Court Reinstates Policy, Finds Application Ambiguous

Great Am. Ins. Co. v. Christy 
(N.H. Sept. 28, 2012)
An attorney in a two-partner law firm confessed to forging documents to misappropriate money from a client’s estate. The attorney entered into a settlement agreement with the estate in April 2007, setting forth a payment plan for the attorney to satisfy his obligations to the estate. A month later, the second partner at the law firm executed a renewal application for professional liability coverage on behalf of the law firm. Question 6(a) on the renewal application asked: “After inquiry, is any lawyer aware of any claim, incident, act, error, or omission in the last year that could result in a professional liability claim against any attorney of the firm or a predecessor firm?” The second partner answered “no” on behalf of the firm. The application also contained the following acknowledgment: “The undersigned proprietor, partner, member, or officer, acting on behalf of the applicant, and all other proposed insureds, hereby declares after diligent inquiry that the above statements are true and that no material facts have been suppressed or misstated.”

According to the second partner, he asked the offending partner whether he had any information that should be disclosed on the application and was told there was none. As a result, Great American issued a professional liability policy to the firm effectiveAugust 1, 2007, through August 1, 2008. Thereafter, the second partner notified Great American of the misappropriation.

Great American filed a petition for declaratory judgment, requesting that the court rescind the 2007-08 policy. Following a hearing, the trial court granted Great American’s request for rescission, finding that the offending partner’s knowledge of a potential claim must be imputed to the second partner, who unwittingly advised on the application that he was not aware of such claims. On appeal, the second partner argued that rescission was improper because his answer to question 6(a) on the renewal application was objectively true and rescission of the policy or denial of coverage would be substantially unfair to the second partner and the other innocent insureds who neither knew nor could have known of the offending partner’s fraud.

The court reversed the trial court’s ruling, holding that the first partner had no actual knowledge of the second partner’s misconduct, and the policy expressly precluded imputing the second partner’s knowledge “to each and every Insured who did not personally participate in committing” wrongful acts by another insured. In the absence of language specifically imputing knowledge to innocent insureds of false statements made on the application completed by the first partner, the contract read as a whole was ambiguous and, therefore, would be read against the insurer.