Insurer Entitled to Rescind Policy for Insured’s Concealment of Lawsuit Filed Prior to Policy Period

The United States District Court for the Central District of California, applying California law, has held that an insurer may rescind a policy issued to a law firm where the firm failed to disclose, when applying for coverage, that a former client had filed suit against it. Soni v. Certain Underwriters at Lloyd’s, London Subscribing to Policy Numbers AP016692016/0014 & YL050600c/011, 2022 WL 11044708 (C.D. Cal. Sept. 19, 2022).

Prior to the inception of the law firm’s professional liability insurance policy, it was sued by a former client for breach of contract and breach of fiduciary duty. Later, during the policy period, the former client filed an amended complaint, which asserted additional claims against the insured. The insured tendered the amended complaint to the insurer. The insurer accepted defense of the lawsuit subject to a reservation of rights. After the lawsuit was settled, the insured filed suit against the insurer, alleging breach of contract and lack of good faith for failure to provide coverage for certain amounts. The insurer filed an answer and counterclaim, which included a counterclaim for rescission.

The court granted the insurer’s rescission claim because “the evidence is undisputed that [the insured] made a material misrepresentation in connection with his application for insurance[.]” Specifically, Question 15 of the insurance application asked, “Has the Applicant been a party to any lawsuit or other legal proceeding within the past year?” The insured answered “No” to this question.

The insured unsuccessfully argued that the application “did not contain any misrepresentations” because it had answered “2” in response to Question 11 in the application, which asked “[h]ow many suits for collection of fees have been filed by the Applicant … during the past year[?]” The insured asserted that the cross-complaint it filed in the client’s malpractice action was one of the collection actions referred to in the answer to Question 11 and thus the matter was disclosed. The court ruled that the insured’s argument was “without merit” because the lawsuit was not “filed by” the insured. The court further held that “the fact that [the insured] filed a cross-complaint in the [underlying action] did not relieve [the insured] of his obligation to fully answer Question 15, i.e., it did not permit [the insured] to conceal the action (and the claims contained therein) filed against him by [the former client].”

The court also rejected the insured’s argument that, “[t]o the extent his answers taken together appeared inconsistent, [the insurer] was on inquiry notice to assess what effect those suits may have on the underwriting of the policy to [the insured].” Instead, the court ruled that the insured’s “answer to Question 15 was not inconsistent with his answer to Question 11 because . . . the questions sought entirely different information[.]”