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MINNESOTA LAWYERS MUTUAL INSURANCE CO. v. HAHN

December 9, 2004.

MINNESOTA LAWYERS MUTUAL INSURANCE CO., Plaintiff,
v.
GILBERT HAHN, et al., Defendants.



The opinion of the court was delivered by: JOHN BATES, District Judge

MEMORANDUM OPINION

This is an action by plaintiff Minnesota Lawyers Mutual Insurance Company ("MLM") seeking a declaration of rights relating to its rescission of a professional liability insurance policy issued to the defendant law firm of Amram & Hahn ("A&H") on September 3, 2003.*fn1 MLM has moved for summary judgment on the ground that rescission was proper because the undisputed facts and law establish that A&H knowingly failed to notify MLM, prior to issuance of the policy, of a letter constituting notice of a claim or circumstances that could reasonably result in a claim against A&H. For the reasons explained below, MLM's motion will be granted.

BACKGROUND

  The following facts are drawn from MLM's Statement of Material Undisputed Facts ("SMUF"), which has not been controverted in any way by defendants through filing a statement of genuine issues or otherwise. See LCvR 56.1. Pursuant to an Application for Coverage and a subsequent Request to Issue, Hahn purchased a professional liability insurance policy for A&H, as the named insured, that was issued by MLM for the policy period July 23, 2003 through July 23, 2004. SMUF ¶ 4. The policy provides coverage for claims, which are defined as "a demand or suit received by the INSURED for money or services. It also means any incident which could reasonably support such a demand or any communication or notice to the INSURED of a potential CLAIM." SMUF ¶ 6. The Application for Coverage submitted by Hahn repeats that same definition of claim. SMUF ¶ 9. In the Application for Coverage, Hahn responded "No" to the following question: "Have any claims been made against the applicant or the applicant's predecessors in business, or any past or present firm members or employees within the past 5 years." SMUF ¶ 10. Hahn also responded "No" in the Application for Coverage to the following question: "Is any firm member aware of any INCIDENT that COULD REASONABLY result in a claim being made against the applicant, its predecessors or any past or present firm members?" SMUF ¶ 11. Hahn certified in the Application for Coverage that "all known claims and all known incidents which might become a claim" have been reported and that the applicant was unaware "of any threatened litigation or existing fact or situation" that could result in a claim. SMUF ¶ 12. Finally, the Application for Coverage provided that the applicant has a continuing obligation to report "any changes in the information contained" in the materials submitted. SMUF ¶ 13.

  A&H and Hahn submitted the Application for Coverage on or about July 14, 2003; thereafter, on or about August 28, 2003, A&H submitted the Request to Issue. See SMUF ¶¶ 4, 17. The Request to Issue includes a certification, executed by Hahn, that there has been no significant change in any information since the application, and that Hahn and A&H are unaware of any claims or circumstances that could result in claims that have not been reported to MLM. SMUF ¶¶ 16, 17. Based on the information contained in the Application for Coverage and the Request to Issue, MLM agreed, on September 3, 2003, to bind coverage for A&H, effective July 23, 2003, and hence the policy was issued. SMUF ¶¶ 4, 8, 15, 18.

  On or about July 22, 2003 — after the Application for Coverage was submitted but before either the Request to Issue was submitted or the Policy was issued — Hahn received a letter ("Claim Letter") from Richard Tomar, Esq., representing certain individuals who claimed to be beneficiaries of trusts for which Hahn served as trustee and attorney. SMUF ¶ 19; Compl. Ex. D. In that letter, Tomar expressly stated that "I have been authorized to institute legal proceedings for claims, including, but not limited to, breach of fiduciary duty, legal malpractice, mismanagement of investments; conversion, misappropriation, dissipation of assets; conflict of interest, accounting, and removal as trustee," and "I am writing to you in an attempt to settle this matter in an amicable fashion." Compl. Ex. D. Hahn did not provide notice to MLM of the Claim Letter or its contents prior to Hahn's execution of the Request to Issue on or about August 28, 2003, or prior to the date MLM bound coverage for Hahn and A&H on September 3, 2003. SMUF ¶¶ 21-22. Not until September 4, 2003, after coverage was bound by MLM, did A&H, through Hahn, provide notice to MLM of the Claim Letter. The existence of the Claim Letter and the facts alleged therein were material to the underwriting decision by MLM to provide insurance for A&H, and MLM would not have undertaken the risk referred to in the Claim Letter had A&H disclosed it during the application process. SMUF ¶ 30; Pl.'s Mot. Summ. J., Ex. 1 (Aff. of Anne Hill) ¶¶ 11-12. MLM therefore determined to rescind the Policy and on April 21, 2004, filed this action for a declaration of its rights.

  Although not responding to or otherwise contesting these facts, defendants proffer certain additional facts in response to MLM's motion for summary judgment. Mr. Hahn attests that his conduct relating to the relevant trusts had not been questioned prior to receipt of the Claim Letter; that when he received and read the letter, "any threat of real litigation was disguised" and he called Tomar in an effort to meet with him; that he asked Tomar for "any concrete reasons and facts relative to the letter" and to explain the basis of the claim; that when Tomar "declined and refused to do so, I regarded his letter as nothing more than a complaint from a disgruntle[d] relative"; that he "did not consider it a threat of litigation at that time"; and that after his meeting with Tomar, Hahn "did not believe that it presented an incident that could reasonably result in a claim being made." Opp'n to Pl.'s Motion for Summ. J., Aff. of Gilbert Hahn, Jr.

  LEGAL STANDARD

  Summary judgment is appropriate when the pleadings and the evidence demonstrate that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The party seeking summary judgment bears the initial responsibility of demonstrating the absence of a genuine dispute of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The moving party may successfully support its motion by "informing the district court of the basis for its motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Id. (quoting Fed.R.Civ.P. 56(c)).

  In determining whether there exists a genuine issue of material fact sufficient to preclude summary judgment, the court must regard the non-movant's statements as true and accept all evidence and make all inferences in the non-movant's favor. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). A non-moving party, however, must establish more than the "mere existence of a scintilla of evidence" in support of its position. Id. at 252. By pointing to the absence of evidence proffered by the non-moving party, a moving party may succeed on summary judgment. Celotex, 477 U.S. at 322. "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50 (internal citations omitted). Summary judgment is appropriate if the non-movant fails to offer "evidence on which the jury could reasonably find for the [non-movant]." Id. at 252.

  DISCUSSION

  MLM contends, and defendants do not challenge, that Virginia law applies here.*fn2 Based on the uncontested facts and the clear law, MLM is entitled to summary judgment confirming its rescission of the Policy ab initio.

  Under Virginia law, "an insurer can rescind an insurance contract for misrepresentation of a material fact in applying for insurance." St. Paul Fire & Marine Ins. Co. v. Jacobson, 48 F.3d 778, 780 (4th Cir. 1995); Cont'l Cas. Co. v. Graham & Schewe, 339 F. Supp. 2d 723, 726 (E.D. Va. 2004). An insurance company contesting a claim on the basis of an alleged misrepresentation by the insured must show by clear proof that (I) the statement on the application was false; and (ii) that the insurance company's reliance on the false statement was material to the company's decision to undertake the risk and issue the policy. See Cont'l Cas. Co., 339 F. Supp. at 726; Commercial Underwriters Ins. Co. v. Hunt & Calderone, P.C., 540 S.E.2d 491, 492 (Va. 2001). The falsity of a representation is assessed under an objective standard that asks what a "reasonable person in possession of the facts known to the insured" would believe. Cont'l Cas. Co., 339 F. Supp. 2d. at 727; see Commercial Underwriters, 540 S.E.2d at 493. A misrepresentation is "material" if truthful answers "would have reasonably influenced the company's decision to issue the policy." Commercial Underwriters, 540 S.E.2d at 493; see Mutual of Omaha Ins. Co. v. Echols Adm'rs, 154 S.E.2d 169, 172 (Va. 1967).

  Materiality includes circumstances where, had it known the truth, the insurer would have issued the policy only under different terms or for a different premium. See Buckeye Union Casualty Co. v. Robertson, 147 S.E.2d 94, 96 (Va. 1966) (holding that fact is material if "reasonably careful and intelligent men would have regarded the fact communicated at the time of effecting the insurance as substantially increasing the chances of the loss insured against, so as to bring about a rejection of the risk or charging an increased premium"); Am. Nat'l Lawyers Ins. Reciprocal v. Dingman, No. CH98-382, 2000 WL 33258811, at *2 (Va. Cir. Ct. 2000) (finding material a misrepresentation as to a potential claim where "company would have underwritten the application differently had this potential claim been disclosed").*fn3 Rescission is proper even where an applicant initially believes an answer is accurate, but discovers before the policy is issued that it is not, and fails to report the correct facts affecting the insurer's risk. See 1 Windt, supra, § 2:28 (explaining that rescission is appropriate if insured fails to "exercise due diligence to communicate to the proposing insurer facts materially affecting the risks that arise after the application has been submitted, but before the policy has been delivered"); see also Stipcich v. Metropolitan Life Ins. Co., 277 U.S. 311, 317 (1928) (holding that ...


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