The United States District Court for the Northern District of California has held that, in an action to rescind a professional liability policy, a triable issue of fact existed regarding whether an insured misrepresented or concealed information in connection with obtaining insurance where the insured did not have express notice of the clients’ dissatisfaction with his services and it was not otherwise obvious that a claim might be filed against him when he applied for the policy. Am. Alternative Ins. Corp. v. Warner, 2020 WL 6204924 (N.D. Cal. Oct. 22, 2020). In denying the insurer’s motion for summary judgment, the court noted that evidence of an increase in premiums is sufficient to establish materiality under California law.
The insured attorney had represented clients in litigation filed against them and their prior attorney. After the conclusion of that litigation, the insured attorney wrote to the clients informing them of a possible malpractice claim they may have against their prior attorney. The insured highlighted a statute of limitations concern but explained that a tolling exception should apply. The clients hired the insured attorney and filed suit against their former attorney. In February 2017, the court dismissed that action, concluding that no tolling exception applied. The insured attorney informed the clients of the dismissal and explained that he believed the court erred, including options for filing an appeal. In April 2017, the insured attorney applied to renew his professional liability insurance. In his application, the attorney affirmed that he was not aware “of any legal work or incidents that might be expected to lead to a claim or suit against them.” The policy was issued on April 20, 2017. In May 2017, the clients informed the attorney that they would not file an appeal of the dismissed claim. They did not voice any dissatisfaction and continued to pay the attorney in connection with another matter.
In February 2018, the clients filed a malpractice complaint against the insured attorney. The insurer agreed to defend the case but reserved the right to deny coverage to the extent the attorney knew or could have reasonably foreseen that the clients would file a complaint against him. The insurer also raised the attorney’s premiums in 2018 based on the new claim filed against him. In August 2019, the insurer filed an action to rescind the policy and later moved for summary judgment.
In California, the court stated, an insurer can rescind a policy if the insured “misrepresented or concealed material information” in its application. To determine whether a party misrepresented information, courts apply an “objective ‘reasonable person’ standard.” The court emphasized that, on the one hand, the attorney could have known that the dismissal was likely to result in a malpractice action, because it was dismissed based on an expired statute of limitations and because the clients had $1.6 million at stake. On the other hand, the court noted, the attorney warned the clients of the statute of limitations issue beforehand, and the clients chose to proceed with the case anyway. Additionally, the clients did not voice any dissatisfaction to the attorney before he applied for the policy. Accordingly, the court concluded that a triable issue of fact existed regarding whether the attorney misrepresented or concealed information by not disclosing the dismissal in his application. The court also noted that, under California law, the insurer could prove that any such misrepresentation or concealment was material because it increased the attorney’s premiums in 2018.