Malpractice insurer can’t avoid summary judgment on misrepresenation defense, despite executive testimony that she wouldn’t have issued policy if insured disclosed losses resulting in later malpractice claim

by Christopher Graham and Joseph Kelly

New York

American Guarantee and Liability Ins. Co. v. Cohen, et al, Case No. 113510/2009 (Sup. Ct. N.Y. Jan. 2, 2014)

Background: Investors and attorney loaned pooled funds through attorney’s “interest on lawyer account” (“IOLA”) to a real estate investment fund managed by a non-party. But the fund was that non-party’s Ponzi scheme. And the loan was a loss, which attorney learned in February 2006. Attorney had a professional liability policy. But he didn’t advise insurer of the loan loss or related circumstances. “As a condition to coverage, the policy require[d] [attorney] to notify the insurer immediately if he has reason to expect a claim may be made against him for professional malpractice.”

Attorney provided insurer a renewal application dated November 19, 2008 for a policy effective December 1, 2008 to December 1, 2009. But he didn’t disclose the loan loss or related circumstances then either.

On December 4, 2008, just four days after policy inception, attorney learned investors sued him for legal malpractice in failing to conduct due diligence and obtain security for the loans. He then notified the insurer. Insurer defended attorney under a reservation of rights.

About two years later, insurer sued attorney for a judgment declaring it had no duty to defend or indemnify him and to recoup defense fees. That’s also when insurer first notified attorney that it denied coverage. “Even in extensive correspondence from [insurer] to [attorney] dated July 16, 2009, reserving its rights to raise coverage defenses, [insurer] failed to identify [attorney’s] late notice as a potential coverage defense.”

Investors intervened in the coverage litigation to protect their interests the insurance as a source to pay their malpractice claims. They appeared to carry the laboring oar in opposing the insurer.

The Court denied insurer summary judgment on late-notice and misrepresentation-in-the-application defenses; instead, granted investors summary judgment on insurer’s misrepresentation-in-the-application defense–because (per the Court) the undisputed material facts established disclosure of the investment loss would have been immaterial to insurer; and denied investors summary judgment on its claim that insurer waived the late-notice defense. So, absent a settlement, the case will go to trial on the late-notice defense.

Misrepresentation: In granting summary judgment on the misrepresentation-in-the-application defense, the Court stressed: “Based on [attorney’s] deposition testimony, [investors] do make a prima facie showing of a reasonable basis for [attorney] to believe that he was not subject to any legal malpractice claim by [investors] arising from his involvement in their investment. [Citations omitted] The record discloses no retainer agreement to provide legal representation to [investors]. No evidence whatsoever contradicts [attorney’s] testimony that he was acting as an investor and not in any legal capacity that reasonably would generate a potential legal malpractice claim, so as to require disclosure of the investments in his renewal application.”

In granting summary judgment on the misrepresentation defense, the Court also focused on what it deemed as the absence of evidence proving attorney’s failure to disclose investor losses and related circumstances was material to insurer: “Nor do [insurer’s] conclusory affidavit and the underwriting guidelines [insurer] presents demonstrate that, even if [attorney’s] belief was not reasonably founded, and he had informed [insurer] of [investor’s] potential claim, [insurer] would not have renewed his policy. . . . Since [insurer’s] own underwriting guidelines do not contemplate a denial of coverage based on an attorney’s involvement with other persons pooling their funds in a joint investment and using an IOLA to hold the funds, the failure to disclose such facts does not amount to a material misrepresentation.”

“[Insurer’s] scant evidence of its underwriting policies and practices fails to rebut [investors’] prima facie showing of no material misrepresentation. [Citations omitted] Absent rebuttal evidence raising a factual issue of materiality, [investors] are entitled to summary judgment on the nonmateriality of [attorney’s] omission in his policy renewal application.”

“The conclusory affidavit by [insurer’s] Assistant Vice President of its Programs Business Unit, that she would have declined a renewed policy to [attorney] had he disclosed the circumstances of the failed investment made through his IOLA, falls short of the showing necessary to establish that [attorney] made a material misrepresentation as a matter of law.”

“[T]he affidavit fails to establish that [she] is an underwriter for [insurer] or any basis for her personal knowledge of [insurer’s] underwriting policies or practices.” And: “Although [she] claims to rely on underwriting guidelines to support her conclusion, . . . [insurer’s] underlying guidelines’ definition of ‘claims’ does not include claims arising from the insured’s investments unrelated to his professional capacity as an attorney. . . . Although ‘claims’ do include ‘pending disciplinary matters’ and ‘disciplinary matters where a decision . . . was rendered,’ none of [attorney’s] conduct at issue in the underlying action falls into either category.”

“[Insurer] provides no evidence of an underwriting policy or practice of denying coverage to similarly situated insureds based on potential liability for failed investments made through an IOLA. . . . Even if [she] possesses personal knowledge of such an underwriting policy or practice by [insurer], absent any corroboration by [insurer’s] underwriting guidelines or comparable documentary evidence, her insistence that she would have declined to renew [attorney’s] professional liability policy is but a conclusory subjective predilection. Without the necessary substantiation by an objective standard, such speculation does not establish the materiality of the claimed misrepresentation by [attorney] and entitle [insurer] to disclaim or deny coverage as a matter of law.”

Comment: So to avoid insurer’s misrepresentation defense, investors apparently argued attorney had a reasonable basis to believe he wasn’t their attorney, seemingly contradicting their position in the underlying malpractice case that he was their attorney. Since it wasn’t in their interests in the coverage case, investors apparently didn’t present any of the evidence they would present in their malpractice case that would prove attorney was representing them. But the insurer apparently didn’t either.

In addition, this Court deemed the insurance executive’s affidavit insufficient to create a fact issue requiring a trial on the misrepresentation defense. That appears to have been for two reasons: (1) she wasn’t the actual underwriter of this risk and so had no personal knowledge about the underwriting decision (not sure why the insurer didn’t have the actual underwriter give the affidavit); and (2) insurer’s underwriting guidelines didn’t corroborate her statement that she wouldn’t have underwritten the risk had attorney disclosed the loan loss and related circumstances. Both points or at least the latter point might be considered credibility issues for the fact finder to address. But this Court didn’t see it that way.

Late-notice defense: In seeking summary judgment on its late-notice defense, “[insurer] relie[d] on [attorney’s] use of his IOLA for the investment to establish that he was acting as an attorney for [investors], triggering his duty to notify [insurer] of the potential legal malpractice claims against him when he learned the investment failed in February 2006. [Insurer] presents no evidence of a retainer agreement establishing an attorney-client relationship between [attorney] and [investors].”

In denying the insurer’s motion for summary judgment on its late-notice defense, the Court explained: “[Attorney] in his deposition testimony, . . . denies any attorney-client relationship with [investors] and maintains that his role was limited to a co-investor and escrow agent and that he never even undertook any responsibility to collateralize the investments. . . . He further testified that, had he had any basis believe a malpractice claim against him potentially would arise from his involvement with the investment, he would have disclosed the potential claim to [insurer] when he renewed his policy. . . . [Attorney’s] deposition testimony, even had [insurer] presented contrary evidence, raises a material factual issue that his belief in the absence of a potential claim by his co-investors for legal malpractice, as distinct from any other negligence or other culpable conduct, causing the lost investment, was reasonable under the circumstances.”

Further: “The underlying claims against [attorney] are predicated on his alleged failure to secure adequate collateral for the investments. Any misconduct in using his IOLA as the escrow account caused no harm to [investors] and therefore may not reasonably be expected to form a basis for a legal malpractice claim against [attorney]. In fact [investors] do not claim any culpable conduct by [attorney] in using his IOLA as the escrow account.”

“[Insurer] has demonstrated neither an attorney-client relationship, nor any factors vitiating [attorney’s] reasonable belief of nonliability for legal malpractice, such that it was unreasonable not to have been aware of such a potential claim from his involvement in the investment before he received the summons in the underlying action. . . . Since [insurer] thus fails to establish, as a matter of law, that [attorney] unreasonably delayed in notifying [insurer] of the claims against him, [insurer] is not entitled to summary judgment awarding declaratory relief on this ground.”

Comment: The policy as a coverage condition required attorney to notify insurer immediately if he had reason to expect a claim may be made against him for professional malpractice. So he says he didn’t have reason to suspect such a claim and, for this Court, his subjective belief was enough as to create a fact issue requiring trial. The insurer would be free to attack the attorney’s credibility regarding his “belief” when the case is tried.

Waiver: Investors didn’t prove insurer waived its right to deny coverage based on the late-notice defense. It didn’t matter that insurer waited until 3 years after notice to disclaim coverage or that it failed to identify late-notice as a coverage defense when it reserved rights in July 2009. Nor did it matter that the insurer controlled attorney’s defense because investors failed to prove that attorney was prejudiced as a result. They “do not show that the underlying action is so close to trial or otherwise has reached a point where the course of litigation has been fully charted. Nor do they show prejudice by any other reason, such as [insurer’s] use against [attorney] of confidential information acquired in defense of the underlying action.”

Tags: New York, professional liability, legal malpractice, notice, material misrepresentation

Category: Professional Liability Insurance Digest Comment »

Comments are closed.

Back to top