CONTINENTAL CAS. CO., v. LAW OFFICES OF MELBOURNE MILLS JR. (D.C. Ken., Mar. 16, 2010)

Mills and several other attorneys represented a group of over 400 plaintiffs seeking damages from American Home Products Corporation and others for injuries arising out of the use of a diet drug, Fen-Phen. Mills’ fees for the Fen-Phen action were governed by contingency fee contracts with each of his clients which limited his fees to 30% of his clients’ gross recovery. In May 2001, following a successful mediation, the Fen-Phen action was settled, resulting in Mills receiving $23 million in fees.

In February 2002, Mills became aware that the Kentucky Bar Association was investigating bar complaints filed against him in connection with the Fen-Phen litigation. Mills admitted that he was aware of the bar complaint as early as February 4, 2002. Shortly thereafter, on February 11, 2002, counsel for Mills attended a hearing of the Bar Association’s Inquiry Commission with respect to a subpoena served on Mills in January or February 2002.

On April 21, 2003, Mills filed an application for renewal of his professional liability policy for the period of 2003 to 2004. In completing the renewal application, Mills denied the existence of any acts or omissions that may reasonably be expected to form the basis of a claim against the firm and likewise denied that any attorney had been subjected to any disciplinary inquiry, complaint, or proceeding. In 2005, plaintiffs from the Fen-Phen action asserted legal malpractice claims against Mills and others in the case.

The insurer subsequently filed the instant coverage action seeking a declaration that the policy was void ab initio based upon a material misrepresentation in the policy application. The court noted that in order to rescind the policy, the insurer must demonstrate that a misrepresentation was material to the acceptance of the risk or the insurer in good faith would either not have issued the policy or would not have issued it at the same premium rate.

Here, the court held that Mills’ answer to the question concerning disciplinary inquiries was clearly a misrepresentation as he knew a bar complaint had been filed against him in early 2002, a year prior to applying for coverage. The court stated that the fact there was an ongoing inquiry into Mills’ actions with respect to the Fen-Phen claim is precisely the type of information the insurer needed to evaluate as potential for a current and future risk. Accordingly, the court upheld the lower court’s determination that the policy was void ab initio and the insurer was not required to provide coverage for the underlying action.
Impact: Here, the insurer had the benefit of significant evidence establishing the existence of the applicant’s knowledge of the disciplinary inquiry well before the application was completed.

Oftentimes, material misrepresentation cases are based upon conjecture or non-party statements, rendering the defense difficult to prove. In this case, there was direct, tangible evidence that the policyholder was aware of a disciplinary proceeding as well as potential claims well before applying for coverage. Proving a material misrepresentation defense is always a two step process requiring both the existence of a misrepresentation and evidence that the knowledge of the correct facts would have affected the insurer’s decision bind coverage.

For a copy of this decision, click here: http://insurancecoverage.typepad.com/insurance_and_reinsurance/2010/04/cases-for-professional-liability-monthly-april-edition.html