Lawsuit not a “Related Claim” to Earlier Demand Letter, but Policy Rescinded Based on Material Misrepresentations in Application
The United States District Court for the Middle District of Florida has held that an insurer was entitled to rescind a professional liability insurance company where the insured architecture firm made multiple material misrepresentations in its application. RLI Ins. Co. v. OutsideIn Architecture LLC, 2023 WL 5840590 (M.D. Fla. Sept. 11, 2023). The court, however, would have held that the lawsuit triggered the insurer’s duty to defend because the claim was not related to an earlier demand letter and the insured had not given prior notice of the claim to its previous insurer where the first demand letter focused on an unrelated alleged breach of contract, not the allegedly negligent conduct raised in the lawsuit. Similarly, the court rejected the insurer’s argument that the policy’s prior knowledge provision precluded coverage because the insurer could not prove the insured knew it committed a negligent act, error, or omission, despite its awareness of the accident.
The architecture firm purchased a professional liability insurance policy for the policy period between March 2020 and March 2022. Prior to that time, the architecture firm had notified its previous carrier of a June 10, 2019 demand letter asserting that the firm had breached a contract with one of its subcontractors. Also on June 10, 2019, a construction worker was involved in a fatal accident while working on the demolition phase of the same project that was the subject of the June 10 demand letter. When it applied for the new policy in early 2020, the architecture firm affirmed in the application that it: (1) was not “aware of any act, error, omission, or circumstance which may possibly result in a claim being made against them but which has not yet been reported to a professional liability carrier”; (2) had not “ever reported a potential claim, circumstance to a professional liability carrier”; and (3) was not “aware of any act, error or omission or circumstance which may result in a claim being made against them but which has not yet been reported to a professional liability carrier.” On July 15, 2020, the family of the deceased worker filed a lawsuit against the architecture firm, asserting that its negligence caused the death.
The court rejected the insurer’s argument that the policy’s related claims and prior notice provisions barred coverage for the lawsuit. The lawsuit was not related to the June 10 demand letter, the court concluded, because the earlier letter had nothing to do with the demolition that allegedly caused the fatal accident. It was not enough that the claims stemmed from the same source and a similar time period because they involved different causes of action, legal duties, damages, and alleged victims. For the same reasons, the court held that the architecture firm had not given its prior insurer notice of the claim involved in the lawsuit.
The court also held that the policy’s prior knowledge provision did not bar coverage. The provision stated that the policy only provided coverage if “none of the insured’s directors, officers, principals, partners or insurance managers knew or could have reasonably expected that the Wrongful Act . . . might give rise to a claim, . . . prior to the inception date of this Policy[.]” A “Wrongful Act” was defined as “a negligent act, error, or omission in the performance of Professional Services for others by an Insured[.]” The court held that the prior knowledge provision asked a “narrow” question: whether the insured “knew or could have reasonably expected that a ‘negligent act, error, or omission in the performance of professional services’ might give rise to a claim.” Although the architecture firm was aware of the accidental death when the policy began, the insurer could not prove the firm knew it committed a negligent act, error, or omission.
By contrast, the court determined that the architecture firm did make a material misrepresentation on its application for the new policy, and the insurer was accordingly entitled to rescind the policy. Under Florida law, a misrepresentation need not be intentional to void an insurance policy. That said, certain provisions trigger an objective analysis while others trigger a more subjective analysis. The court concluded that the application language at issue called for an objective test because it asked the applicant to attest that the answers are “true, accurate, and complete.” Because the firm had undisputedly contacted its prior insurer regarding the June 10 demand letter but indicated that it had not ever reported a potential claim to a prior professional liability carrier, the insurer was entitled to rescind based on an underwriter’s declaration confirming that the company would not have issued the policy or would have issued the policy only at a higher premium if the insured had answered the question truthfully. Further, the court held that the answers to the other application questions were also material misrepresentations because they asked whether a claim could “possibly” result, and thus the insured was obligated to answer yes under the circumstances, even if it subjectively believed a claim would not in fact result.