Malpractice Insurance Application: Truth or Consequence Policy Rescinded
Material misrepresentation or non-disclosure on the attorney malpractice insurance application that crosses a line will get coverage rescinded. 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 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 The monies for the premium are returned to the insured and the coverage is withdrawn as though nothing had ever been in force.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With claims-made insurance coverage, having coverage rescinded has consequences beyond the current matter(s) that caused the rescission. 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 and prior years past acts coverage is gone. The law firm with a claims-made coverage gap will be unable to obtain coverage for its past acts. 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 subsequent malpractice applications.
A crossing the line example between an error on the application and a material misrepresentation is Schibell, Mennie & Kentos, LLC v. Allied World Ins. Co., No. A-3144-22 (N.J. Super. Ct. App. Div. Dec. 20. 2024). 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.
“On July 31, 2012, Wells Fargo Bank notified the Office of Attorney Ethics (OAE) that the firm of Schibell & Mennie LLC (The Firm) had a trust account check returned for insufficient funds. The OAE sent a letter to the Firm asking for a written explanation of the deficiency.
Schibell responded that on July 31 he deposited a $100,000 check into the Firm’s trust account, adding to the $4,595.83 balance “to accommodate all office bonuses that were being paid.” He then issued a $7,500 employee bonus check from the trust account. Although Schibell directed the employee-payee to delay cashing the $7,500 check until after the $100,000 check cleared, the employee failed to do so, and the trust account became overdrawn. ….
The OAE alleged in count one that Schibell made false statements of material fact to disciplinary authorities in violation of RPC 8.1(a), and engaged in conduct involving dishonesty, fraud, deceit, or misrepresentation in violation of RPC 8.4(c). The allegations in count two asserted that Schibell commingled funds in violation of RPC 1.15(a), failed to deposit earned fees into the business account in violation of Rule 1:21-6(a)(2) and RPC 1.15(d), and left inactive balances in the trust account in violation of Rule 1:21-6(d) and RPC 1.15(b) and (d).
A special ethics master (SEM) thereafter recommended the Court suspend Schibell’s license for six months,
Regarding the commingling charge, the SEM found Schibell admitted holding personal funds in the trust account for many years. The SEM also concluded that Schibell violated RPC 1.15(d) and Rule 1:21-6 when he admittedly failed to maintain accurate trust account records and failed to transfer funds from his trust account to his business account.”
Now for the insurance application misrepresentation:
“On June 7, 2016, after the OAE filed its complaint but before the DRB decision and Court order, the Firm submitted an application for malpractice insurance from Allied. Application question 11(a) asked “has any attorney been the subject of any bar complaint, investigation or disciplinary proceeding within the past [five] years?” The Firm responded “No.” On three successive years, the Firm submitted renewal applications signed by Schibell providing the same response.
The initial application and the renewals each contained the following clause:
By acceptance of this Policy, all Insureds affirm or reaffirm as of the Inception Date of this Policy that:
- the statements in the Application are true and accurate and are specifically incorporated herein, and are all Insureds’ agreements, personal representations and warranties;
- all such communicated information shall be deemed material to the Insurer’s issuance of this Policy;
- this Policy is issued in reliance upon the truth and accuracy of such representations;
- this Policy embodies all agreements existing between the Insureds and the Insurer, or any of its agents, relating to this insurance; and
- if any representation is false or misleading, this Policy shall be void from the inception.
Each of the malpractice policies Allied issued to the Firm provided coverage for claims, as well as disciplinary proceedings, based on the information in the initial application and the renewals.
On August 6, 2019, the Firm requested coverage under the 2018 policy for a claim asserting Schibell fraudulently converted life insurance policy proceeds intended for the estate of his former partner, Mark Kentos. After its independent discovery of Schibell’s disciplinary history, Allied denied the claim.
Schibell admitted he omitted the disciplinary action on his policy application. On October 28, 2019, Allied rescinded the malpractice policy to the Firm, stating that “unbeknownst to Allied . . . at the time each of the policies were issued, the Firm made material misrepresentations and omissions during the application process for the Policies – namely, that no attorney had been the subject of any [1] bar complaint, [2] investigation or [3] disciplinary proceeding within the past five years.”
On April 14, 2020, plaintiffs filed suit against Allied alleging breach of contract and violation of the New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1. Allied’s summary judgment motion and plaintiffs’ cross motion were filed in August and October 2021, respectively. After the discovery period expired on March 2, 2022, the trial court entered an order granting summary judgment to Allied and denying plaintiffs’ cross-motion.
The appellate court affirmed the district court decision.
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. The firm ends up with a 4 year coverage gap and no past acts coverage.