Insurer Entitled to Rescind Lawyers Professional Liability Policy Where Insured Made Material Misrepresentations in Application

The U.S. District Court for the Southern District of Illinois, applying Illinois law, has held that an insurer was entitled to rescission of a policy where the insured made material misrepresentations in its application.  Carolina Cas. Ins. Co. v. Robert S. Forbes PC, 2017 WL 86136 (S.D. Ill. Jan. 10, 2017).  The court also held that the insurer did not waive its right to rescind because, even though the insurer took a year to investigate the claim, the insurer consistently reserved its right to rescind the policy.

An attorney applied for a professional liability insurance policy for his firm.  On the application, the attorney represented that neither the firm nor any attorney in the firm was aware of any fact or circumstance that might reasonably be expected to result in a professional liability claim or suit.  The attorney also represented that no attorney in the firm was aware of an actual or alleged act, omission, circumstance, or breach of duty that a reasonable attorney would recognize might reasonably be expected to result in a claim.  At the time the application was executed, however, the attorney was aware that his failure to timely file a document adversely impacted his client’s appeal in a workers compensation case.  In addition, the attorney was also involved in disciplinary proceedings for alleged misconduct over a period of several years.  After the insurance policy was issued, the client in the workers compensation case sued the attorney alleging malpractice.  The attorney provided notice of the claim to the insurer, and the insurer issued two reservation of rights letters which, among other things, reserved the insurer’s rights to rescind the policy based on the misrepresentations.  After investigating the claim, the insurer filed a declaratory judgment action seeking a declaration that there was no coverage for the action, or in the alternative, rescission of the policy.

The court granted summary judgment to the insurer, concluding that rescission of the policy was appropriate.  First, the court determined that because the policy was issued to a corporation, rescission was not barred by an Illinois statute prohibiting rescission of personal lines policies after a policy has been in effect for more than a year.  The court then rejected the attorney’s argument that the misrepresentations on the application were not material as a matter of law.  According to the court, “a misrepresentation is material if it would have increased the premium paid for the insurance because the risk would have been greater than that actually anticipated by the insurer.”  The court determined that it was “clear that a reasonably careful underwriter would regard the real facts. . .to substantially increase the chances of a malpractice claim so as to cause [the insurer] not to issue the policy on the terms it did.”  Finally, the court held that the insurer did not waive its right to rescind because, even though it waited a year to file suit after learning of the relevant facts, the insurer consistently reserved its right to rescind and did nothing to indicate it was waiving any rights.