In Continental Casualty Co. v. Law Offices of Melbourne Mills, Jr., PLLC, the Sixth Circuit has just ruled that a lawyer’s failure to disclose an ongoing state bar association investigation against him constituted a material representation justifying the rescission of his malpractice insurance.
The defendant was one of three attorneys who represented a class of Kentucky plaintiffs in a product liability lawsuit over the diet drug fen phen. The case was settled for $200 million in 2001 and the defendant received $23 million as his fee. Class members later accused the lawyers of cheating them and a state judge ordered the lawyers to repay $62.1 million in settlement funds and interest.
The defendant sought coverage of legal malpractice claims arising from the fen phen matter under a policy sold by Continental. Continental sued to rescind the policy based on the defendant’s failure to disclose the state bar investigation in his policy application.
The Court wrote: “This is ‘precisely the kind of information that Continental [sought and] would need to evaluate its potential for current and future risk.’ In this case, that risk was amplified by the enormity of the $200 million class action settlement. [The defendant] had a duty to disclose this information … and when he did not, he affected Continental’s opportunity to consider and weigh its options when issuing the policy.”
In the alternative, the court concluded that the Kentucky Supreme Court’s decision to disbar the defendant in 2010 served as a sufficient basis for precluding coverage under the policy’s dishonesty exclusion clause.
This case obviously involved some serious malfeasance, but the point needs to be made: Check your application CAREFULLY before submitting it. If you're faced with a serious claim of some sort, you don't want to fight the rescission battle.