In an action for rescission of a professional liability policy, Maine’s highest court recently held that an insurer must prove both fraud and materiality as well as actual reliance. In that case, Liberty Insurance Underwriters, Inc. v. Estate of Faulkner, Yor-07-180 (Me. Oct. 7, 2008), a attorney allegedly made misrepresentations in his 2003 application for a lawyer’s professional liability insurance policy when he responded “no” when asked if he had “ever been disbarred or been the subject of reprimand, censure, sanction, or other disciplinary action” by the Bar. In fact, the attorney had been the subject of a disciplinary action by the Grievance Commission of the Maine Board of Overseers of the Bar in 2002 pursuant to which he had been reprimanded for violating three rules of the Maine Bar. After the attorney died, several former clients made claims against his estate for alleged breaches of professional responsibility. In response to the claims, the insurer filed a declaratory judgment action seeking to rescind the policy based on the attorney’s misrepresentations. The trial court sought guidance from the Supreme Judicial Court (technically “reported questions” to the court) on the issues, among others, of whether the insurer had to prove (1) that the misrepresentation was both fraudulent and material; and (2) that the insurer actually relied on the misrepresentation.

The high court analyzed Section 2411 of Maine’s Insurance Code and held that the statute requires an insurer to prove both fraud and materiality in an action for rescission of an insurance policy. It also held that an insurer must show actual reliance in order to rescind a policy.

The court also held that Section 2411 permits rescission of a renewed professional liability policy based on a misrepresentation in the original application for insurance.

Click here to read the decision.