Lawyer Should Know Better – Never Lie on an Insurance Application

Lawyer Lies on Application for Malpractice Insurance – Policy Rescinded

Nov 16, 2021

BACKGROUND

Georgia Noel Inman and her twin brother Walker Patterson Inman III (“Patterson”) were clients or former clients of G&A and its attorneys. Patterson was also a client or former client of Grimmer Davis and its attorneys. Georgia and Patterson’s father died when they were twelve years old. Their stepmother served as their deceased father’s personal representative and successor trustee. However, there were allegations that she was pilfering or hiding assets from the estate. In 2013, Grimmer and G&A began representing Georgia and Patterson in the probate dispute with their stepmother in an action in Wyoming.

On June 27, 2018, Georgia filed a motion to disqualify the firm Grimmer Davis and the individual attorneys Grimmer and Davis from representing Patterson in the consolidated trust cases pending in Wyoming, citing various conflicts of interest and breaches of professional duties against Grimmer, Davis, G&A and Grimmer Davis (“Grimmer Parties”). In this disqualification motion, Georgia asserted that the Grimmer Parties advocated for positions that favored Patterson and were adverse to her interests. The motion states that “Georgia potentially has claims against parties and lawyers in this litigation” and “Georgia now has viable claims, which she will be bringing to undo both the Greenfield Plantation sale and the assignment of claims”-two transactions involving Georgia, Patterson, and Grimmer.

The Wyoming court appointed a Special Master in the consolidated trust cases, who issued a Report of Special Master on Georgia’s Motion to Disqualify on March 5, 2019. The Special Master found that Grimmer made an audio recording of Georgia and used her confidential statement to him in a manner adverse to her best interests. Finally, the Special Master found that in refusing to pay sums due for the purchase of the Greenfield Plantation and in filing a counterclaim in related litigation in South Carolina, Grimmer was adverse to Georgia. The Special Master recommended that Grimmer and Davis be disqualified from further representation in the consolidated trust cases and that any member of any firm with which Grimmer was associated also be disqualified. He further recommended that Grimmer’s pro hac vice admission be revoked.

The South Carolina court also found that a material adversity existed between Grimmer, who at that time was the trustee of a trust holding assets for Patterson as the sole beneficiary, Patterson, and Georgia.

INSURANCE

Travelers had initially provided professional liability insurance coverage to Grimmer Davis for the policy period of March 20, 2018 to March 20, 2019. At the conclusion of that policy period, Grimmer Davis failed to submit a renewal application and the 2018 policy expired. Travelers did not automatically renew Grimmer Davis’ coverage.

However, in April 2019, Grimmer Davis requested that Travelers issue a new policy to provide coverage retroactive to March 20, 2019, the 2018 policy’s expiration date. Grimmer Davis submitted an application for insurance, dated April 18, 2019, which Grimmer signed on behalf of Grimmer Davis. In response to Question 27 on the application, asking whether “you or any member or employee of your firm have knowledge of any incident, act, error, or omission that is or could be the basis of a claim under this proposed professional liability policy, ” Grimmer Davis answered “No.”

Grimmer also agreed to immediately inform Travelers if any of the information supplied in the application changed between the date of the application and the effective date of any insurance policy Travelers issued in response to the application. If Grimmer provided any changed information, the application allowed Travelers to “withdraw or modify any outstanding quotation or agreement to bind coverage.”

In order to evaluate Grimmer Davis’ request for a renewal policy with a retroactive effective date of March 20, 2019, Travelers required Grimmer Davis to provide a letter confirming that its attorneys were not aware of any facts or circumstances after March 20, 2019, that may give rise to a claim under the renewal policy. Grimmer Davis provided Travelers with a letter, dated April 18, 2019 (“No Known Circumstances Letter”), stating, in part, that “[a]s of the date of this letter, we are not aware of any facts, circumstances, or losses from the period of March 20, 2019 to the present as respects our lawyers’ professional lawyers insurance.”

Kristin Montalvo, the Travelers underwriter responsible for Grimmer Davis’ account, reviewed the application and letter to evaluate the risk of insuring Grimmer Davis. She provided Grimmer Davis with a quote and Grimmer Davis accepted. On April 19, 2019, Travelers issued to Grimmer Davis a Travelers 1st Choice+ Lawyers Professional Liability Coverage insurance policy, effective March 20, 2019 to March 20, 2020.

A week later, on April 25, 2019, Georgia asserted a malpractice claim against Grimmer Davis, G&A, Grimmer, and Davis based on their prior representation of her.

Montalvo, Travelers’ underwriter, testified in an Affidavit that if Grimmer Davis had disclosed Georgia’s various claims and assertions against the Grimmer attorneys in the Wyoming and South Carolina actions, as well as those court’s findings regarding ethical violations, Travelers would not have issued the renewal policy.

DISCUSSION

Traveler’s Motion for Summary Judgment

Utah law provides for rescission of insurance policies in three circumstances. Utah Code Annotated Section 31A-21-105(2) governs rescission and provides that “no misrepresentation . . . affects the insurer’s obligations under the policy unless: (a) the insurer relies on it and it is either material or is made with intent to deceive; or (b) the fact misrepresented or falsely warranted contributes to the loss.”

Courts applying this statute have held that an insurer may rescind a policy where

the insurer relies on a material misrepresentation made by the applicant;
the insurer relies on a misrepresentation that was made by the applicant with the intent to deceive; or
the applicant’s misrepresentation contributes to the loss.

An insurer need only satisfy one of the justifications for rescission to rescind a policy. Travelers, however, claims that it is entitled to rescind the policy under all three of those justifications.

Here, Grimmer acted on behalf of Davis Grimmer and attested in the application and the “No Known Circumstances” letter that no one at the firm was aware of any facts, circumstances, or losses that could impact coverage under the policy. However, at the time Grimmer signed those documents, Georgia Inman had already repeatedly threatened substantial claims against the firm and its attorneys, and two courts had already determined that the attorneys’ conduct was improper and breached professional obligations to a former client.

The information Grimmer gave or failed to give Travelers occurred before Travelers agreed to issue the policy. Although the policy’s inception date was backdated to pre-date the Application, Travelers only agreed to backdate the policy because of Grimmer’s misrepresentations and material omissions. The inception date of the policy, which was obtained as a direct result of misrepresentations and material omissions, does not require that the terms of the policy apply to the issue. The more applicable law in this situation is Utah’s rescission statute.

Utah courts have recognized that the doctrine of equitable estoppel will prevent a party from taking advantage of misrepresentations made in the insurance context. Equitable estoppel may be invoked to prevent injustice where one has reasonably relied to his or her detriment on an intentional or negligent false representation by another. [Barnard v. Barnard, 700 P.2d 1113, 1115 (Utah 1985).]

All the elements for equitable estoppel are met here. Grimmer made untrue statements and omitted material information to obtain a policy with a backdated inception date. Travelers relied on those misrepresentations and agreed to issue the policy with a backdated inception date.

The undisputed evidence demonstrates that Grimmer knew or should have known that the information he provided to Travelers was false and given with the intent to obtain the insurance policy. Intent to deceive can be inferred from circumstantial evidence. Grimmer had threats from Georgia Inman that she would bring any claims possible against the firms and attorneys. A few weeks before applying for the renewal policy, the Wyoming court issued a ruling in favor of Georgia. That ruling was issued five days after the prior policy expired. Grimmer knew or should have known that he and his firm needed insurance coverage. However, when he applied for that insurance coverage and asked for it to apply retroactively, he did not mention any of these material circumstances to Travelers. He knew or should have known that Travelers was concerned about this kind of information when they asked for a separate letter. Nonetheless, he did not disclose the information.

Georgia made complaints relating to Grimmer Davis’ ongoing representation of Patterson, the alleged resulting damages to assets owned by a trust to which Georgia is a beneficiary, and their obligations to her as a former client. Defendants contend that Georgia’s claims against Grimmer Davis can simply be attributed to Georgia’s confusion as to the firms’ names. She did admit to some confusion as to the relationship of the two firms, but she also made clear she was seeking disqualification of Grimmer, Davis and both firms specifically. She repeatedly referred to “firms” in the plural, as did the courts. There is no genuine dispute as to whether Georgia threatened claims against Grimmer Davis and its members relating to conduct that occurred after she was represented by G&A.

Under the terms of the policy, a “Claim” is a demand for “money or services” against an “Insured” for a “Wrongful Act.” Georgia claimed that the damages to the trust was in March 2018, after Grimmer Davis was formed. Georgia repeatedly made such claims stemming from Grimmer Davis’ representation of Patterson in 2018 after Grimmer Davis was formed and representing Patterson. Grimmer does not allege that he was unaware of Georgia’s claims and assertions.

The Special Master’s Report and the Wyoming Court’s Order clearly dealt with both firms. Even if Georgia’s claims against Grimmer Davis had proved to be unmeritorious, it was clear that she intended to bring them and bring them against Grimmer Davis, Grimmer, and Davis. It does not matter whether she alleged a valid claim, only that she was threatening to bring claims. Grimmer either knew or should have known that the information he provided Travelers was false.

Grimmer’s representations to Travelers were material because Travelers relied on them in issuing the renewal policy and they contributed to the loss. A fact is material to the risk assumed by an insurance company if reasonable insurers would regard the fact as one which substantially increases the chance that the risk insured against will happen and therefore would reject the application. If a fact would “naturally influence the insurer’s judgment in making the contract, estimating the degree or character of the risk, or in fixing the rate of insurance, ” then it is material.

Defendants present no evidence to dispute Travelers’ position on reliance or materiality. Defendants do not assert a material disputed fact that would prevent this court from entering summary judgment.

Even if Georgia Inman erroneously made claims against Grimmer Davis, and Grimmer and Davis in their roles at Grimmer Davis, Grimmer Davis should have disclosed the existence of those claims to Travelers when it was pursuing the renewal policy. Those claims were material and Travelers relied on Grimmer Davis’ assertions that there were no such claims in issuing the policy renewal. Grimmer knew of the claims and did not disclose them. The court, therefore, concludes that Defendants made misrepresentations to Travelers, Travelers relied on those misrepresentations, and those misrepresentations were material to Traveler’s decision to provide insurance.

Accordingly, the court concluded that Travelers is entitled to rescind the policy under Utah law. The court further declares that the policy is void and Travelers has no duty to defend or indemnify Defendants under the policy. Therefore, the court granted Traveler’s motion for summary judgment.

ZALMA OPINION

A lawyer should know that insurance is a contract of utmost good faith where neither party may do anything to deprive the other of the benefits of the contract. In this case, a lawyer not only failed to act in good faith when applying for malpractice insurance, he acted badly by misrepresenting to the insurer that he knew of no potential action against him or his firms when, in fact, he had been so advised by Georgia and her counsel and by orders of two different courts. Rescission was the only appropriate action available to the Travelers.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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He is available at http://www.zalma.com and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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