In a decision with important implications for all attorneys seeking malpractice insurance, the Fifth Circuit recently held that a law firm’s failure to disclose even a potential claim can void coverage. The case is Imperium Insurance Company v. Shelton & Associates, 749 Fed. App’x 214 (5th Cir. 2018).
In 2013, a Mississippi law firm applied for malpractice coverage from Imperium. In the application, the lawyers represented that that were not aware of any “legal work or incidents that might reasonably be expected to lead to a claim of suit against them.” Imperium issued a claims-made policy to the firm. During the year of coverage, two former clients of the firm filed malpractice actions against it. Imperium filed a declaratory-judgment action seeking rescission based on misrepresentations, and the trial court granted summary judgment to Imperium in both cases.
On appeal, the Fifth Circuit consolidated the cases and then dismissed one of the for lack of subject-matter jurisdiction. But the court affirmed the summary judgment in the other case, upholding rescission of the law firm’s policy.
In 2011, a Mississippi court entered a $2.9 million judgment against one of the law firm’s clients after the firm failed to move to set aside deemed admissions, failed to respond to a summary-judgment motion based in part on those deemed admissions, and failed to appear at the hearing of that motion. The law firm later filed post-judgment motions seeking to set aside the judgment and respond to the admission requests. The trial court denied both motions in 2012.
In January 2013, the law firm tendered its insurance application representing that it knew of no potential claims. Later that year—after his appeals were denied—the client sued the law firm for malpractice.
The Fifth Circuit applied Mississippi insurance law, which permits an insurer to void or rescind a policy where the applicant made a misstatement of material fact. An application contains a material misrepresentation where (1) it contains answers that are false, incomplete, or misleading, and (2) the false, incomplete, or misleading answers are material to the risk insured against under the policy. The Fifth Circuit determined that these elements were satisfied, holding that “every reasonable attorney” aware of the events leading to the judgment would reasonably have anticipated a malpractice lawsuit. And the malpractice claim was of the very type the policy was intended to cover. As a result, the misrepresentation was material.
Though this case was decided under Mississippi law, it has clear implications for Texas attorneys too. Similar to the law in Mississippi, Texas law permits an insurance company to rescind a policy based on misrepresentation in the application. Texas law requires proof of the following five elements to support rescission: (1) the making of the representation; (2) the falsity of the representation; (3) reliance thereon by the insurer; (4) the intent to deceive on the part of the insured in making same; and (5) the materiality of the representation. Mayes v. Massachusetts Mut. Life Ins. Co., 608 S.W. 612, 616 (Tex. 1980).
To be sure, Texas law affords the insured a powerful defense unavailable in Mississippi—the lack of any intent to deceive. But it would be foolhardy for any Texas lawyer to bank on this as a means of avoiding rescission.
Texas attorneys should protect themselves—and ensure their coverage is in place when they need it—by a fulsome disclosure of potential claims in the application for malpractice coverage.