No Coverage Due to Material Misrepresentation on Insurance Application Based on Totality of Circumstances

An intermediate New Jersey appellate court has affirmed a trial court’s decision concluding that no coverage was available for a legal malpractice claim because the insured law firm made material misrepresentations on its insurance renewal application in failing to disclose the insured’s knowledge of circumstances that could result in a professional liability claim.  Ironshore Indem., Inc. v. Pappas & Wolf, LLC, 2018 WL 2012009 (N.J. Super. Ct. App. Div. May 1, 2018).

In August 2011, the insured law firm completed an application to renew its professional liability policy.  The application asked: “After inquiry, does any firm member know of any circumstance, situation, act, error or omission that could result in a professional liability claim or suit against the firm or its predecessor firm(s) or any current or former member of the firm or its predecessor firm(s)?”  The insured responded “No,” and the insurer issued the policy.

In fact, a firm member previously worked as outside and in-house counsel providing securities-related advice to a company that was subsequently sued by the New Jersey Attorney General for securities-related fraud.  In August 2012, the receiver of the company filed a lawsuit against the firm for legal malpractice.  The insurer sought a declaration that no coverage was available because the insured made a material misrepresentation on the application in failing to disclose the potential that the company may sue for malpractice.  During the coverage action, the firm member testified that, nine months before the firm completed the application, he was concerned about a claim being asserted against him in connection with the securities fraud suit.

The trial court granted summary judgment in favor of the insurer, and the appellate court affirmed.  The appellate court concluded that the trial court had properly applied New Jersey’s subjective standard when considering whether an insured had prior knowledge of the potential for a claim.  The appellate court held that, although it “will ordinarily be very difficult” to prove a subjective element, such as intent, on summary judgment, this hurdle may be “overcome by a reasonable analysis of the circumstances.”  The appellate court further concluded that there was “overwhelming credible evidence showing [the attorney] knew of potential relevant claims” and that, accordingly, the trial court properly determined from the circumstances that the firm was “actually aware of [the] possibility of a lawsuit.”  The appellate court also rejected the argument that the trial court erroneously had relied on the attorney’s deposition testimony in granting summary judgment to the insurer because the attorney had testified only that he was concerned in general about a claim being brought against him, and not specifically a legal malpractice claim.  The appellate court stated that such a “distinction is unpersuasive” because the attorney provided services to the company in his capacity as such, and therefore “any claim against him as an attorney would likely result in a claim with his liability insurance.”