Insurance Coverage Alert – Court Finds Law Firm's Policy Void Due to Misrepresentations Regarding Prior Knowledge

11.15.21

The U.S. District Court for the District of Utah has determined that a law firm’s statements regarding its lack of knowledge of circumstances that could lead to a claim – made in applying for a professional liability insurance policy – were misrepresentations warranting the policy’s rescission. The insurer, represented by Aronberg Goldgehn in the action, was therefore entitled to summary judgment, the court finding the policy void and that the insurer had no duty to defend or indemnify the law firm against claims under the policy. Travelers Casualty and Surety Company of America v. Grimmer Davis Revelli & Baliff, PC., 2021 WL 5234373, No. 19-CV-597-DAK-JCB (D. Utah, November 10, 2021).

The insured law firm – Grimmer Davis Revelli & Ballif (“GDRB”) – applied for professional liability insurance in April 2019, approximately a month after its prior policy expired. In the policy application, the firm answered “no” to a question asking whether the firm or any member or employee had “knowledge of any incident, act, error, or omission that is or could be the basis of a claim” under the proposed policy. In connection with the firm’s request that the new policy have an effective date of March 20, 2019 – the date of the prior policy’s expiration – the insurer required that the firm also submit a letter confirming the firm’s lack of awareness of any facts or circumstances arising in the period from March 20, 2019 to the date of the new application.

Based on the factual record, the court found that the firm’s principal, who signed the application in April 2019, was aware of facts and circumstances that could lead to a claim. The court described events occurring from June 2018 through December 2018, when a former client of the firm’s principal filed multiple motions and briefs, in lawsuits pending in Wyoming and South Carolina, accusing the firm and its attorneys of wrongful conduct and breaches of their duties to her. In these filings, the former client – who ultimately asserted a malpractice claim a few days after the firm submitted the application – repeatedly threatened to assert claims against the firm and its attorneys for damages she alleged they caused her. The court also noted that in January 2019, the claimant’s counsel sent a letter to the firm, its principal and other firm members, demanding their withdrawal from the Wyoming suit and enclosing a draft Motion for Sanctions. In the draft motion, the claimant asked the Wyoming court to consolidate all of her “future complaints” against the firm and its lawyers.

The court also noted that in March 2019, a Special Master appointed in the Wyoming litigation issued a report in connection with the claimant’s motion to disqualify the firm and its attorneys. In the report, the Special Master determined that the firm’s principal’s conduct was improper in several respects. The Special Master recommended disqualification of the firm’s principal and another firm member and that the principal’s pro hac vice admission be revoked. The Wyoming court accepted the Special Master’s report and issued an order dated March 25, 2019 disqualifying the attorneys from further representing any party in the Wyoming litigation. Previously, a South Carolina court had disqualified the firm and two of its members from representing any party in that action after the claimant asserted breaches of their duties to her and sought their disqualification from that case, as well.

The court in the Travelers v. Grimmer Davis case determined that the claimant’s many accusations and threatened claims, and the separate court findings regarding the firm’s attorneys’ conduct, provided the firm’s principal with knowledge of an incident, act, error or omission that could be the basis of a claim under the proposed policy. Applying Utah law, the court found the firm’s application answer and separate letter statement were misrepresentations, pointing out that “a misrepresentation occurs where an applicant for insurance ‘knows or should have known about a misstatement in the application and still presents it to the insurer.’” 2021 WL 5234373 at *4, quoting ClearOne Communications, Inc. v. Nat’l. Union Fire Ins. Co. of Pittsburgh, 494 F. 3d 1238 (10th Cir. 2007). The court also noted that under Utah’s statutory rescission standard, it is not necessary for the insured’s statement to have been made with the intent to deceive, so long as the insured has at least some knowledge or awareness of the misstatement. 2021 WL 5234373 at *4, citing Deerbridge v. Mutual Protective Ins. Co., 963 P. 2d 788 (Utah Ct. App. 1998).

The court rejected the firm’s assertion that a policy provision, rather than the Utah rescission statute (Utah Code 31A-21-105(2)), should govern the standard for policy rescission. The firm asserted that the policy provision required the insurer to establish an intent to deceive. The firm’s argument was misplaced, according to the court, because the provision applied to conduct occurring after the policy was issued, rather than misstatements in the policy application. Here, the court noted, the statements were made before the insurer agreed to issue the policy, so the Utah statute provided the applicable standard. Moreover, the court determined that the doctrine of equitable estoppel barred the firm from asserting the policy provision should control over the Utah statute, given the court’s determination that the firm made untrue statements and omitted material information to obtain a policy with a backdated inception date. The court further found, though, that even if the policy provision applied, the insurer was entitled to rescission because intent to deceive was inferred from the circumstantial evidence in the record.

The insured firm also asserted that its statements were not misrepresentations because, according to the firm, the claimant’s threatened claims pertained to legal representation by a separate law firm that GDRB’s principal also owned – Grimmer & Associates, P.C. (“G&A”). Once again, the court rejected this argument. The court noted that the claimant asserted on numerous occasions that she planned to bring claims against GDRB and attorneys working at the firm. Moreover, regardless of G&A’s prior conduct or that firm’s representation of the claimant, the threatened complaints related to GDRB’s ongoing representation of the claimant’s twin brother and ongoing damage the claimant alleged the GDRB attorneys caused.

In rejecting the firm’s argument based on its belief that any claims would more appropriately be asserted against G&A, the court noted that even if the former client’s claims against GDRB proved to be unmeritorious, it was clear she intended to bring them against GDRB and members of that firm. The court stated “[w]hether or not the claims were ultimately successful, the evidence undeniably demonstrates that [the claimant] specifically identified [GDRB] on numerous occasions as a party against whom she intended to assert a claim.” 2021 WL 5234373 at *7.

Finally, the court found that the insurer established the required rescission elements of materiality and reliance through the undisputed sworn testimony of its underwriter. Once again quoting from the Tenth Circuit’s ClearOne decision, the court recognized that under Utah law, “a fact is material to the risk assumed by an insurance company if reasonable insurers would regard the fact as one which substantially increases the chance that the risk insured against will happen and therefore would reject the application.” ClearOne, 494 F. 3d at 1249-50. The court in Travelers v. Grimmer Davis noted that the underwriter testified that she relied on the application answer and representations in the separate letter from the firm, and that the insurer would not have issued the policy had the firm disclosed the claimant’s threatened claims and the courts’ decisions. Based on the underwriter’s testimony, the court determined the evidence established that repeated threats and adverse judicial decisions are incidents that an underwriter considers material because they increase the risk of claims and increase the risk to the insurer.

Click HERE for copy of the opinion.

Comment:

Insureds applying for policies are regularly asked whether they have knowledge of facts or circumstances that can lead to a claim. And, insurers often must analyze, in a post-policy issuance setting, whether that type of knowledge existed at the time of application. The Travelers v. Grimmer decision emphasizes the importance of full disclosure of events and facts relating to potential claims against the insured, regardless of whether the insured believes the potential claims have merit or ultimately may be subject to coverage defenses under the policy. Where third parties make accusations of wrongful conduct by the insured and threaten to assert claims against the insured, courts applying the reasoning and rationale of the Travelers v. Grimmer Davis court will likely find misrepresentations if those circumstances are not disclosed in response to “prior knowledge” questions.

If you have any questions about this update, please contact the author listed below or the Aronberg Goldgehn attorney with whom you normally consult:

Christopher J. Bannon
cbannon@agdglaw.com
312.755.3175

The above material is intended for general information and promotional purposes, and should not be relied on or construed as professional advice. Under the Illinois Rules of Professional Conduct, the above information may be considered advertising material. The transmission of this information is not intended to create, and receipt of it does not create, a lawyer-client relationship.



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