Applying California law, a federal district court has rejected an insured law firm’s argument that the terms “may” and “might” as used in connection with an application question regarding knowledge of potential claims are ambiguous and unenforceable. Am. Alternative Ins. Corp. v. Warner, 2019 WL 6493945 (N.D. Cal. Dec. 3, 2019).
On February 7, 2017, a case that the law firm had filed on behalf of a group of clients nine months earlier was dismissed on statute of limitations grounds. Two months later, on April 3, 2017, the law firm completed a renewal application for professional liability coverage. The firm responded “no” to the question whether, after inquiry, any attorney in the firm was aware of “any legal work or incidents that might be expected to lead to a claim or suit against them.” The firm also provided with the application a written statement that no attorney was “aware of any potential claims, disciplinary matters, investigations or circumstances that may give rise to a claim.” In reliance on these representations, the insurer issued a policy for the period May 8, 2017 to May 8, 2018.
On February 2, 2018, the clients whose suit had been dismissed filed suit against the firm for legal malpractice. The firm reported the suit to its professional liability insurer, which, in turn, brought suit against the firm seeking to rescind the policy based on the firm’s failure to disclose material information in the application – namely, that the firm knew of circumstances that might lead to a malpractice claim.
The firm moved to dismiss the claim for rescission, contending that because the terms “may” and “might” were ambiguous, the statements regarding knowledge of potential claims were subject to multiple interpretations, and therefore unenforceable. The court disagreed, noting that other courts have held that the phrase “might be expected to be the basis of a claim or suit” is “perfectly clear,” such that no question of law existed.
The court also rejected the insured’s argument that because the malpractice suit raised four claims, only one of which concerned the undisclosed missed statute of limitations, the insurer had to defend the other three claims. According to the court, the remedy of rescission applied to the entire contract and if granted, rescission is retroactive, rendering the policy “totally unenforceable from the outset.”