• Law Firm's Malpractice Policy Rescinded Due to Partner's Material Misrepresentation
  • June 23, 2009
  • Law Firm: Hinshaw & Culbertson LLP - Chicago Office
  • Minnesota Lawyers Mutual Insurance Co. v. Hancock, ___F Supp 2d___, 2009 WL 563900 (E.D. Va.)

    Brief Summary
    The court voided a law firm’s malpractice policy because a partner had failed to disclose to the firm’s malpractice insurance carrier that he had previously embezzled client funds.

    Complete Summary
    Solo attorneys Michael Hancock and Stephen Dalton merged their law practices in 2006 under the name Dalton Hancock, PLLC. Prior to the merger, and unbeknownst to Dalton, Hancock had begun embezzling money from his clients by moving money from the clients’ escrow accounts to his firm operating account without authority and without having earned the money. 2009 WL 563900 at *1. Hancock’s embezzlement continued after the merger. Id.

    At the time of the merger, Hancock signed an “Adding an Attorney” form for the purpose of signing on as an insured under Dalton’s existing Minnesota Lawyers Mutual Insurance Company (“Minnesota Lawyers Mutual”) claims made malpractice policy. Id. In that form, Hancock represented that he was “[un]aware of any incident which could reasonably result in a claim being made against” him. Id. Neither Dalton nor Minnesota Lawyers Mutual knew that Hancock’s statement was false. Dalton subsequently submitted an application to renew the Minnesota Lawyers Mutual policy, reaffirming Hancock’s prior misrepresentation without knowledge of its falsity. The renewal application stated that "the statements in the application are the representations of all insureds." Id.

    After Hancock admitted his embezzlement and was disbarred, several of the clients from whom Hancock had embezzled sued Hancock and the Dalton Hancock law firm. Minnesota Lawyers Mutual then filed a declaratory judgment action against Hancock, Dalton, the Dalton Hancock firm and the clients whose funds were allegedly embezzled, seeking a declaration rescinding and voiding the policy because of Hancock’s material misrepresentation. Minnesota Lawyers Mutual then sought summary judgment, which was granted.

    The court said that to rescind an insurance policy for misrepresentation, the insurer must show: (1) that the statement on the application was untrue; and (2) that the issuer’s reliance on the false statement was material to the company’s decision to undertake the risk and issue the policy. Finding Dalton’s lack of knowledge of the falsity of the statement immaterial, the court held that under the policy’s specific language, the insurer was required only to show that the statement on the application was false, not that it was “knowingly” false. The court also rejected defendants’ attempt to rely on the policy’s ”innocent insureds” provision, which provided coverage to any insured who did not personally participate in or acquiesce to known misconduct. The court held that the provision did not “preclude the remedy of rescission for a material misrepresentation.”

    Significance of Opinion
    In order to obtain greater certainty of coverage for innocent insureds, law firms should closely scrutinize the wording of their malpractice policy applications and should even more closely scrutinize their potential new colleagues.