Attorney Malpractice Policy Rescinded due to Misrepresentation

Subjective belief no “claim” existed irrelevant when “circumstances” reasonably suggested a claim possible.

In an opinion written by Judge Amy J. St. Eve, the U.S. District Court for the Northern District of Illinois granted Minnesota Lawyers Mutual Insurance Company’s (“MLM”) motion for summary judgment allowing MLM to rescind the professional liability policies that MLM issued to Jerry A. Schulman, an Illinois-based patent and trademark attorney, due to a misrepresentation.

MLM issued a series of claims-made Lawyers Professional Liability Policies to Schulman.  MLM sought to rescind three policies it issued to Schulman from January 1, 2012 to January 1, 2015.  In December 2011, Schulman applied for the 2012 policy.  He signed a Firm Information Verification form, several Warranty Pages, and a Request-to-Issue form.  By signing these documents, Schulman represented to MLM that he was “not aware of any claims or circumstances that could result in claims or disciplinary actions” and that if one of his clients decides to abandon a patent application or allow a patent application to expire, such decision is memorialized in writing.  In December 2012 and December 2013, Schulman signed and submitted similar documents to apply for the 2013 and 2014 policies and in each year disclosed one incident “which could reasonably result in a claim being made against him.” These were incidents involving Kopta and ASICO, respectively.

Kopta filed a malpractice action against Schulman in 2013 which stemmed from an abandoned patent application.  In 2008, the United States Patent and Trademark Office (“PTO”) issued a Notice of Abandonment of Kopta’s patent application.  According to the malpractice suit, it was not until 2011 that Kopta was made aware of any issues surrounding her patent application.  In 2012, Schulman left a voicemail at MLM’s offices stating that he needed to report a claim.  MLM denied coverage for the matter citing that Schulman had knowledge of the claim prior to the submission of his application for the 2012 policy.   Schulman informed MLM of the malpractice suit once it was filed, and MLM agreed to defend under a full reservation of rights.

ASICO had many active matters with Schulman.  Schulman implemented a system where it sent docket sheets to ASICO each month, in part, to advise them on the status of their matters, “including whether the matters had been abandoned.”  According to Schulman’s deposition, some ASICO matters “went abandoned because [he] didn’t notice they went abandoned,” which “happened more than a just a few times.”  When applying for the 2012 policy, Schulman did not disclose to MLM the 2008, 2010, or 2011 Notices of Abandonment mailed to him or his 2010 discovery of a filing oversight.  When applying for the 2013 policy, Schulman failed to disclose the same information as well as a 2012 Notice of Abandonment.  In addition, when applying for the 2014 policy, Schulman failed to disclose his December 2013 admission to ASICO of a docketing error.  When applying for the 2014 policy, Schulman reported to MLM regarding the 2010 filing oversight after a meeting in 2013 with ASICO regarding the same.  After unanswered requests for more information, MLM filed the declaratory judgment action.

MLM sought to rescind the 2012, 2013, and 2014 policies due to misrepresentation under Section 154 of the Illinois Insurance Code.  Under Section 154, in order for a misrepresentation to be grounds for recession it must (1) be false and (2) be made with an actual intent to deceive or “materially affect the acceptance of the risk or hazard assumed by the insurer.”  According to the court, “Schulman’s affirmative certification that he had no knowledge of any circumstances that could result in claims—coupled with his undisputed and repeated omissions concerning abandonment notices, petition dismissals, and docketing errors, even after his clients sent follow-up inquiries—prevented an adequate assessment of insurance risk.”

The court found Schulman’s argument that he did not believe any “claim” existed under the policies as irrelevant.  The application materials asked whether Schulman was aware of “any claims or circumstances that could reasonably result in claims or disciplinary action.”  The court noted that the application materials did not call for the subjective evaluation by the insured.  Moreover, the court found that Schulman’s undisputed failure to read the MLM policies and to understand the meaning of the term “claim” did not excuse his misstatements and omissions in completing the applications.   According to the court, “Illinois law charges an insured with ‘knowing the particulars of the policy.’”  In finding that Schulman made misrepresentations, the court held that it did not matter that he did not intend to mislead MLM because under Illinois law, “a misrepresentation, even if innocently made, can serve as the basis to void a policy.”

Lastly, the court evaluated the materiality of the misrepresentations.  Under Illinois law, testimony from the insurer’s underwriter may be used to establish materiality.  MLM’s underwriter stated that MLM would have declined to renew the policies or at a minimum required a higher premium for the increased risk had Schulman not made the misrepresentations on his application materials.  The court held that the misrepresentations made in Schulman’s application for the 2012, 2013 and 2014 policies were material; and, thus, granted MLM’s request for rescission.  Minnesota Lawyers Mut. Ins. Co. v. Jerry A. Schulman, No. 14-cv-50142 (N.D. Ill.  Sept. 19, 2016).

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