In Blum Collins LLP, et al. v. NCG Professional Risks, Ltd., et al., No. 2:12-cv-08996 (C.D. Cal. July 31, 2014), the US Court for the Central District of California, applying California law, granted summary judgment to the insurer, finding no coverage for an underlying professional negligence claim where the insured law firm made a material misrepresentation in its policy application.

In connection with the underlying claim, Cynthia Beck retained Craig Collins, in his capacity as a partner of the Collins Law Firm, to represent her in a property dispute.  Prior to entry of judgment in that dispute, Beck and Collins ended their attorney-client relationship and entered into tolling agreement so that Beck could “evaluate her assertions of malpractice and her potential damages.”  About a month later, in October 2007, judgment was entered against Beck in the property dispute.   

Less than a year later, in July 2008, Collins, in his capacity as a partner of the law firm Blum Collins, applied for professional liability insurance with Lloyd’s London (Lloyd’s).  In completing the policy application, Collins denied being aware “of any circumstances, allegations, tolling agreements or contentions as to any incident which may result in a claim being made against the Applicant or any of its past or present Owners [or] Partners. . . .”  The policy application expressly stated that Lloyd’s could deny coverage if it determined that any material information was omitted or misstated in the application. 

Lloyd’s issued a professional liability policy to Blum Collins.  The policy provided that Lloyd’s could deny coverage for “any Claim arising out of any acts, errors, or omissions which took place prior to the effective date of this insurance, if any Assured on the effective date knew or could have reasonably foreseen that such acts, errors or omissions might be expected to be the basis of a Claim.”  Exclusion (l).

The judgment against Beck was affirmed on appeal.  Beck later brought a malpractice suit against Collins and Blum Collins, seeking approximately $7 million in damages.  Lloyd’s denied coverage on the Beck claim, citing Collins’s answer to Question 10.C and Exclusion (l).  Blum Collins and Collins (d/b/a Collins Law Firm), in turn, brought suit against Lloyd’s, alleging breach of insurance policy, breach of duty of good faith and fair dealing, fraud, and declaratory relief.

The district court granted summary judgment in favor of Lloyd’s, agreeing with the insurer that Plaintiffs’ answer to Question 10.C was an omission or misstatement.  Among other arguments, the court soundly rejected Plaintiffs’ assertion that Collins’s agreement with Beck—which effectively tolled the statute of limitations on any legal malpractice claim—did not put Plaintiffs on notice of a potential claim against them.  Plaintiffs effectively contended that they had no notice of the claim until Beck served her complaint.  This argument, reasoned the court, ignored the plain language of the agreement between Collins and Beck, which expressly referenced the evaluation of “her assertions of malpractice and her potential damages.”  The court held that the agreement with Beck “unequivocally gave plaintiffs notice that there were contentions that ‘may result in a claim’ against one of the ‘Owners [or] Partners’ of Blum Collins.” 

The court found it “obvious” that the misstatement or omission was material.  Under California law, “the fact that the insurer has demanded answers to specific questions in the application for insurance is in itself usually sufficient to establish materiality as a matter of law.”  Further, Lloyd’s provided evidence that a truthful answer to Question 10.C would have altered whether it would have insured Blum Collins and the coverage offered, namely that Lloyd’s does not cover known losses.  The court also concluded that Exclusion (l), among other exclusions relating to whether the policy covered Collins’s work for Beck, applied to deny coverage. 

In sum, the district court concluded (1) that the plain language of what was effectively a tolling agreement with the ex-client put Blum Collins on notice that a claim could be made against one of its partners and (2) that Blum Collins failed to present this material information to the insurer—information that plainly would have impacted the insurer’s decision to issue the policy and the coverage it would offer.  As a result of Collins’s misrepresentation in the policy application, the district court held that Blum Collins and Collins had no entitlement to coverage for Beck’s malpractice claim.