materially affects either the acceptance of the risk or the hazard assumed by the company. * * * ”

Section 154 establishes a two-prong test for determining if the policy may be rescinded. Under the first prong, the statement must be false; and under the second prong, the statement must have been made with an actual intent to deceive or either the statement must “materially affect the acceptance of the risk or hazard assumed by the insurer.” The Illinois supreme court has interpreted section 154 as permitting rescission for an innocent misrepresentation if it materially affects the insurer’s acceptance of the risk.

A material misrepresentation in an application for insurance is a statement of something as a fact which is untrue and affects the risk 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

In establishing the materiality of a misrepresentation, an insurer may rely on the underwriter’s testimony or the testimony of its employees.

In this case the appellate court concluded that there was very little evidence presented by DAI to satisfy the two-prong test of section 154.

There is no dispute that Koziol failed to disclose his parents’ 2002 Ford vehicle in his application for insurance with DAI for his 2008 Charger. There is also no dispute that the vehicle was separately insured by a different insurance company (State Farm). Nor is there any dispute that had DAI known of the additional vehicle, it would have charged Koziol an additional $477 for his premium.

Here, as in Beltran, DAI has again presented nothing in its pleadings and affidavits to support its conclusion that additional people residing with Koziol who were not drivers of the 2008 Dodge, the DAI-insured vehicle, along with the additional vehicle, which was insured by another carrier and not driven by Koziol, actually increased the risk being insured against. Thus, there was no evidence presented, except for the increased premium, as justification for the rescission and the court concluded that the omission of the additional vehicle was not a material misrepresentation as contemplated by section 154 of the Code.

The court of appeal concluded that an increase in premium, standing alone, without any actual evidence of an increased risk to the insured, is insufficient to justify rescission of an automobile insurance policy under section 5/154 of the Code.


Usually, an increase in premium because of a false statement or concealment of a fact, should be sufficient to support a rescission. This $11,500 case has changed the law and concludes that just an increase in premium is not enough to support rescission. It should have been obvious to the court that the existence of another car in the location could increase the risk faced by the insurer and that is why they asked the question in the application. The insurer needed to explain why the premium was increased.

© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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