By Lazar Emanuel [Originally published in NYPRR July 2003]
In Chicago Insurance v. Kreitzer & Vogelman, [NYLJ, 6/12/2003], Southern District Senior Judge Robert W. Sweet upheld the right of a legal malpractice insurer to rescind a policy for material representations in a lawyer’s application and to refuse to defend and indemnify the defendant-lawyers against the claims of clients. Judge Sweet also concluded that the insurer had not waived its right to rescind, was not estopped from doing so, and did not have to provide tail coverage under the original policy issued by another carrier.
Under a program of the New York State Bar Association, the Bertholon-Rowland Corporation acted as the managing general agent for legal malpractice insurer Home Insurance Company of Indiana. In early 1995, plaintiff Chicago Insurance Company (CIC) agreed to take over the program, which involved more than 10,000 policies and $40 million in annual premiums. As part of the agreement, CIC promised to renew as many policies as possible during the first year of its program.
In December 1994, lawyer Kreitzer submitted an application for renewal to CIC in behalf of a law firm (K&V) with which he was associated. Because the application disclosed the existence of several claims against K&V by its clients, the application was referred for underwriting and the premium was increased by 10%.
In reality, on the date of the application, there were 28 potential claims against the firm. This was omitted from the application, as was the fact that Kreitzer himself was the subject of outstanding charges before the First Department’s Disciplinary Committee. In fact, Kreitzer left the question inquiring into complaints blank. At trial, he argued that he didn’t know what the question meant. Judge Sweet found that this argument lacked credibility and that failure to answer the question constituted a “material misrepresentation by way of omission.”
CIC issued a first renewal policy in reliance on Kreitzer’s application. Judge Sweet pointed out that if CIC had known the facts, it would have insisted on very different terms, including restricting prior acts, imposing liability limits, limiting defense costs, and charging a significantly higher premium. As the first renewal was about to expire, Kreitzer submitted a second renewal application. At the time of the application, CIC was aware of five claims against the K&V law firm. Because of these claims, CIC required an increase in premiums of 73%. Kreitzer did not disclose in the second application the existence of approximately thirty client claims; and once again, he failed to disclose the existence of the disciplinary proceeding against him.
Kreitzer Suspended for Three Years
Based upon the charges in the disciplinary proceeding, Kreitzer was suspended from the practice of law for three years. A few weeks after the suspension, CIC issued an endorsement providing for an unlimited extended reporting period (“tail coverage”) in exchange for a premium of $63,467. On the same day, CIC received notice of a claim by another Kreitzer client. As many additional claims developed, CIC conducted a series of investigations into client claims which resulted finally in a notice of rescission and a tender of the refund of all premiums paid. At the date of rescission, CIC had paid $41,503 in defense costs and an additional $54,000 in settlement of claims against Kreitzer and K&V. CIC demanded the repayment of these sums but they were not repaid.
Both parties made a series of motions for summary judgment, all of which were denied. After a bench trial, Judge Sweet ruled in favor of CIC’s application for a declaratory judgment of rescission. He decided that CIC did not have to show that it would not have issued any policy at all, but only that it would not have issued a policy with these terms. “Even if a misrepresentation was made innocently or without the intent to deceive, it is sufficient to void the policy if it is material” [citing Kulikowski v. Roslyn Sav. Bank, 121 A.D.2d 603, 503 N.Y.S.2d 863 (2d Dept. 1986)].
Judge Sweet also found that CIC had not waived its right to rescind and was not estopped from asserting it. The carrier had conducted an extremely fact-intensive investigation into its right to rescind. The investigation had lasted six months, but Judge Sweet found that this was not unreasonable under the circumstances. “Public policy supports the allowance of such a reasonable investigation; it would be unwise to give insurers an economic incentive to rescind insurance at the drop of a hat and without sufficient investigation…” He went on to reject Kreitzer’s argument of estoppel as well as the argument that CIC was required to continue its tail coverage.
Lazar Emanuel is the publisher of NYPRR.
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