Coverage attorneys understand that the remedy of rescission may be the most difficult to obtain in declaratory relief. Generally, it is the author’s experience that courts do not like to rescind contracts, and that courts may typically go out of their way to uphold the existence of a contract, even while finding that certain terms, conditions or exclusions bar coverage. In a recent decision by the Montana Supreme Court, this observation held true when the court reversed a trial court’s granting of rescission in the context of a lawyer’s professional liability policy.
In ALPS Prop. & Cas. Ins. Co. v. McLean & McLean, PLLP, 2018 WL 37379590 (Mont. Aug. 7, 2018), the court held than an innocent insured attorney had a reasonable expectation of coverage after purchasing an extended reporting period endorsement. The insured firm was operated by a father and son. Unknown to the son, the father had converted client trust account funds. Upon discovery, the son reported the ethical violation to the state disciplinary body and, shortly thereafter, clients began making claims against the firm.
In response to the claims, the carrier sought to cancel the policy from inception based upon a material misrepresentation in the application involving a response to a question regarding knowledge of any action that might reasonably lead to a claim. The carrier pointed to Montana Statute Section 33-15-403 which it argued provided carriers with an absolute right to rescind a policy from inception based upon material misstatements in an application. The trial court had previously granted judgment in favor of the carrier based upon this statute.
The Supreme Court reversed, finding that the son was entitled to coverage based upon his innocent insured status and his reasonable expectation of coverage. In the end, while denying rescission as a relief, the court did find that the father and the firm were not entitled to coverage based upon misstatements made by the father in the application on his behalf and on behalf of the firm. As a result, the policy remained enforced, and the son was provided coverage for the claim.
This case demonstrates the difficulty carriers can face when attempting to rescind a policy, even in the face of a clear misrepresentation made for the purpose of inducing a carrier to issue a policy in the face of an impending claim. In the law firm context, coverage counsel should consider whether an innocent insured may avoid the remedy of rescission, and carriers should craft any declaratory action in a many to disclaim coverage for misrepresentations or prior knowledge in the event the court declines rescission.
Kurt Zitzer