A court rescinded a Georgia attorney’s professional liability coverage after his partner stole more than a million dollars from clients and lied about it on their firm’s insurance application. A federal district court in Georgia granted an insurer’s motion for summary judgment earlier this month, permitting rescission of the professional liability insurance policy issued to the attorney’s law firm. ProAssurance Cas. Co. v. Smith, No. CV415-051, 2016 U.S. Dist. LEXIS 105033 (S.D. Ga. Aug. 9, 2016).
From 2013 to 2014, the attorney’s partner committed ethical and criminal violations when he settled several cases without client authority, forged client signatures, and deposited settlement money into a personal account. When the attorney’s partner submitted the firm’s application for professional liability insurance in June of 2014, the partner certified that there were no circumstances, acts, errors or omissions of which he was aware that could result in a professional liability claim. However, by that time the partner had already stolen about $500,000 of client money, making his assertion objectively false. The insurer relied on the representations in the application and issued a policy to the firm. The partner then continued to forge signatures and stole another $750,000 from his clients.
After the partner pled guilty to criminal charges, his former clients sued him, his firm, and his partner, Jenkins, who was innocent of any wrongdoing. The insurer filed a suit seeking policy rescission or a declaratory judgment action determination that it owed no coverage for the partner’s fraudulent and criminal actions. Jenkins and the firm opposed rescission based on the policy’s innocent insured provision, which was part of a dishonest acts exclusion that provided that coverage would exist for an insured “who did not participate in the dishonest, criminal, malicious or fraudulent act giving rise to the malpractice claim.”
The court permitted rescission, holding that the partner who committed the fraudulent and criminal acts knew his assertions on the application were objectively false, were material, and would have affected whether the insurer would have issued the policy. Further, the court said the innocent insured provision was not a defense available to Jenkins or the firm because the exclusion that contained the innocent insured provision had been rescinded along with the rest of the policy. The court also distinguished the policy’s innocent insured provision from provisions that consider misrepresentations on the insurance application severable and not binding on an innocent insured.
This decision highlights the distinction between severability provisions that apply to dishonest acts exclusions — which preserve coverage for insureds who did not perpetrate or have knowledge of the dishonest acts — and severability provisions that apply to misrepresentations in an application. The latter protect innocent insureds when a co-insured makes misrepresentations in application that would allow the insurer to rescind the policy. If such a provision had been in the policy before the court, the outcome likely would have been different. But without a severability provision for misrepresentations in an application, the dishonest partner’s misrepresentations led to rescission of the policy even for innocent co-insureds who were not involved in the dishonest conduct or the application for insurance where misrepresentations were made.