Legal Malpractice Law Review : Professional Responsibility Case Summaries & Commentary : Bennett J. Wasserman : LegalMalpractice.com : Lawyer Malpractice & Legal Ethics

Guarantee Insurance Co. v. Saltman, 217 N.J. Super. 604, (App. Div. 1987)

NJ Underlying Legal Malpractice Action

Student Contributor: Colleen Gaedcke

Facts: A few months after obtaining professional malpractice coverage from the plaintiff, one of the partners at the defendant law firm was served with a legal malpractice complaint. The defendant submitted the complaint to the plaintiff who provided a defense under a reservation of rights to disclaim pending an investigation of any misrepresentation by the law firm on its application for coverage. This investigation ultimately revealed that the defendant law firm did not have knowledge of the malpractice claim at the time it submitted its application.

Despite the results of its own investigation, however, plaintiff moved to disclaim its duty to defend and indemnify the firm for alleged fraudulent misrepresentations and intentionally withholding information concerning the malpractice action. Additionally, plaintiff sought reimbursement for all defense costs.

The law firm, in turn, filed a counterclaim against the plaintiff arguing that it owed a defense and indemnity for the pending malpractice claim, and furthermore, sought indemnification for all legal fees incurred in defending the plaintiff’s declaratory judgment action. The court found that the plaintiff’s policy with the defendant was valid and required plaintiff to provide a defense and indemnity in the malpractice action. Moreover, under Court Rule 4:42-9(a)(6), the law firm was awarded a significant portion of the legal fees it incurred in defending the declaratory judgment action.

Issue: Can an insured recover counsel fees from an insurer for costs and expenditures incurred in defending an insurer’s disclaimer of coverage?

Ruling: Under the American Rule, a prevailing party cannot collect attorney’s fees from the losing party. The New Jersey Supreme Court has, however, carved out an exception to this Rule in R. 4:42-9(a)(6) for an insured who is forced to litigate for its policy benefits against an insurer who erroneously disclaims coverage under a liability or indemnity policy of insurance.

Lesson: New Jersey Courts recognize that counsel fees must be awarded to insureds in order to make certain that they are receiving the full value of the coverage afforded by liability and indemnity policies in instances where an insurer’s disclaimer is not supported by the policy’s exclusions, conditions, or limitations on coverage.

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Berry et al. v. Javitch, Block & Rathbone, L.L.P., 182 Ohio App.3d 795 (2009).

Student Contributor: Shiv Vydyula

Facts: The Berrys commenced suit for negligent concealment and alleged that defendants committed fraud when they failed to disclose that they were insured for malpractice by Clarendon National Insurance Co. Defendant(s) only disclosed a policy from Legion Insurance, which did not cover the time period of the Berrys'  claim.

This failure to disclose prevented the plaintiffs from asserting a claim against the appropriate carrier-- Clarendon. Defendants agreed to settle the matter for $195,000, $65,000 of which was to be paid up front by Defendants. Defendants would then have 90 days to get Legion to satisfy the balance of the claim. If payment was not made in 90 days, the Berrys could proceed directly against Legion. This, despite the fact that the parties' agreement provided that Legion had disclaimed coverage. Legion never paid the remaining $135,000. 

Eventually, the Berrys filed suit for fraudulent inducement against defendants. The trial court granted summary judgment in favor of the defendants without opinion. The Berry appealed the trial court's decision and argued that they had valid claims for fraud against defendants. 

Issue: Does failure to disclose a malpractice policy amount to fraud?

Ruling:  Yes, if the following prerequisites are met: 

(a) a representation or, where there is a duty to disclose, the concealment of a fact (b) that is material to the transaction at hand, (c) was made falsely, with knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred, (d) with the intent of misleading another into relying upon it, and (e) justifiable reliance upon the representation or concealment, (f) with a resulting injury proximately caused by the reliance. 

The appellate court remanded on the issue of whether the failure to disclose was purposeful in light of the fact that Defendants had notified Clarendon of the suit, yet answered Plaintiffs' interrogatory requesting information regarding any policy which "may" provide coverage with only Legion. 

Lesson: Under Ohio law, Intentional concealment of an applicable malpractice insurance policy could amount to fraud.

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First American Title Ins. Co. v. Lawson, 351 N.J. Super. 407 (App. Div. 2002)(PDF)

Student Contributor: Evan Kusnitz

NJ Underlying Legal Ethics Action

Facts: Three attorneys formed a law firm in New Jersey. In addition to engaging in the unauthorized practice of law in New Jersey, one of the attorneys, Wheeler, also misappropriated client funds. When another of the attorneys, Lawson, discovered the misappropriation and confronted the attorney engaged in this violation, Wheeler tried to explain his actions in light of the financial difficulties facing the firm and convinced Lawson to join in his scheme in order to pay off the firm’s liabilities.

In the meantime, the firm had been notified by the Office of Attorney Ethics that it would be conducting an audit of the firm’s books in response to several grievances. Shortly thereafter, Wheeler completed an application for malpractice insurance, along with two warranty statements, denying that he was aware of any actual or potential malpractice claims against the law firm.

Eventually, two title insurance companies were forced to make payment to several of the firm’s defrauded clients. These title insurers subsequently filed claims against the firm for reimbursement of monies paid as a result of the firm’s wrongful conduct. When the firm attempted to seek a defense and coverage from its malpractice carrier, the carrier filed a declaratory judgment action seeking to rescind its policy, given Wheeler’s misrepresentation to the carrier that he was unaware of potential malpractice claims.

Issue: May a malpractice carrier rescind a policy due to deliberate misrepresentations on its application?

Ruling:

1. Equitable fraud provides that a party may rescind a contract where there is proof of (a) a material misrepresentation of a presently existing or past fact; (b) the maker’s intent that the other party rely on it; and (c) detrimental reliance by the other party. In the context of an application for insurance, an additional inquiry must be made into whether the insured knew that the information was false when completing the application.
2. This rule applies even if the insurer might not have been diligent in investigating the background of the insured.

Lesson: A malpractice insurer may rescind a policy when the insured deliberately conceals information concerning known ethical and professional violations that may serve as the basis of legal malpractice actions.

EDITOR'S NOTE: The New Jersey Supreme Court affirmed the Appellate Division’s decision to allow the malpractice carrier to rescind its policy with regard to the liability of the partners who engaged in unlawful conduct, however, based on partnership law, it reversed the rescission of the policy with regard to the innocent partner. First American Title Ins. Co. v. Lawson, 177 N.J. 125 (2003)(PDF).

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