Lawyer’s Material Misrepresentations in Policy Renewal Applications Justify Rescission

A federal district court in Illinois has granted an insurer’s motion for summary judgment rescinding three consecutive professional liability policies.  This comes after the court determined under Illinois law that the insured attorney made material misrepresentations in each of the renewal applications.  Minn. Lawyers Mut. Ins. Co. v. Schulman, 2016 WL 4988006 (N.D. Ill. Sept. 19, 2016).

The insurer issued consecutive claims-made professional liability policies to a patent and trademark attorney.  The application for each policy required the insured to certify that he was “not aware of any claims or circumstances that could result in claims or disciplinary actions that have not been reported to” the insurer.  The insured also represented that if a client “decides to abandon a patent application or allow a patent application to expire,” such decision is “memorialized in writing[.]”  The insured failed to disclose that he had allowed various patent applications to expire for two clients and that neither client had agreed in writing to abandon the application process.  When the clients ultimately brought complaints against the attorney, he tendered the claims to the insurer.

The insurer moved to rescind its policies.  The court noted that, under Illinois law, an insurer may rescind in the event of misrepresentations that materially affect the acceptance of the risk.  The court agreed that the attorney misrepresented both that he required written client acknowledgment to abandon a patent application and that he had no knowledge of any circumstances that could result in claims.  Although the insured argued that he did not believe that any claim existed with respect to the two clients, the court held that an objective standard applied and was satisfied in light of the attorney’s repeated omissions and client inquiries about their patent applications.

The court held that the misrepresentations were material under an objective test that asks “whether a reasonably careful and intelligent underwriter would regard the facts as stated to substantially increase the chances of the event insured against.”  The court held that an affidavit from the insurer’s underwriter averring that the insurer would have declined to renew the policies, or, at a minimum, would have required substantially more premium, constituted competent summary judgment evidence, noting that “it borders on the surreal to think that the nondisclosure was immaterial.”