Prior Knowledge Condition Bars Coverage for Insured’s Knowing Misrepresentations to Client
Applying Arizona law, the United States District Court for the District of Arizona has held that an insurer had no obligation to indemnify an insured for a jury verdict because the insured was aware before the inception of the policy that his knowing representations could reasonably result in a claim. Continental Cas. Co. v. Evans, No. 2:13-cv-02379 (D. Ariz. Apr. 20, 2015). The court also held that no indemnity coverage was available because the insured was not providing “professional services.” Wiley Rein represented the insurer in the coverage action.
A former client of an insured accountant filed suit against the accountant for alleged misrepresentations made to induce the former client to make a $250,000 investment in a business entity in connection with the entity’s purchase of an airplane charter company. The client stated that he agreed to the investment, subject to the insured’s promise to return the client’s funds if the charter company was not purchased. When the airplane charter company was not purchased and the insured failed to return the client’s funds, the client filed suit against the accountant for making misrepresentations to induce the investment. The accountant tendered the lawsuit to his insurer, and the insurer agreed to defend under a reservation of rights. The jury returned a verdict in favor of the former client, concluding that the insured made knowingly untrue statements of material fact to the client. The insurer then filed suit seeking a determination that it had no continuing duty to defend the insured in the appeal of the jury verdict or to indemnify the insured.
The court held that the insurer had no duty to defend or indemnify the accountant because the policy’s prior knowledge provision was not satisfied. The court premised its holding on the jury’s conclusion that the accountant made knowing misrepresentations to the client prior to the policy period. Thus, “prior to the effective date of [the] Policy, . . . [the accountant had] a basis to believe that any  act or omission, or interrelated act or omission, might reasonably be expected to be the basis of a claim” by the former client.
The court also held that the insurer had no duty to defend or indemnify the accountant because the action giving rise to the accountant's liability did not constitute “professional services.” The policy defined “professional services” as “those services performed in the practice of public accountancy by you or others for remuneration that inures to the benefit of [the named insured].” The court concluded that there was no evidence that remuneration inured to the benefit of the named insured because the accountant did not charge the business entity for soliciting investments from the client or charge the client for providing investment advice.