Insured Lawyers’ Material Misrepresentations Warrant Rescission and Coverage also Barred by Prior Knowledge Exclusion

The United States District Court for the Northern District of Mississippi, applying Mississippi law, has granted summary judgment in favor of an insurer, holding that the insurer is entitled to rescind a lawyers professional liability policy based on the insured attorneys’ material misrepresentations in the insurance application.  Imperium Ins. Co. v. Shelton & Assocs. P.A., 2016 WL 5477635 (N.D. Miss. Sept. 29, 2016).  The court also held that, even if the policy were not rescinded, the malpractice actions against the attorneys were excluded from coverage based on the policy’s Prior Knowledge Exclusion. 

Two insured attorneys were sued for alleged instances of malpractice taking place between 2007 and 2011.  They sought coverage under a professional liability policy affording coverage for claims first made and reported during the policy period.  While defending the underlying action under a reservation of rights, the insurer brought suit seeking a declaration, under the Prior Knowledge Exclusion, that it had no duty to defend or indemnify the two attorneys in connection with the lawsuit because the attorneys knew or could have reasonably foreseen that their failures with respect to representing their clients from 2007 to 2011 might later be the basis for a claim against them.  The insurer also asserted that it was entitled to rescind the policy because the insured attorneys made material misrepresentations of fact in the insurance application.

The court agreed with the insurer, finding that the insured attorneys did in fact make a misrepresentation in the application for the insurance policy at issue when they responded “No” to the question: “After inquiry, are any attorneys in your firm aware. . . of any legal work or incidents that might reasonably be expected to lead to a claim or suit against them?”  According to the court, the fact that the attorneys had been aware of their failures, which resulted in adverse judgments against their clients, made this answer a misrepresentation.  Further, the court found the misrepresentation was material because the uncontested facts demonstrated that, had it known the true facts, the insurer would not have issued the policy to the attorneys without at least an incident exclusion for one of the actions.

The court further found that even if the policy were to remain in effect, the Prior Knowledge Exclusion would preclude coverage.  That provision barred coverage for claims if “the Insured at or before the effective date knew or could have reasonably foreseen that such Wrongful Act might be expected to be the basis of a Claim.”  After first noting that neither the Mississippi Supreme Court nor the Mississippi Court of Appeals had yet addressed a similar exclusion, the court explained that it would apply the subjective/objective two-prong approach adopted by many other jurisdictions.

The court found that the attorneys’ filing of motions in their client’s case that sought to remedy their failure to take action on their client’s behalf, which happened more than a year prior to the policy’s effective date, shows that the insured attorneys were subjectively aware of the facts giving rise to the underlying malpractice action prior to the policy’s effective date.  The court then found that the objective prong was met because courts consistently find that when an attorney’s negligent failures result in an adverse judgment against their client, a reasonable attorney could have reasonably foreseen the potential for a malpractice claim, and it did not matter that the attorneys’ client never indicated that a malpractice claim would be brought.