1052 (Ill. App. 1st Dist. 1990). Here, the insured claimed that the person filling out the application for insurance was unaware that a construction project dispute might give rise to a claim against the trustees of a trust, and that therefore no misrepresentation could be held to have occurred. The insured contended that although an objective “reasonableness” standard applies in determining whether a misrepresentation is material, a subjective standard should be applied as to whether a misrepresentation occurred at all.
The court disagreed, stating that the application question calls for no subjective evaluation, “but in traditional objective language requires the disclosure of any facts indicating the probability of a covered claim.” Additionally, the court made the point that a material misrepresentation will avoid the contract even though made through mistake or good faith (see Campbell v. Prudential Ins. Co., 155 N.E.2d 9 [Ill., 1958]).
In the same vein, where the applicant for insurance did not take seriously a claim against his company, believing the claim letters to be “nothing more than a negotiating ploy,” the insurer was allowed to void the policy. “The application calls for no judgmental or subjective evaluation. Rather, it requires in traditional objective language the disclosure of any facts indicating the probability of a covered claim. Consequently, what [the insured] understood about the letters is not relevant.” See International Insurance Co. v. Peabody International Corp., 747 F.Supp. 477 (N.D. Ill. 1990).
The fact that the insured believed that a claim that had been made against him had “dissipated” by the time an insurance application was completed did not relieve the insured from disclosing that, in fact, the claim had been made, so that the insurer was entitled to void the policy in Utica Mutual Ins. Co. v. Klein, 460 N.W.2d 763 (Wis. App. 1990).
In American Special Risk Management Corp. v. Cahow, 192 P.3d 614 (Kan. 2008), the court explained the modern, two-prong, subjective-objective standard like this:
Under this inquiry, the court first asks the subjective question of whether the insured knew of certain facts and then asks the objective question of whether such facts could reasonably have been expected to give rise to a claim. The reasoning behind the application of this standard is based upon the plain language of the insurance policy—the use of both subjective and objective elements in the critical language of the policy is deemed to clearly express the parties’ intent to incorporate both components.
Peoples Bank applied for an E&O endorsement to a D&O policy. Shortly after the policy was issued, the bank filed a claim for coverage and defense in a negligence and conversion action against it. A bank employee opened a business under the name American Special Risk Management, presented improperly endorsed checks that were honored by the bank, and deposited the real American Special Risk Management Corporation’s funds into the account that he then transferred to his personal account. When the scheme was discovered by American and was reported to Robert Chenoweth, a senior operations officer with the bank, Chenoweth put a hold on the most recent checks deposited to the account. He did not believe that American believed the bank was liable.
The bank applied for D&O and E&O coverage about three weeks after Chenoweth learned that American was filing criminal charges against the scheming employee. The application asked two questions:
1. Has there been any actual, threatened or pending litigation against the Applicant or any subsidiary during the past 3 years?
2. Are there any facts, circumstances or situations involving the Applicant, any subsidiary or any past or present director, trustee, officer or employee which could reasonably be expected to give rise to a claim?
The banks answered “no” to both questions. Applying the first prong—the subjective test—the court found that the bank had knowledge of corporate checks being deposited and had put a hold on two outstanding checks and that there was a criminal investigation against the embezzling employee. Applying the objective prong, the court pondered whether what the bank knew could reasonably be expected to give rise to a claim. The court agreed with the lower court’s finding that it is “’inconceivable’ that the Bank’s officers, with their knowledge of the banking industry and the facts known in this case, would not have been sufficiently concerned” and that “a reasonable person in the position of the Bank would have been concerned and conducted an investigation.”
Thus, the court held that the bank had knowledge of facts and circumstances that could result in a claim and stated that there was no coverage.
And in Booker v. Blackburn, 942 F.Supp. 1005 (Dist. N. J. 1996), the insured engineer failed to list a third party’s claim against him. The insured claimed to believe that the complaint had simply been a formality. Nonetheless, the court found for the insurer and allowed rescission of the policy.
That the applicant was not relieved from the consequences of material misrepresentations in the insurance application in spite of the fact that other relevant questions in the application were allowed by the underwriters to go unanswered was the holding of Pennsylvania Casualty Co. v. Simopoulos, 369 S.E. 2d 166 (Va. 1988). The insured misrepresented his claims and professional discipline records in obtaining insurance, but alleged that the company was prevented from denying subsequent claims because it allowed other important questions on the application to go unanswered. Among the insured’s contentions was that the unanswered questions should have served to put the insurance company on notice that further investigation regarding the issuance of the policy was in order. The court held that
the unanswered questions were insufficient for this purpose.
The Supreme Court of New Jersey, however, allowed partial rescission of a professional liability contract. Two partners, Lawson and Wheeler, formed a limited liability partnership to practice real estate transactions. They engaged not only in the illegal practice of law, practicing in states in which they were not licensed, but also in an extensive check-kiting scheme. A third partner, Snyder, maintained an office apart from the other two and did not know of the financial activities. During this time, Wheeler applied for professional liability insurance, and signed an application asserting that he knew of no pending claims, acts, errors or omissions that might be expected to result in a claim. About a year later, the policy lapsed, but was reinstated with Wheeler’s execution of a new warranty that he knew of no pending claims or activities that might result in a claim. In the meantime, Lawson was disbarred and a title insurer, which was suddenly forced to pay several claims, brought action against the partners singly and as a limited partnership. The professional liability insurer declared the policy was void, and refused to pay. The actions were consolidated, and when they reached the supreme court, the court said that in general a rescission would be allowable. But in this instance the policy was “sufficiently divisible in respect of each individual so that partial rescission was a permissible remedy for one attorney’s knowing material misrepresentations in application.” The court