Lawndale Nat. Bk., Tr. 4846 v. AMERICAN CAS. CO., READING, PA.

• Citation: 489 F.2d 1384
• Decision Date: 07 December 1973
• Docket Number: No. 72-1036.,72-1036.
• Parties: LAWNDALE NATIONAL BANK, UNDER TRUST NO. 4846, Plaintiff-Appellant, v. AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

489 F.2d 1384 (1973)

LAWNDALE NATIONAL BANK, UNDER TRUST NO. 4846, Plaintiff-Appellant, v. AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Defendant-Appellee.

No. 72-1036.

United States Court of Appeals, Seventh Circuit.

Argued January 26, 1973.

Decided December 7, 1973.

George C. Rabens, Chicago, Ill., for plaintiff-appellant.

Edward A. McCarthy, Chicago, Ill., for defendant-appellee.

Before HASTINGS, Senior Circuit Judge, and KILEY and PELL, Circuit Judges.

KILEY, Circuit Judge.

Plaintiff, Lawndale National Bank under Trust No. 4846 (Lawndale), brought this diversity action against defendant, American Casualty Company of Reading, Pennsylvania (American Casualty), to recover upon a fire insurance policy for fire losses on property, title to which Lawndale held under a land trust, for Albert Berland as beneficiary. The jury returned a general verdict for American Casualty. Lawndale has appealed from the judgment on the verdict. We reverse and remand.

On August 13, 1969 American Casualty, upon Berland's application—and acting at the direction of the Illinois Fair Plan Insurance Program (Fair Plan)— issued a policy providing coverage for loss by fire of a 12-flat apartment building located in Chicago, Illinois. In his application for insurance Berland answered "none" to the following question: "Give the applicant's 5 year loss record for fire and extended coverage perils." The answer was false. The policy issued, a fire occurred thereafter, and Lawndale filed a claim under the policy for loss of $35,177.46. American Casualty rejected Lawndale's claim and denied liability on the ground that coverage was void since the inception of the policy. Lawndale's suit followed.

American Casualty's answer asserted that the policy was void ab initio because of Berland's false statement, and that the claimed loss was caused by Berland's arson. Lawndale moved to strike the defenses. The motion was denied and the court instructed the jury with respect to both fraud in the application and arson asserted against Berland.

I.

Lawndale contends that the district court erred in denying its motion to strike the defense of Berland's false representation. This contention is based on the proposition that American Casualty is precluded from relying on the affirmative defense of Berland's misrepresentation since the application for insurance was not attached to or made a part of its policy.

The Illinois Insurance Code provides that:

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, of which a copy is attached to or endorsed on the policy, and made a part thereof. . . . Ill.Rev.Stats. Ch. 73, § 766.

The reasons for the district court's ruling upon the issue are that § 766 is inapplicable since "this litigation . . . does not deal with the customary form of insurance contract;" that the Fair Plan is designed to serve a unique insurance function; and that the application for and issuance of a policy under the Fair Plan program are different from those in the standard insurance contract.

The Illinois Fair Plan is the result of federal and state statutes, 12 U.S.C. § 1749bbb et seq., Ill.Rev.Stats. ch. 73, § 1065.69 et seq., designed to make basic property insurance available in high risk urban areas where ordinary insurance would be unavailable. The federal statute provides that in exchange for participating in statewide Fair Plan insurance programs the federal government will protect the insurers from loss caused by riot and civil commotion through a system of re-insurance. The Illinois statute authorizes the administrative framework through which applications for insurance are received and policies are issued.¹

The district court correctly characterized the issue as one of first impression. Concededly Illinois law governs, and no Illinois case has decided the precise issue. In rendering our decision we must anticipate how the Illinois Supreme Court would decide the issue, were the issue before that court.

It is undisputed that the application containing the alleged misrepresentations was not attached to or made a part of the policy. The policy itself does not contain the misrepresentation nor is it contained in any endorsement on it or rider appended to it. Read literally the language of § 766 bars American Casualty from using the alleged misrepresentation contained in the application as a defense. Moreover, neither the federal nor the Illinois Fair Plan statutory scheme contains any express provision limiting the application of § 766 to the present situation.²

We hold that the district court erred in denying Lawndale's motion to strike the defense of misrepresentation in the application because that defense is precluded by § 766.³

Since the late Justice Hugo Friend's opinion in Anderson v. John Hancock Mut. Life Ins. Co., 316 Ill.App. 338, 45 N.E.2d 39 (1942), through Freberg v. Coronet Ins. Co., 96 Ill.App.2d 39, 238 N.E.2d 174 (1968), the Illinois appellate courts have consistently adhered to the construction of § 766 given in Anderson: that unless the application is attached to the policy or the claimed misrepresentation is in the policy itself or in an endorsement or rider attached thereto, the misrepresentation is not available for suit to invalidate the policy or in defense of a suit upon the policy. This is the general rule followed in states having similar statutes. 1 Couch on Insurance §§ 4:20-21.

In Anderson plaintiff brought suit under three industrial life insurance policies issued by defendant. Each of the three policies provided that the policy would be void by breach of any of the enumerated conditions. The court held that plaintiff in that case, who was ill prior to issuance of the policy but who stated in the application which was not attached to the policy that her health was good, could not recover because of the breach of one of the enumerated provisions contained in the policy. The dictum in the court's discussion of § 766 is that in "policies of this character"— referring to industrial life insurance policies—the application need not be attached where the policies contain the conditions breached. The court considered plaintiff's arguments that those insured in such policies would have had greater protection in having the application attached than in the policy's small print alone and thus be better able to correct false or inaccurate statements to guard against possible fraud by agents. The court concluded these arguments should be addressed to the legislature.

In Auriemma v. Western & Southern Life Ins. Co., 323 Ill.App. 271, 55 N.E.2d 292 (1944), the court relied on the Anderson decision in holding that in industrial life insurance policies, conditions in the policy as to "sound health" apply to the health of the insured at the delivery of the policy. The issue now before us was there "abandoned" on appeal, although the question was raised by defendant's answer. The court's review was limited to the trial court's decision striking the other defenses implied in the court's holding.

In Loving v. Allstate Ins. Co., 17 Ill. App.2d 230, 149 N.E.2d 641 (First District, 1958), the court—of which court panel the author of this opinion was a member—first stated that in an automobile insurance policy, in order for All-state to use the misrepresentation as a basis to deny "rights on the . . . policy," the application must, under § 766, be attached to the policy, and since the policy was not attached the defense of misrepresentation was not available. The court stated that § 766, inter alia, requires the insurer to place in the hands of the insured the "entire contract" upon which it intends to rely, whether policy alone or with application, endorsement or rider. Id., at p. 236, 149 N.E.2d 641. The purpose of such a statute is "solely" for the protection of the insured. See 1 Couch on Insurance § 4:20. The court went on, however, to point out that the alleged Loving misrepresentations relied upon were in the policies themselves and therefore the defense was available. The summary judgment for Loving was reversed and the cause remanded for trial of the issue whether Loving had notice before application of refusal of a different insurer to renew his policy with that insurer.

The Illinois Appellate Court in Government Employees Ins. Co. v. Dennis, 65 Ill.App.2d 365, 212 N.E.2d 759 (Second District, 1965), an automobile insurance case, concluded that § 766 had no application to preclude insurer from declaratory judgment that the policy was void ab initio for misrepresentation of ownership because the alleged misrepresentation occurred not "in negotiation of the policy" but after the policy issued. The court noted that the application was not attached to the policy but the policy itself stated that the person who made the representation was the owner. The cause was remanded because of the trial court's error in dismissing the insurer's suit at close of its case and in rejecting insurer's offer of express testimony on the assumption there was no evidence of misrepresentation.

Finally, in Freberg v....