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November 2010
Lawyers’ Professional Liability (Malpractice) Insurance Non-Disclosures on the Application and Loss of Coverage for Misrepresentations
By Thomas Browne, Esq., Hinshaw & Culbertson LLP © 2010 by Hinshaw & Culbertson LLP
Article Used with Permission
Risk Management Issues
What is the scope of the duty of disclosure in a lawyer’s application for malpractice insurance? What are the consequences for failing to make adequate disclosure?
The Case
Continental Casualty Co. v. Law Offices of Melbourne Mills, Jr., PLLC, 2010 WL 996472 (E.D. Ky. 2010)
Defendant Mills and other lawyers represented more than 400 plaintiffs seeking damages for alleged injuries arising from use of the diet drug Fen-Phen (the “Fen-Phen Action”). In May 2001, following a successful mediation, Mills and co-counsel obtained a $200 million settlement of the Fen-Phen Action. The Fen-Phen plaintiffs collectively received approximately $74 million (37%) of the $200 million settlement. Mills and other counsel and consultants received $10 million, and $20 million was used to form The Kentucky Fund for Healthy Living, Inc. (the “Fund”), which named Mills a director and paid him a salary.
In early February 2002, Mills became aware that the Kentucky Bar Association (“KBA”) was investigating bar complaints filed against him related to the Fen- Phen Action. Shortly thereafter, Mills’ counsel attended a hearing of the KBA’s Inquiry Commission regarding an application for a subpoena duces tecum related to the Fen- Phen Action.
On August 21, 2003, Mills filed an application for renewal of his professional liability insurance with Continental Casualty Company for the 2003-2004 period. The Continental application requested information regarding any unreported claims and any disciplinary proceedings against lawyers in Mills’ firm.
Mills failed to disclose the investigation relating to the Fen-Phen Action on his 2003 application. When Mills submitted this answer, he had no reason to believe the KBA had terminated its investigation of his conduct in the Fen-Phen Action. After reviewing the 2003 application, Continental issued the policy to Mills’ firm.
Later, plaintiffs from the Fen-Phen Action asserted legal malpractice claims against Mills and others in the case of Abbott v. Chesley, Case No. 05-CI-436 (Cir. Ct., Boone Cty. Ky.) (“Abbott”). The Abbott court ultimately ruled that Mills and others “breached their fiduciary duties to the Plaintiffs when they paid themselves fees over and above the amount to which they were entitled to under their fee contracts with their clients,” and awarded the Abbott plaintiffs $42 million dollars in compensatory damages.
Continental defended Mills against the Abbott litigation under a full reservation of rights, including the right to rescind the policy. Continental then sought a declaration that its policy did not provide coverage for the underlying action, arguing that Mills’ conduct had caused: (1) the policy to be void ab initio or (2) the Abbott litigation to be excluded from coverage under a Kentucky statute that allows an insurer to rescind a policy, inter alia, if the policy is procured through misrepresentation, or if the insurer would have set a different premium or policy limit, or would not have provided coverage had correct information been provided.
The court determined that Mills’ application, which had resulted in Continental’s issuing the policy, contained misrepresentations satisfying the criteria for rescission of the policy. The court explained that Mills’ answer to Question 4, which asked whether any attorney at the firm had been “disbarred, suspended, formally reprimanded or subject to any disciplinary inquiry, complaint or proceeding for any reason other than nonpayment of dues during the expiring policy period, ” was false because “Mills knew that a bar complaint had been filed against him in early 2002, and he admitted that as of the date he signed and certified the 2003 application, the KBA’s investigation was ongoing.”
Mills was not only “aware that an investigation was ongoing, his attorney attended a hearing held by the KBA Inquiry Commission, which resulted in Mills being served with a subpoena duces tecum requesting records related to the Fen-Phen Action.”
Mills attempted to avoid rescission of the policy by arguing that the filing of a complaint with the KBA was not sufficient to constitute a disciplinary proceeding or inquiry. The court rejected this argument, stating “The Rules of the Kentucky Supreme Court clearly state that the purpose of a subpoena duces tecum served by the Inquiry Commission is to direct the recipient ‘to produce to Bar Counsel any evidence deemed by the Inquiry Commission to be material to the investigation of a complaint.’”
Further, the court held that the fact that there was an ongoing KBA inquiry into Mills’ actions with respect to the Fen-Phen Action was precisely the type of information Continental needed to evaluate its potential for current and future risk. Accordingly, the court held that Continental was entitled to rescind the policy.
Risk Management Solution
This case underlines the importance of total accuracy and completeness in the wording of lawyers’ malpractice insurance applications. Any inaccuracy in an insurance application that may impair an underwriter’s ability to assess risk and decide whether and on what terms to provide insurance may provide a valid basis for the insurer to disclaim coverage.
Law firms should therefore make a comprehensive investigation of all lawyers to be covered by insurance before submitting each year’s renewal application so the firm has confidence that the application is complete and accurate. Failure to do so can result in the firm losing the anticipated benefits of having insurance when a claim is made.
Disclaimer: Perspectives is published as a service to lawyers. While the information contained herein is believed to be reliable, readers are advised to consult their own legal and insurance counsel for assistance in applying it to their unique situations.
Lawyers’ Professional Liability (Malpractice) Insurance Responsibility for Representations Made without Client Authority – Responsibility to Co-Counsel
By Thomas Browne, Esq., Hinshaw & Culbertson LLP © 2010 by Hinshaw & Culbertson LLP Article Used with Permission
Risk Management Issue
Can a law firm be held liable to a second law firm when, without client authority, it promises that the client will pay the second law firm’s fees?
The Case
DePetris & Bachrach, LLP v. Srour, 71 A.D. 3d 460, 898 N.Y.S.2d 4 (N.Y.App. Div. 1st Dept. 2010 (DePetris) According to plaintiff DePetris law firm, it had agreed to represent Srour based upon a representation from the Shiboleth law firm that its client, the Nasser family, would pay $75,000 in fees to DePetris for representing Srour. The Nassers failed to pay, and DePetris sued both them and Shiboleth.
Shiboleth moved to dismiss DePetris’ claims for breach of implied warranty of authority, tortious misrepresentation of authority, and assurances of payment. The trial court granted the motion and dismissed the claims.
DePetris appealed, and the Appellate Division reinstated its claims against Shiboleth. The court concluded that DePetris’ allegations that Shiboleth had promised that the Nassers would pay $75,000 when Shiboleth had no authority to make this representation, and that Shiboleth claimed it had specifically discussed the issue with the Nassers, stated viable claims for breach of the implied warranty of authority and tortious misrepresentation of authority and assurances of payment under New York law. Moreover, because the claims were stated against Shiboleth directly, and not the Nassers, the fact that the Nassers had never stated to DePetris that Shiboleth had authority to act on their behalf, and that no writing existed to take the promise out of the statute of frauds, were not valid defenses to the action. The deliberate nature of Shiboleth’s alleged acts also rendered any lack of consideration to the Nassers for the “promise” irrelevant. (The opinion also reinstated two other causes of action for reasons unrelated to this alert).
Risk Management Solution
Lawyers should take care to secure actual authority in writing before promising third parties that their clients will pay any fees. Failure to do so may cause the lawyers to incur direct liability if the clients later fail to pay as promised.
Disclaimer: Perspectives is published as a service to lawyers. While the information contained herein is believed to be reliable, readers are advised to consult their own legal and insurance counsel for assistance in applying it to their unique situations
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