The United States District Court for the Southern District of West Virginia, applying West Virginia law, has held that an insurer which was entitled to rescind a lawyer’s professional liability policy, and thus owed no duty to defend the underlying action, was not entitled to reimbursement of defense costs.  ALPS Prop. & Cas. Ins. Co. v. Turkaly, 2018 WL 385195 (S.D. Va. Jan. 11, 2018).

On July 15, 2016, the plaintiff in an underlying lawsuit notified the insured attorney that he was being sued for allegedly mismanaging the assets in a trust.  On July 18, 2016, the court in which the action was pending also notified the insured of the lawsuit.  On August 31, 2016, the insurer sent the insured an online application to renew his professional liability insurance.  The application asked whether the insured was “aware of” or had “knowledge of any fact, circumstance, act, error or omission that could reasonably be expected to be the basis of the claim against you, regardless of the merit of such claim, that has not been previously reported to” the insurer (the “Prior Knowledge Question”).  The insured answered the Prior Knowledge Question in the negative.  The insured also signed an acceptance page on September 15, 2016, which stated that there were “no changes to the answers and information set forth in the most recent Application.”  After making these representations in the online application and on the acceptance page, the insured reported the underlying lawsuit to the insurer on September 16, 2016.  Although the insurer defended the insured, it thereafter sought to rescind the policy and further sought a declaration that it had no duty to defend the insured and was entitled to reimbursement of defense costs it had incurred on the insured’s behalf.

The court first determined that the insurer was entitled to rescind the policy because the insured had made two misrepresentations when applying for coverage.  First, the insured failed to respond to requests for admission in the underlying lawsuit asking him to admit that he had received both the plaintiff’s and the court’s notices of the underlying lawsuit before September 1, 2016.  As such, these requests were deemed admitted.  The court explained that these admissions served as evidence that the insured knew of the underlying lawsuit at the time he completed the August 31, 2016 application.  By answering the application’s Prior Knowledge Question in the negative, the insured thus misrepresented his knowledge of any fact that could be the basis of a claim against him.

Second, the insured had made a misrepresentation on September 15, 2016, by signing the acceptance page affirming that he was not aware of any fact that could be the basis of a claim.  The court emphasized that the insured had been served in person with a copy of the complaint just nine days prior to signing the acceptance page, and he tendered the lawsuit one day after signing the acceptance page.  Because no party disputed that these misrepresentations were material, and because a reasonable insurer would have taken alternative action in issuing the policy had it known that the insured had been sued for mismanagement of trust assets, the court held that the insurer was entitled to rescind the policy.

The court then considered the insurer’s request for a declaration that it did not have a duty to defend the insured and was entitled to reimbursement of defense costs.  The court noted that the insurer had confirmed that the policy “applied” with respect to the resolution of both issues.  The court went on to explain that, by rescinding the policy, it was deemed void ab initio, and thus could not form the basis of liability for either the insurer or the insured.  As such, the insurer had no duty to defend the underlying lawsuit; however, the insured similarly was not liable for reimbursement of defense costs under the policy.