The Seventh Circuit U.S. Court of Appeals recently affirmed the district court’s ruling that Essex Insurance Company could rescind a medical malpractice insurance policy based on materially false statements and non-disclosures on the application and, therefore, not provide a defense in an underlying malpractice action. In Essex Insurance Company v. Galilee Medical Center S.C., Nos. 14-1791, 14-1801, U.S. App. LEXIS 4139 (Mar. 4, 2016), Essex issued a malpractice policy to Galilee, a company providing medical services in Chicago, which also covered Galilee’s physicians. The applications for coverage contained a notice that Essex would rely on the answers provided by the applicants for the insurance and that all information and statements made in the applications were “material to the acceptance of the risk or hazard assumed by” Essex. The applications completed by both Galilee and Luis Angarita, a physician employed by Galilee, asked, among other things, whether either the clinic or its doctors used drugs for weight reduction for patients and if so, what drugs were used. The doctor’s application also asked whether he used injections for weight control or any “experimental procedures, devices, drugs, or therapy in treatment or surgery.” In essence, the application questions asked whether the applicants used any non-traditional weight loss therapies in their practices. Both the clinic and the doctor answered “no” to all those questions.

In June 2011, Rosa Ravelo, one of Angarita’s former patients, sued both Angarita and an affiliated Galilee company, for medical negligence based on his use of mesotherapy, a type of injection into subcutaneous layers of fat to assist in “a more desirable body shape and contour,” which she claimed caused her to develop “painful, infected, blister-like granulomas on her body.” Mesotherapy has not been approved by the FDA for any purpose whatsoever but Dr. Angarita, apparently undeterred by that technicality, administered the treatment to more than 5,000 patients. After the suit was filed, Galilee sought coverage under the Essex policy but the company denied coverage and filed a declaratory judgment action seeking to rescind the policy under Section 154 of the Illinois Insurance Code. That provision allows an insurer to deny coverage and rescind a policy if 1) a statement in the policy application is false; and 2) the false statement either was made with intent to deceive or materially affects the risk assumed by the insurer. Essex’s suit was based on 1) Galilee’s no answer regarding its employees’ use of drugs for weight reduction; 2) Angarita’s no answer to whether his practice included weight reduction by methods other than diet and exercise and if he dispensed drugs or injections for weight control; 3) Galilee’s no answer about whether its employees used experimental procedures; and 4) Angarita’s no answer when asked about whether he used experimental procedures, drugs or therapies. The district court granted Essex’s motion for summary judgment, based in large part on an affidavit from Essex’s managing director of underwriting that stated that a yes answer to any of the disputed questions would have resulted in either denial of coverage or much higher premiums and Essex’s determination that the no answers on the application were false.

On appeal, the defendants first argued that they had not made material misrepresentations on the applications regarding their “use” of drugs for weight control and reduction because they claimed that “use,” as used in the application, included only the act of administering the mesotherapy and that Galilee could not have “used” mesotherapy because Angarita only recommended the procedure when he was at Galilee but administered the injections at his home office. Alternatively, defendants argued that “use” was ambiguous. The court quickly dismissed the ambiguity argument stating “any reasonable applicant” would have understood what Essex wanted to know, and that the court would not allow the defendants to receive coverage they did not pay for based on their failure to make truthful representations in response to clear questions on the application, an argument that the court said “bordered on the surreal.” The court made equally quick work of the “home office” argument stating that a reasonable person would not find a difference between the recommendation and a treatment and that there was no evidence that Angarita ever informed Ravelo that he was administering the treatments in his individual capacity. The court also disregarded defendants’ equally specious argument attempting to distinguish between “weight” reduction and “size” reduction, an attempt the district court described as “disingenuous at best.”

Most importantly however, the appellate court noted that under Section 154, a material representation, even if innocently made, can still serve as the basis for a rescission if it “materially affects the risk assumed by the insurer.” Since Essex had submitted unrefuted evidence that the policy would not have been issued as it was or would have been issued with much higher premiums had the questions been truthfully answered, proving the materiality of the false answers, the appeals court affirmed the district court’s ruling.