Fraud in Application Voids Law Firm’s Professional Liability Policy

The United States District Court for the District of New Jersey, applying New Jersey law, has held that an insurer may rescind a professional liability policy and recover damages where it relied on false statements made in the insurance application.  Colony Ins. Co. v. Kwasnik, Kanowitz & Assocs., P.C., No. 1:12-cv-00722 (D.N.J. June 27, 2014).

On behalf of his law firm, an attorney submitted an application for a professional liability policy that included three questions regarding allegations of past and potential malpractice or ethical violations brought against the firm or its attorneys.  After issuing the policy, the insurer brought the present action alleging that fraudulent answers to those questions voided the policy and entitled it to damages under the New Jersey Insurance Fraud Prevention Act (IFPA).

Ruling on the insurer’s motion for summary judgment as to rescission, the court considered whether: (1) the attorney made a false statement, (2) that was “material to the particular risk assumed by the insurer,” and (3) upon which the insurer actually and reasonably relied in issuing the policy.  The court added that rescission of an insurance policy based on fraud does not require knowledge of the statement’s falsity “unless the applicant made the statement in response to a subjective question.”  First, noting the attorney’s failure to disclose four past professional liability claims against the firm, a threat of malpractice litigation, and an ethics complaint against the attorney, the court determined that the uncontested facts established numerous false statements in the application.  Second, the court held the statements material to the risk assumed because the questions “went to the very heart of the risk assessment.”  Finally, finding that the insurer neither would have issued the policy but for the false statements nor had any reason to know the falsity of the statements, the court held that the insurer actually and reasonably relied on the attorney’s misrepresentations.

Based on those conclusions, the court also granted the insurer’s motion for damages under the IFPA because it determined that the uncontested facts established that the attorney knowingly made the material false statements in the application.