Malpractice Policies Rescinded Based on Material Misrepresentations

An Indiana federal court, applying Indiana law, has granted an insurer’s motion for summary judgment and rescinded malpractice insurance policies where the policyholder attorney made material misrepresentations and omissions in procuring coverage by failing to disclose a scheme to misappropriate client funds.  Minn. Lawyers Mut. Ins. Co. v. Conour, 2014 WL 5089290 (S.D. Ind. Oct. 8, 2014).

An attorney pled guilty to wire fraud arising from his involvement in a “Ponzi Scheme” with clients’ settlement funds.  At his plea hearing, the attorney admitted to defrauding clients by converting client funds for his own use.  The attorney tendered several claims to the insurer under a series of five attorney malpractice insurance policies.  The attorney did not request coverage for either the criminal case or a related disciplinary action.  Following the attorney’s tender, the insurer investigated the claims and declared coverage unavailable.  Shortly thereafter, the insurer refunded the policy premiums and filed a coverage action seeking rescission of the policies or, in the alternative, a declaration of no coverage.

The insurer moved for summary judgment on its rescission claim based on the attorney’s alleged misrepresentation on his initial application that no firm member was aware of any incident “which could reasonably be made against the applicant” and his certification that he had no knowledge of existing facts that could result in claims or disciplinary actions that had not been reported.  The court held that the insurer was entitled to summary judgment.  In so holding, the court determined that rescission is appropriate where “a representation was false and material to the decision to issue the policy.”  The court found that, based on the attorney’s admissions at his plea hearing, including his admission that he began carrying out the misappropriation scheme years before applying for coverage with the insurer, the attorney had made misrepresentations in procuring coverage with the insurer.  The court also determined that the misrepresentations were material because there was no dispute that the insurer would not have issued any of the policies if the attorney had disclosed that he was misappropriating client funds.