Insurer Entitled to Rescind Policy Where Insured Law Firm Made Material Misrepresentations in Application

The United States District Court for the Southern District of New York, applying New York law, has held that an insurer was entitled to rescind a lawyers professional liability policy because the insured law firm made a material misrepresentation in its application.  Travelers Cas. & Surety Co. of Am. v. Gold, Schollar, Moshan, PLLC, 2018 WL 1508573 (S.D.N.Y. Mar. 14, 2018).

In the application for the policy, the signing attorney represented that no member or employee of the firm had “knowledge of any incident, act, error, or omission that is or could be the basis of a claim” under the proposed policy.  The attorney also agreed, as the authorized representative of the firm, that the representations made in the application “are true and complete and will be deemed material to the acceptance of the risk assumed by [insurer] in the event an insurance policy is issued.”  However, for almost a year before the application was executed, a member of the firm had been removing client funds from an attorney trust account.  The member’s misconduct eventually resulted in several malpractice actions against the firm and its individual attorneys.  During the policy period, the firm notified the insurer of potential claims relating to the member’s misappropriation of client funds, and requested that the insurer provide a defense and coverage to the firm for a malpractice action.  The insurer declined to provide a defense on the basis of the policy’s “misrepresentation condition” and reserved its right to seek rescission.

In the resulting coverage litigation, the insurer moved for summary judgment seeking rescission and/or a declaration that it had no obligations under the policy because the firm made a material misrepresentation in its policy application.  The firm and the individual attorney defendants failed to respond to or oppose the motion.  Applying New York law, the court held that the application contained a “misrepresentation” because it was undisputed that, “at a time of the application, . . . a member of the Firm had improperly removed client funds from the Account.”  Since the member obviously knew of her own actions, and a reasonable person in the insured’s position would foresee that the misconduct could form the basis for a malpractice claim, the application contained a misrepresentation.  Finally, the court concluded while materiality is typically a question for the jury, where “the evidence concerning the materiality is clear and substantially uncontradicted, the matter is one of law for the court to determine.”  Because the insurer would not have issued the same policy had the member’s misconduct been disclosed in the application, the misrepresentation was material.  The court directed that the policy be rescinded and deemed void from inception.