New Hampshire Supreme Court Overturns Rescission of Insurance Policy

In its recent decision in Great American Insurance Co. v. Christy, 2012 N.H. LEXIS 126 (N.H. Sept. 28, 2012), the Supreme Court of New Hampshire had occasion to consider whether an “innocent insured” provision in a legal malpractice policy precluded rescission of that policy, despite clear evidence that at least one insured failed to disclose information material to the risk in the policy application.

The insured law firm, Christy & Tessier, P.A., included attorneys Robert Christy and Thomas Tessier, partners for over forty-five years.  In 2001, Tessier was retained by a cousin to handle the probate administration of his aunt’s estate.  Over a five-year period, Tessier fabricated numerous documents as part of a scheme to misappropriate funds from the estate as well as from his cousin’s own personal bank accounts.  While there was no evidence that Christy was aware of these thefts, Christy did falsely notarize various documents Tessier, not knowing that these documents assisted Tessier in perpetuating his scheme.  In all, Tessier misappropriated over $1.5 million combined from his aunt’s estate and from his cousin’s personal accounts.  The scheme was discovered in 2006, and Tessier’s cousin asserted a claim against Tessier in October 2006.  In April 2007, Tessier entered into a settlement agreement with his cousin whereby he agreed to repay his debts pursuant to a payment plan.  In September 2007, however. Tessier advised that he would be unable to pay his debt.  It appears that Christy was unaware of the claim or of the settlement.

Christy & Tessier were insured under successive professional liability policies issued by Great American Insurance Company (“GAIC”) from 2001 to 2007.  The firm submitted an application for a renewal for the 2007-2008 policy period on May 22, 2007, which was subsequent to Christy’s settlement agreement.  Question 6(a) of the application asked:

After inquiry, is any lawyer aware of any claim, incident, act error or omission in the last year that could result in a professional liability claim against any attorney of the Firm or a predecessor Firm?

The application was completed and signed by Robert Christy, who answered “No” in response to this question. Notably, the application contained the following acknowledgment near the signature line:

The undersigned proprietor, partner, member, or officer, acting on behalf of the applicant, and all other proposed Insureds, hereby declares after diligent inquiry that the above statements are true and that no material facts have been suppressed or misstated.

Christy testified that he when completing the application, he asked Tessier whether he was aware of any information that should be disclosed, and Tessier told him there was none.  GAIC sought a rescission of the 07-08 policy when it subsequently learned of Tessier’s misappropriations and the settlement, as well as Christy’s improper notarizations.

Following a hearing, a trial court granted GAIC’s demand for rescission of the policy, concluding that the firm’s response to question 6(a) was false since Tessier knew of a claim against him as early as 2006.  The trial court concluded that Christy’s lack of knowledge was not a defense, explaining that:

[e]ven though Christy’s answer to the question and his subsequent declaration on the application were unwittingly false, the question on the application did not pertain solely to Christy’s knowledge but rather to the knowledge of ‘any lawyer’ at the law firm …  Accordingly, Tessier’s knowledge was imputed to Christy and the other insureds.

As such, and having concluded that the misstatements were material to GAIC’s decision to issue the policy, the trial court agreed that GAIC was entitled to a rescission of the policy.

On appeal, the Supreme Court of New Hampshire expressed its concern in imputing Tessier’s knowledge to Christy.  The court found support for its concern in the following “innocent insured” provision in the policy:

B.  Waiver of Exclusion (Innocent Insured) and Breach of Conditions: Whenever coverage under any provision of this policy would be excluded, suspended or lost

                                                *          *          *

2.   because of non-compliance with Section VII, Claims, subsection A, Notice of Claims relating to the giving of notice to the Company with respect to which any other Insured shall be in default solely because of the default or concealment of such default by one or more Insureds responsible for the loss or damage otherwise insured hereunder,

the Company agrees that such insurance as would otherwise be afforded under this policy shall apply with respect to each and every insured who did not personal participate in committing one or more of the acts, errors or omissions described in either such exclusion or such condition … .

While this provision, on its face, was limited to giving notice of claims to GAIC, and served to protect one insured in the situation where another insured conceals information, the court observed a broader principle in the policy to protect innocent insureds.  The court believed Christy was precisely such an innocent insured when completing the policy application as Tessier withheld information that should have been disclosed.

GAIC pointed out that the application inquired whether any prospective insured was aware of facts that that could give rise to a claim, not just whether Christy was aware of such facts.  GAIC further argued that the innocent insureds language in the policy did not apply to the policy application.  The court did not agree, explaining:

It is not clear, however, that the policy provision excluding imputed knowledge to innocent insureds does not apply to giving notice on the Shortform Application.  Thus, in the absence of language specifically imputing knowledge to innocent insureds of false statements made on the Shortform Application, the contract read as a whole is ambiguous.

In light of this ambiguity, the New Hampshire Supreme Court concluded that the lower court erred as a matter of law on the issue of rescission.  The matter was, however, remanded for further findings on whether application of any other coverage defenses operated to preclude coverage.

Ninth Circuit Holds No Duty to Defend Anxiety Claim

In its recent decision in Conley v. First Nat'l Ins. Co. of America, 2012 U.S. App. LEXIS 20281 (9^th Cir. Sept. 27, 2012), the United States Court of Appeals for the Ninth Circuit had occasion to consider whether under Montana law, a lawsuit alleging “anxiety” qualified as “bodily injury” for the purpose of triggering a duty to defend under a general liability policy.

The underlying matter giving rise to plaintiffs’ claim involved accounting and tax services provided by Silvertip Accounting, which was insured under a primary general liability policy issued by First National Insurance Company of America.  Plaintiffs, Dale and Karen Conley, alleged that as a result of bad advice from Silvertip, they suffered severe tax penalties and disruption of their gifting and estate plan.  The Conleys filed suit against Silvertip in Montana state court, alleging breach of fiduciary duty, fraud, negligence, false advertising and deceptive trade practices. First National denied coverage to Silvertip on the grounds that the Conleys’ lawsuit did not allege an “occurrence” or “bodily injury.” The Conleys subsequently entered into a consent judgment with Silvertip in the amount of $3.6 million as well as an assignment of rights under the First National policy.  The Conleys later filed a declaratory judgment against First National in Montana federal court.

In a June 2011 decision, the United States District Court for the District of Montana, on competing motions for summary judgment, held that the underlying suit did, in fact, allege an “occurrence.”  It further held, however, that the complaint filed by the Conleys in their state court action against Silvertip did not allege any specific physical injuries qualifying as “bodily injury,” but instead merely alleged anxiety resulting from their financial loss.  The Conleys nevertheless relied to a letter their attorney had written to First National immediately after First National denied coverage to Silvertip, which stated that the Conleys’ financial loss had “taken a serious toll on their health” and that their financial loss also had an “emotional cost.”   The lower court acknowledged that under Montana law, facts extrinsic to a complaint can give rise to a coverage obligation.   Notwithstanding, the court concluded that the Conleys’ letter failed to “make even a generalized reference to physical injury” that could be considered “bodily injury.”  Further, the court concluded that:

An injury to a person’s “health” can take many forms, and will not necessarily include physical harm.  It is not the Defendants’ responsibility to affirmatively disprove a bodily injury where none has been alleged.  An insurer is not required to seek out information that could give rise to a duty to defend.

On appeal, the Ninth Circuit began its decision by observing that in Allstate Ins. Co. v. Wagner-Ellsworth, 188 P.3d 1042 (Mont. 2008), Montana’s Supreme Court articulated the rule that for the purpose of a general liability policy, “bodily injury” includes “mental or psychological injury that is accompanied by physical manifestations.”  This necessarily includes “conditions that are susceptible to medical diagnosis and treatment in a manner which distinguishes them from mental injuries.”  In other words, under Montana law, mental injuries unaccompanied by a physical manifestation do not constitute “bodily injury.”

The Conleys argued that for the purpose of a duty to defend, anxiety, unlike a claim of emotional distress or mental anguish, is typically understood to include physical manifestations.  The Conleys further argued that their letter to the insurers explicitly stated that their “dread of tax liability” had taken a serious toll on their health.  Notwithstanding, the Ninth Circuit held that this allegation, in and of itself, did not trigger a defense obligation:

Even if anxiety "typically includes such things as headaches, sleeplessness, muscle tension, [and] nausea," an insurer need not assume physical manifestations rising to the level of "bodily injury" whenever "anxiety" is alleged.

Rather, continued the court, there must be an actual allegation of a physical manifestation supported by “sufficient documented evidence” for coverage to be triggered.  In this regard, the Ninth Circuit agreed with the lower court that the Conleys’ letter to First National failed to make even a generalized reference to physical injury that could constitute “bodily injury.”

The Ninth Circuit also rejected the Conleys’ argument that their pre-suit letter at the very least triggered a duty for First National to investigate whether the Conleys had actually suffered “bodily injury.”  In addition to agreeing with the lower courts statement of Montana law that insurers do not have an affirmative obligation to disprove bodily injury where none has been alleged, the court concluded that First National did, in fact, sufficiently investigate by reviewing the complaint and accompanying materials and by requesting additional information pertinent to its investigation.   

Threshold Motion Successful

Surveillance evidence can be useful in showing that the plaintiff does not meet the Insurance Act threshold.

In Dahrouj v. Aduvala, 2012 ONSC 4090 (S.C.J.), the plaintiff was injured in a minor rear end collision.  She was a homemaker and alleged she developed chronic pain which impaired her functioning in the home and her social interaction in the community.

The evidence at trial was that the plaintiff visited her family doctor on multiple occasions prior to the accident complaining of head, neck and back pain.  She made similar complaints post-accident.  The defendant obtained surveillance showing the plaintiff engaged in a variety of activities, including scraping snow and ice off her car, pumping gas, reaching for groceries on an upper shelf and carrying groceries.  Justice Hackland described the video as “particularly devastating” to the plaintiff’s credibility, as it showed the plaintiff stretching and lifting, the activities she alleged restricted her functioning as a homemaker.

The plaintiff’s expert diagnosed her with “central sensitization”, based on a 45 minute interview and relying only on the plaintiff’s self reports.  Justice Hackland preferred the defence expert, who conducted a more thorough assessment and whose opinion was corroborated by the surveillance evidence.

Justice Hackland held the plaintiff had not proved she sustained a serious, permanent impairment of an important physical function.  As a result, she was not entitled to general damages and her recovery was limited to $32,000, the amount the jury awarded for past housekeeping. 

Surveillance of the plaintiff can be extremely important in defending claims, especially those alleging chronic pain.  When surveillance can be combined with expert opinion, it can be effective in showing that the plaintiff’s claim does not meet the threshold.

Ninth Circuit Affirms Rescission of Professional Liability Policy

In its recent decision in Tudor Ins. Co. v. Hellickson Real Estate, 2012 U.S. App. LEXIS 19904 (9^th Cir. Sept. 21, 2012), the United States Court of Appeals for the Ninth Circuit, applying Washington law, examined whether an insurer was entitled to rescission of a professional liability policy based on the insured’s failure to have disclosed several pending administrative complaints in the policy application.

Tudor Insurance Company successfully obtained summary judgment on its claim for rescission of a professional liability policy it had issued to Hellickson Real Estate.  Tudor demonstrated that at the time the policy was issued, Hellickson had been notified by state authorities of at least ten complaints filed against it with the Washington Department of Licensing.  Hellickson, however, failed to disclose these complaints in its application. Tudor learned of these misrepresentations when during the policy period, Hellickson sought coverage for a disciplinary proceeding brought by the Department of Licensing.  After learning of these prior complaints, Tudor advised that it was rescinding the policy and it also advised that it would not be providing Hellickson with a defense in connection with the disciplinary proceeding. 

On appeal, the Ninth Circuit began its decision by observing that under Washington law, an insured is presumed to have intended to have deceive the insurance company if it knowingly makes a false statement.  See, Ki Sin Kim v. Allstate Ins. Co., 153 Wn. App. 339, 223 P.3d 1180 (Wash. Ct. App. 2009).  It is the insured’s burden to prove it had no intention to deceive.  The court agreed that all elements necessary for rescission were present.  First, it concluded that Hellickson had knowingly misrepresented the existence of the pending administrative complaints.  In this regard, the court held that the insured’s “professed misinterpretation” of the application, in and of itself, was insufficient to raise a question of fact as to whether its false statement was made knowingly, particularly since the application language was clear and unambiguous.  The court also agreed that that the insured failed to rebut the presumption of its intention to deceive Tudor, since it failed to present “more than a scintilla of evidence” regarding its intention.  Finally, the court agreed that Hellickson’s misrepresentations were material in nature and that Hellickson.  At most, explained the court, Hellickson raised an argument that there was no misrepresentation.  The court readily dismissed this argument, noting:

… the Hellicksons revealed nothing to Tudor about the existence of the DOL investigations, but instead disclosed only a listing agency fine that they averred had been "handled through appeal" and "reduced or dropped" with "no claims made." As the district court discerned, Tudor's failure to investigate that incident does not create a factual question about whether numerous and ongoing disciplinary investigations by the state licensing authority prompted by a slew of complaints against the Hellicksons for misrepresentation, negligence, incompetence, and malpractice were material to Tudor's risk.

Hellickson argued in the alternative that even if Tudor was otherwise entitled to rescind the policies, it was estopped from doing so as a result of having wrongfully denied coverage for the Department of Licensing proceeding. Specifically, Hellickson claimed that under Washington law, if an insurer wrongfully denies coverage, then it is estopped from relying on coverage defenses, which necessarily includes the right to rescind a policy.  The court disagreed with this assessment of the law, explaining:

This argument is untethered from Washington state case law, which establishes only that an insurer who refuses to defend a policyholder in bad faith may be estopped from disputing the scope of coverage provided by a valid contract. See Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 229 P.3d 693, 696 (Wash. 2010). The Washington courts have never held that such an insurer may be estopped from disputing the very legitimacy of the contract. To the contrary, the courts have consistently ruled that policyholders who render their contracts void by their own fraud may not pursue claims of bad faith against the insurer. See Ki Sin Kim, 223 P.3d at 1189 (citing, inter alia, Mutual of Enumclaw Ins. Co. v. Cox, 110 Wn.2d 643, 757 P.2d 499, 504 (Wash. 1988)).

DRI Professional Liability Seminar, December 6-7

DRI’s Professional Liability Seminar is scheduled for December 6-7, 2012 at the Sheraton Hotel in New York City.  Click here for details.  The seminar is dedicated to addressing the educational needs of attorneys and insurers who protect the interests of all types of professionals, from lawyers and accountants to insurance producers and those involved in the construction and design industry. Its seminar will include leading experts in the field who will provide important updates to ensure that you have the information you need.

New York Court Addresses Application of Pending And Prior Exclusion

In its recent decision in Executive Risk Indem., Inc. v Starwood Hotels & Resorts Worldwide, Inc., 2012 NY Slip Op 6183 (N.Y. 1^st Dep’t Sept. 18, 2012), New York’s Appellate Division, First Department, had occasion to consider the application of a pending and prior exclusion in a professional liability policy.

The coverage dispute in the Executive Riskdecision arose out of Starwood’s right to coverage for an underlying suit involving a contract between Starwood and another party for the construction and management of a luxury hotel.  Starwood was sued for an amount in excess of $18 million for allegedly having caused delays and cost overruns on the project by failing to have fulfilled its responsibilities in implementing the hotel’s design.  Notably, plaintiff wrote a demand letter to Starwood in October 2005 and later brought suit in July 2006.  In August 2006, Starwood tendered its defense to its professional liability carrier, Executive Risk, which had issued successive claims made and reported professional liability policies to Starwood for the periods April 2005 to June 2006 and from June 2006 to June 2007.  Starwood sought coverage under the 05-06 policy, or any other policy that may be applicable.

Executive Risk denied coverage under the 05-06 policy on the basis that the claim was not first made and reported under that policy.  It also denied coverage under the 06-07 policy on the basis that plaintiff’s October 2005 claim letter and the subsequent lawsuit constituted a single claim, which necessarily was not first made during the 06-07 policy period.  Executive Risk also denied coverage under the 06-07 policy based on the application of a “prior pending” exclusion.  The lower court granted summary judgment in favor of Starwood, concluding that the claim was first made during the 06-07 policy period and that the exclusion was inapplicable.

On appeal, the court agreed that the claim could not be considered first made under the 05-06 policy.  The court’s reasoning was based on way in which the term “professional services” was defined in the 05-06 policy versus how it was defined in the renewal.  In the 05-06 policy, the “professional services” was defined as “[f]ranchiser, hotel and property manager, mortgage banker, mortgage broker, travel agent, title agent, real estate agent and real estate broker as well as incidental and related computer and print publishing services.”  In the subsequent policy, however, “professional services” was more broadly defined to also include “interior and exterior design and decorating consulting services.”  To qualify as a “claim” under either policy, the claimant had to bring suit or make a demand seeking to hold the insured responsible for a “wrongful act,” which in turn was defined as an act, error or omission in the insured’s “professional services.” 

The court agreed with Starwood that underlying plaintiff’s October 2005 letter did not implicated an identified “professional service” under the 05-06 policy, since that policy’s definition of “professional services” did not include design work.  As a result, reasoned the court, the plaintiff’s October 2005 letter did not allege a “wrongful act,” and it therefore followed that the letter did not qualify as a “claim” as that term was specifically defined.  The court further held, however, that the July 2006 lawsuit, which also related to Starwood’s design services, and was filed during the 06-07 policy, qualified as a claim first made and reported during that policy period, since the 06-07 policy’s definition of “professional services” included Starwood’s design work.

While the court concluded that the lawsuit fell within the 06-07 policy’s insuring agreement in the first instance, it nevertheless concluded that the policy’s “prior pending” exclusion operated as a bar to coverage.  The exclusion stated that coverage was unavailable “based upon, arising from, or in consequence of any written demand, suit, or other proceeding pending, or order, decree or judgment entered for or against any insured on or prior to [the June 10, 2006 inception date], or the same or substantially similar fact, circumstance or situation underlying or alleged therein.”  Starwood argued that the October 2005 demand letter did not trigger this exclusion since a demand letter could not be “pending” within the meaning of the exclusion.  Specifically, Starwood contended that “a demand is not generally understood to be something that is undecided or awaiting decision in the same sense as a judicial proceeding.”    The court found Starwood’s argument flawed since it would render meaningless the word “demand” as used in the exclusion.  The court further observed that the term “pending” is generally defined as “in question,” “open to discussion,” “under consideration” or “still under consideration.”  The court concluded that “[w]ithout doubt, these synonyms all describe the status of [plaintiff’s] demand when the 06-07 policy commenced on June 10, 2006.”

Adding an Insurer as a Defendant Rather than a Statutory Third Party

Can an insurer add itself as a defendant rather than as a statutory third party?

In Azad v. Dekran, 2012 ONSC 4257 (S.C.J.), the Personal insured the defendant and brought a motion pursuant to r. 13.01 to intervene as an added defendant.  It wished to allege that the accident did not occur or was staged and to crossclaim against its insured.  It preferred this route rather than being added as a statutory third party since s. 258(14) of the Insurance Act prohibits a statutory third party from taking a position incongruous to its insured.

Master Dash dismissed the motion, holding that it was not a proper use of r. 13.01.  One of the purposes of s. 258 is to permit an insurer to contest the plaintiff’s claim in a situation where it denies coverage.  The plaintiff’s action is not the appropriate forum to decide issues between the insured and insurer.  Any dispute could be decided in subsequent proceedings, including a proceeding to recover the statutory minimum paid to the plaintiff. 

Master Dash noted that if the accident was staged, the plaintiff would not be entitled to damages; on the other hand, if the trial court did award damages, it would mean there was a legitimate accident and there would be no basis for a crossclaim against the insured.  In addition, as a statutory third party, the insurer would have a right to discover its insured.

Master Dash refused to follow the decision in Esho v. Dekran, 2012 ONSC 3638 (S.C.J.), where the insurer was added as a defendant.  Now that there are conflicting decisions on this issue, perhaps it will be up to the Divisional Court to provide clarity.