by Christopher Graham and Joseph Kelly

Zurich American Ins. Co. v. Diamond Title of Sarasota, Inc., Case No. 8:10-cv-383-T-30 AEP (M.D. Fla. Dec. 4, 2013) addresses a common question-type in professional liability insurance applications — namely, did the applicant or prospective insured “know of any circumstances, acts, errors or omissions that could result in a professional liability claim against the Applicant?” Similar questions are in some D&O policy applications.

Rotolo, Diamond Title’s owner and President, answered “No” to the question, although involved in a mortgage fraud. Later, she pled guilty to related crimes.

JLO sued Diamond Title during the policy period for negligence in releasing escrow funds, but not fraud. Zurich then sued Diamond Title to rescind its professional liability policy, joining JLO to bind it to any judgment.

Like the insurance code of many states, Florida’s Code provides that “a misrepresentation in an application for insurance may prevent recovery under the policy if the misrepresentation was material to either the acceptance of risk or the hazard assumed by the insurer.” Fla. Stat. § 627.409.

The Court concluded the undisputed material facts established as a matter of law that Rotolo made a misrepresentation material to acceptance of the risk and the hazard assumed; so Zurich was entitled to summary judgment.

The Court rejected defendants’ argument that there was no misrepresentation. Citing the policy’s professional services definition and dishonesty exclusion, defendants argued in essence that because criminal mortgage fraud couldn’t result in a covered professional liability claim, Rotolo while knowing of mortgage fraud had no knowledge of acts that could result in professional liability claims. But according to the Court: “Rotolo was not relieved of her duty in the application to report acts that could result in a professional liability claim simply because the Policy may not have covered those acts.”

The Court also rejected defendants’ argument that the application wording altered Florida law, by requiring proof that Rotolo’s misrepresentation was intentional. The following “supporting” application wording said no such thing:

THE DISCOVERY OF ANY FRAUD, INTENTIONAL CONCEALMENT, OR MISREPRESENTATION OF MATERIAL FACT WILL RENDER THIS POLICY, IF ISSUED, VOID AT INCEPTION.

The Court also rejected defendants’ argument that Zurich failed to prove materiality. Contrary to defendants’ argument, it was immaterial that Zurich did not conduct the policy’s underwriting and immaterial that the underwriter’s affidavit referenced no underwriting guidelines. As the Court explained:

The Court does not need an underwriter or guidelines to appreciate how not knowing Rotolo and her employee had been committing mortgage fraud in excess of five years left Zurich unable to adequately estimate the nature of risk in issuing the Policy. [Citation omitted]. As previously discussed, many of these acts could have resulted in claims against the Policy. An objective insurer may not have issued a policy at all. Certainly a policy would not have been issued under the same terms and pricing knowing that Diamond Title was engaged in an ongoing scheme to commit mortgage fraud.

Tags: Florida, E&O, rescission, material misrepresentation