In a July 31, 2014 opinion (here), Central District of California Judge Fernando M. Olguin, applying California law, granted a professional liability insurer’s motion for summary judgment in a coverage lawsuit brought by the Blum Collins LLP law firm and Craig M. Collins dba the Collins Law Firm for breach Judge Olguin agreed that because of a material misrepresentation in law firm’s application for insurance, coverage was precluded under the policy.

The plaintiffs contended that the insurer had wrongfully refused to defend and indemnify them in a legal malpractice lawsuit brought by Cynthia Beck, whom Collins had represented in a property dispute.  In her lawsuit, Beck alleged that Collins’s negligence has resulted in a $7 million judgment against her. Judge Olguin ruled that coverage under the policy for the malpractice claim was precluded due to the Blum Collins law firm’s omission from  its insurance application of the existence of a tolling agreement that had been entered with Beck ten months before the application was completed.

Background

In December 2004, Cynthia Beck retained Craig Collins in his capacity as a partner of the Collins Law From to represent her in a property dispute. In September 2007, Beck and Collins terminated their attorney-client relationship and entered into an Agreement (the “September 2007 Agreement”) whereby “Collins agreed to furnish Beck with time to evaluate her assertions [of malpractice] and her potential damages without filing an action during the time period are in place.” In October 24, 2007 judgment was entered against Beck in the property dispute. The judgment was affirmed on appeal in January 2009. In February 2009, Beck’s representative sent Collins an email alleging that the judgment against Beck had been caused by Collins’s malpractice. In March 2009, the plaintiffs gave notice of Beck’s claims to its professional liability insurer.

Collins had completed an application for the professional liability insurance on July 23, 2008 (that is about ten months after the entry into the September 2007 Agreement). Application Question 10.C. asked the following question: “After enquiry, are any persons listed on Supplement 1 aware of any circumstances, allegations, tolling agreements or contentions as to any incident which may result in a claim being made against the Applicant or any of its past or present Owners [or] Partners ….?”  The response given to Question 10.C. was “No.”

On July 27, 2008, the insurer issued a professional liability insurance policy, designating Blum Collins LLP as the “Named Assured.” The policy defined the term “Named Assured” as the partnership as such, as well as “any lawyers who are partners in the Named Assured.”

The application stated in pertinent part that the insurer “reserve[s} the right to deny or rescind coverage on any Policy that is issued as a result of this Application if, in the statements set forth herein and in any attachments made hereto it is found that material information has been omitted, suppressed or misstated.” Policy Exclusion I precludes coverage for any loss arising from any Claim “arising out of any acts, errors, or omissions which took place prior to the effective date of this insurance, if any Assured on the effective date knew or could have reasonably foreseen that such acts, errors, or omissions might be expected to be the basis of a Claim.”

In January 2011, Beck filed a professional negligence lawsuit against Craig Collins and Blum Collins LLP. The law firm sent the complaint to its insurer seeking a defense to the lawsuit and seeking indemnification. The insurer denied coverage for the claim. In June 2012, the plaintiffs filed their coverage lawsuit against the insurer. The parties filed cross-motions for summary judgment.

The July 31 Order

In his July 31, 2014 order, Judge Olguin granted the insurer’s summary judgment motion and denied the plaintiffs’ motion.

In their motion papers, the plaintiffs had disputed whether or not the plaintiffs’ alleged failure to give the insurer notice of the potential lawsuit was such a material omission as to warrant the insurer’s refusal to defend, arguing that the refusal to defend was a breach of contract.

In support of this position, the plaintiffs made three arguments. The plaintiffs’ first argument was based on the fact that application question 10.C. had asked whether “any persons listed in Supplement 1 are aware of any … tolling agreements … as to any incidents which may result in a claim.” The plaintiffs argued that they were not provided with Supplement 1 and “thus it would be impossible for Plaintiffs to know how to have answer the question.”

Judge Olguin characterized these arguments as “utterly meritless.” He noted that “Plaintiffs provide no authority or evidence to support their argument that the absence of Supplement 1 excuses any misstatement or omission in their response to Question 10.C.” He also noted that “Despite the absence of Supplement 1, plaintiffs answered both questions that referenced it. Had the absence of Supplement 1 truly affected plaintiffs understanding of the question, plaintiffs, a law firm with several experienced attorneys, would not have answered the questions.”

Second, the plaintiffs argued that Blum Collins LLP did not represent Beck and had not entered the September 2007 Agreement with her, and thus was not related to any potential claim for “the Assured” to disclose in the application. Judge Olquin rejected this argument as well, noting that Question 10.C. “clearly contemplates the possibility that claims might be brought against owners or partners of the applicant law firm arising from different associations or employment.”

Third, the plaintiffs argued that Question 10.C. only asked for the disclosure of incidents that “may result in a claim” and since no claim had materialized, they were not aware of any incident that may result in a claim. Judge Olguin said that this argument “ignores the plain language of the September 2007 Agreement,” which, he said, “unequivocally gave plaintiffs notice that there were contentions that ‘may result in a claim’ against one of the ‘Owners [or] Partners’ of Blum Collins LLP…” Judge Olguin added that “any expectation or understanding to the contrary stretches the bounds of credulity.”

Judge Olguin also concluded that not only was the answer to Question 10.C. a misrepresentation or omission, but it was material as well, citing affidavit evidence the insurer provided declaring that a truthful answer to the question would have altered whether the insurer would have issued the policy or the terms that would have been offered. The plaintiffs did not really dispute this, but instead they tried to argue that the insurer had waived the right to rescind the policy. In response to this contention, Judge Olguin cited with approval to case law holding that “established law clearly affords the insurer the right to avoid coverage by way of cross-claims and affirmative defenses when the insured files an action on the contract before the insurer can filed its action for rescission.”

Finally, Judge Olguin also found that coverage for the plaintiffs’ claim was precluded by several policy exclusions, including in particular the exclusion precluding coverage based on the insureds’ knowledge on the policy’s effective date of “acts, errors or omissions” that “might be expected to be the basis of a Claim.” In response to the plaintiffs’ efforts to resist this exclusion based on arguments about which of the plaintiffs’ did or didn’t know about Beck’s assertions and the September 2007 Agreement, Judge Olguin noted that the plaintiffs were taking “contradictory positions,” since on the one hand, they assert that there was not an application misrepresentation “because the September 2007 Agreement as not between Blum Collins LLP and Beck, but rather between the Collins Law Firm and Beck,” while on the other hand, “Blum Collins LP argues that [the insurer] had a duty to defend it in Beck’s lawsuit, because, at the time, Collins was a partner at Blum Collins.”

Discussion

It is pretty clear that Judge Olguin had very little patience for the plaintiffs’ arguments based on the law firms’ and Collins’s multiple shifting identities. It is also clear that the bottom line for Judge Olguin is that if Blum Collins LLP wanted to argue that it had a sufficient connection to this set of circumstances to expect the insurer to provide a defense to Beck’s claim, then Blum Collins had a sufficient connection to the representation of Beck and to the September 2007 Agreement that the Agreement should have been disclosed in response to the application question.

Readers can reach their own conclusions about the responses the law firm provided to the application questions. For me, this case does provide a reminder of the importance of making sure that all relevant information is provided in response to application inquiries. In most circumstances, that will entail a careful survey of all persons proposed to be insured under the insurance that is being sought. Of course, the failure to fully survey everyone was hardly the problem in this case, as the person completing the application was the very person who was in best position to know about the problems with Beck and about the September 2007 Agreement — which may have been the source of the many problems Judge Olguin obviously had with the plaintiffs’ arguments here.