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Lawyers Should Never Lie to Their Insurers



Rescission is, if I have often reported, including a report on earlier review of this case, available at an insurer whose insured misrepresents material facts when applying for insurance.

In Imperium Insurance Company v Shelton & Associates, Professional Association, A Mississippi Professional Association; Jason L. Shelton no. 16-60728, C / w 16-60730, United States Court of Appeals for the Fifth Circuit (March 6, 2019), a consolidated appeal involving coverage under a legal malpractice policy, the Fifth Circuit granted the petition for panel rehearing filed by Imperium Insurance Company ("Empire") based on the question of whether the jurisdictional amount to establish diversity jurisdiction has been with each of the cases although not raised in the earlier iteration of the case.

FACTS

In January 201

3, Jason Shelton applied for legal-malpractice insurance on behalf of the Shelton Defendants. In the application, Shelton represented that he and his attorneys were not aware of any “legal work or incidents that might reasonably be expected to lead to a claim or suit against them.” Relying on Shelton's application, Imperium issued a claims-made insurance policy

During the policy year, two malpractice suits were filed against Shelton and his firm by clients. Shelton's most sought-after coverage from Imperium for each of the cases. Imperium initially provided a defense during a reservation of its rights but later filed two declaratory-judgment actions in federal court, seeking a declaration that coverage was excluded by the policy's prior-knowledge exclusion or, alternatively, that the policy may be rescinded due to material misrepresentations made in Shelton's application for insurance coverage. The district court granted summary judgment in favor of Empire in both cases.

The insurance policy that issue in these appeals is a claims-made policy. The policy provides coverage for malpractice claims arising out of "wrongful acts" committed by the insured. The policy excludes, however, coverage for claims arising out of wrongful acts prior to the effective date of the policy if the insured "knew or could have reasonably foreseen" that the wrongful act for which coverage is sought "might be expected to be the basis of a claim. ”

On January 8, 2013, less than a year after the errors that resulted in the two lawsuits were made, Shelton completed his application for malpractice insurance with Empire. He represented his application, after inquiry, neither he nor any of his attorneys were aware. . . of any legal work or incidents that might reasonably be expected to lead to a claim or suit against them. ”

Despite having several months to settle against a Viox manufacturer, the Shelton Defendants failed to submit the required documentation. the deadline

Imperium separately filed two declaratory-judgment actions in federal court, seeking a declaration that the Shelton Defendants were not covered under the policy. Following discovery, Imperium moved for summary judgment, arguing that the policy's prior knowledge exclusion applies and, alternatively, that Empire is called the policy due to Shelton's failure to disclose the potential Tyler and Chism claims in the insurance application. The district court granted Empire's exercise. In addition, insured seeking to recover from a claim of bad faith must first establish the existence of coverage on the underlying claim, the district court also granted summary judgment in Imperium's favor, denying Shelton's bad-faith counterclaims.

ANALYSIS [19659011] A federal district court has subject matter jurisdiction over a state claim when the amount is in controversy with and there is complete diversity of citizenship between the parties. In a declaratory judgment action, the amount in controversy is the value of the right to be protected or the extent of the injury to be prevented. In the case of declaratory judgment regarding insurance coverage, the object of the litigation is the policy and the value of the right to be protected is the potential liability under that policy. In determining the amount in controversy, the court includes the policy limits, potential attorney's fees, penalties, statutory damages, and punitive damages. The burden is on the part of federal jurisdiction to prove, by a preponderance of the evidence, that the jurisdictional amount is controversial with [anditisplainthattheFifthCircuithadsubjectmatterjurisdictionovertheTyleractionAlthoughtheChismpresentedalesseramountinthedepositionofKarenCavinesstherepresentativeofChism'sestateherelawyerexpresslystatedthatthevalueoftheestate'sVioxxclaimwas$200000NeitherpartydisputedthisamountThepartiesadmittedinpleadingsthattheamountisincontroversywith

Rescission

Mississippi law applies in this diversity case. Under Mississippi law, if an applicant for insurance is found to have made a mistake of material fact in the application, the policy that is based on the false application is referred to as void or rescind the policy. Whether the misrepresentation was intentional, negligent, or the result of mistake or oversight is of no consequence.

In January 2008 the Shelton Defendants informed the court that Tyler had "no response to all" to AFC's motion to which the discovery requests admitted . Imperium argued that there is no dispute of fact that any reasonable attorney with awareness of the above facts would conclude that a claim claims "might reasonably be expected."

The Fifth Circuit held that, under the facts every reasonable attorney aware of these facts would know that such facts might reasonably be expected to lead to a claim or suit. The Mississippi Supreme Court, in particular, found "damning" the statements of the Shelton attorney at the hearing to have the requests admitted. Instead of objecting that service was improper, the attorney stated, "Your honor, [Tyler] has no response, no response at all, your Honor." The state court entered summary judgment on the basis of the admissions and lack of response. 19659002] Therefore, Shelton made a misrepresentation when he represented that he was not aware of any “legal work or incidents that might reasonably be expected to lead to a claim or suit.” In Mississippi, a misrepresentation in an insurance application is material if knowledge of the true facts would have influenced a prudent insurer in determining whether to accept the risk. In fact, material if it might have suffered a prudent insurer to decline the risk, accept the risk only for an increased premium, or otherwise refuse to issue the exact policy requested by the applicant. Empire is deposited with evidence from the insurance agent who procured the insurance policy for Shelton. The agent testified that, had known Imperium of the Tyler facts, "it would have either endorsed approval pending and incident exclusion, higher premium or denial to write the risk at all."

In sum, because Shelton made a material misrepresentation in his application for insurance by failing to disclose the potential tyler claim, empire is called the policy and the district court judgment in favor of imperial in the tyler matter is affirmed.

Either Shelton was a lawyer in name only and had insufficient knowledge to expect a malpractice claim after such egregious misconduct by the lawyers in the firm or intentionally misrepresented material facts when he applied for the insurance. Regardless, the insurer, Empire, was issued and issued a policy that would not have been issued on the same terms, or that all, if Shelton had honestly responded to the application question. The policy was, therefore, void from its inception and in the underlying actions are limited to recover whatever assets Shelton or the Shelton have available to pay.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for reading, and conveyed the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance, 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 50 years in the insurance business. 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

About the last 51 years Barry Zalma has dedicated his life 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.

Insurance claims professional and expert witnesses Kevin Quinley said about the following volumes: “Zalma's series of books is a terrific blend of both the legal underpinnings and the practical implications for the claim practitioner. Insurance Maven Bill Willson said: "Zalma On Insurance Claims" is a tour de force, an indispensable tool that should be a part of every claims training program in America and in the library of every claims professional for quick and frequent reference. This comprehensive guide is in the library of every insurance defense and policyholder law firm. It should be part of every claims training program of carriers, independent adjusting firms, and public adjusters.


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