Law Firm’s Misrepresentations in Insurance Application Warrant Recission Under Utah Statute

The United States District Court for the District of Utah, applying Utah law, has held that a law firm’s representation in its insurance application that it lacked knowledge of any incident, act, error, or omission that could be the basis of a claim, constituted a material misrepresentation in light of a former client’s threats of a claim against the firm and a judicial finding of improper conduct, warranting recission of the policy under Utah statutory law.  Travelers Cas. & Sur. Co. of Am. v. Grimmer Davis Revelli & Ballif, P.C., 2021 WL 5234373 (D. Utah Nov. 10, 2021).

In June 2018, a former client of the firm filed a motion to disqualify the firm from a series of probate actions in Wyoming, citing conflicts of interest and breaches of professional duties, and stating that the former client had claims against the firm.  In December 2018, the former client again stated that she intended to assert claims against the firm and would seek “substantial” damages.  In March 2019, a special master issued a report finding improper joint representation and conflicts of interest by the firm and recommending disqualification, which the court accepted.  Similarly, the court in a related litigation in South Carolina disqualified the firm based on conflicts of interest. 

In April 2019, the firm sought liability insurance for a retroactive March 20, 2018 to March 20, 2019 policy period.  In its application, the firm responded “no” to the question whether “you or any member or employee of your firm have knowledge of any incident, act, error, or omission that is or could be the basis of a claim under this proposed professional liability policy[.]”  The firm also provided a letter confirming that “we are not aware of any facts, circumstances, or losses from the period of March 20, 2019 to the present as respects our lawyers’ professional lawyers insurance.”  After the policy issued, the former client asserted a malpractice claim against the firm.  The insurer sought to rescind the policy based on the firm’s material misrepresentations during the application process and on the underwriter’s testimony that, had the firm disclosed the former client’s assertions and the courts’ findings, the insurer would not have issued the policy.  

The court granted summary judgment to the insurer, concluding that it was entitled to rescind the policy pursuant to Utah’s rescission statute which provides, in relevant part, that “no misrepresentation . . . affects the insurer’s obligations under the policy unless: (a) the insurer relies on it and it is either material or is made with intent to deceive[.]”  The court reasoned that the firm “attested in the application and the [letter] that no one at the firm was aware of any facts, circumstances, or losses that could impact coverage under the policy” but “at the time [the firm representative] signed those documents, [the former client] had already repeatedly threatened substantial claims against the firm and its attorneys, and two courts had already determined that the attorneys’ conduct was improper and breached professional obligations to a former client.”  The court determined that “[t]hose claims were material and [the insurer] relied on [the firm’s] assertions that there were no such claims in issuing the policy renewal.”

The court rejected the firm’s argument that the policy’s “misrepresentation condition,” providing that the policy may be considered void if, after the policy inception date, the firm representative “intentionally concealed or misrepresented any material fact or circumstance, concerning this insurance,” applied instead of the recission statute.  The court concluded that “[t]he inception date of the policy, which was obtained as a direct result of misrepresentations and material omissions, does not require that the terms of the policy apply.”  Further, the court found that, in any case, the firm representative who signed the application “intentionally concealed material facts.”