When does misrepresentation or non-disclosure on the attorney malpractice insurance application cross the line between having coverage declined to having the coverage rescinded? Having coverage declined because of properly disclosing application information is a problem. As with many things in life addressing a problem honestly and promptly minimizes the damage. But cover-ups are usually worse than the initial crime. For coverage rescission, the application must clearly misrepresent facts that would have caused the insurer not to issue the coverage in the 1st place. A rescission of coverage puts the malpractice insurer and the insured back in the same position that they were in prior to the coverage being written. The monies for the premium are returned to the insured and the coverage is withdrawn as though nothing had ever been in force. But it is hard to rewrite history.
With claims-made insurance coverage, having coverage rescinded has consequences beyond the current matter(s) that caused the rescission. Although the insured is now in the same position (s)he was at the beginning of the policy term(s). In reality, one or more years of claims-made coverage is gone. Not only has current coverage been rescinded, but also the past acts coverage is gone. With a gap in claims-made coverage the law firm will be unable to obtain any coverage for its past acts through any malpractice insurance carrier. The rescission of claims-made coverage removes all past acts for the firm. And oh by the way, the applicant gets to retell their sins on every malpractice application for many years to come.
Another example of crossing the line between an error on the application and a material misrepresentation is ALPS Prop. & Cas. Ins. Co. v. Turkaly, 2018 U.S. Dist. LEXIS 5026 (S.D. W.Va. Jan. 11, 2018). The courts found that coverage rescission was appropriate. The insurer proved a material misrepresentation of the facts and because of misrepresentation the insurer would not have issued the coverage if the facts were known. According to the JDSUPRA’s article, Mr. Turkaly in a period of 2 weeks twice affirmed in writing that he had no knowledge of a claim when in fact he had waived service on a legal malpractice claim just 2 months prior to the renewal of his policy.
Sad part is that Mr. Turkaly may have had coverage under the ALPS policy if he had promptly reported the claim. Even if non-renewed, coverage could have been placed with a surplus lines insurer at renewal, just had a much higher price. But his past acts may have been protected. Even if the surplus lines insurer would not have offered past acts coverage, he likely would have been entitled to purchase an Extended Reporting Period Endorsement (Tail) from ALPS. But we will never know.
Coverage might be denied by an accurate application by a particular insurer, but it is more important to answer the questions honestly. Pricing and the coverage may not be advantageous, but an alternative policy provides coverage for other matters that may have occurred in the past. Not destroying your claims-made past acts.