New Hampshire Supreme Court Overturns Rescission of Insurance Policy

In its recent decision in Great American Insurance Co. v. Christy, 2012 N.H. LEXIS 126 (N.H. Sept. 28, 2012), the Supreme Court of New Hampshire had occasion to consider whether an “innocent insured” provision in a legal malpractice policy precluded rescission of that policy, despite clear evidence that at least one insured failed to disclose information material to the risk in the policy application.

The insured law firm, Christy & Tessier, P.A., included attorneys Robert Christy and Thomas Tessier, partners for over forty-five years.  In 2001, Tessier was retained by a cousin to handle the probate administration of his aunt’s estate.  Over a five-year period, Tessier fabricated numerous documents as part of a scheme to misappropriate funds from the estate as well as from his cousin’s own personal bank accounts.  While there was no evidence that Christy was aware of these thefts, Christy did falsely notarize various documents Tessier, not knowing that these documents assisted Tessier in perpetuating his scheme.  In all, Tessier misappropriated over $1.5 million combined from his aunt’s estate and from his cousin’s personal accounts.  The scheme was discovered in 2006, and Tessier’s cousin asserted a claim against Tessier in October 2006.  In April 2007, Tessier entered into a settlement agreement with his cousin whereby he agreed to repay his debts pursuant to a payment plan.  In September 2007, however. Tessier advised that he would be unable to pay his debt.  It appears that Christy was unaware of the claim or of the settlement.

Christy & Tessier were insured under successive professional liability policies issued by Great American Insurance Company (“GAIC”) from 2001 to 2007.  The firm submitted an application for a renewal for the 2007-2008 policy period on May 22, 2007, which was subsequent to Christy’s settlement agreement.  Question 6(a) of the application asked:

After inquiry, is any lawyer aware of any claim, incident, act error or omission in the last year that could result in a professional liability claim against any attorney of the Firm or a predecessor Firm?

The application was completed and signed by Robert Christy, who answered “No” in response to this question. Notably, the application contained the following acknowledgment near the signature line:

The undersigned proprietor, partner, member, or officer, acting on behalf of the applicant, and all other proposed Insureds, hereby declares after diligent inquiry that the above statements are true and that no material facts have been suppressed or misstated.

Christy testified that he when completing the application, he asked Tessier whether he was aware of any information that should be disclosed, and Tessier told him there was none.  GAIC sought a rescission of the 07-08 policy when it subsequently learned of Tessier’s misappropriations and the settlement, as well as Christy’s improper notarizations.

Following a hearing, a trial court granted GAIC’s demand for rescission of the policy, concluding that the firm’s response to question 6(a) was false since Tessier knew of a claim against him as early as 2006.  The trial court concluded that Christy’s lack of knowledge was not a defense, explaining that:

[e]ven though Christy’s answer to the question and his subsequent declaration on the application were unwittingly false, the question on the application did not pertain solely to Christy’s knowledge but rather to the knowledge of ‘any lawyer’ at the law firm …  Accordingly, Tessier’s knowledge was imputed to Christy and the other insureds.

As such, and having concluded that the misstatements were material to GAIC’s decision to issue the policy, the trial court agreed that GAIC was entitled to a rescission of the policy.

On appeal, the Supreme Court of New Hampshire expressed its concern in imputing Tessier’s knowledge to Christy.  The court found support for its concern in the following “innocent insured” provision in the policy:

B.  Waiver of Exclusion (Innocent Insured) and Breach of Conditions: Whenever coverage under any provision of this policy would be excluded, suspended or lost

                                                *          *          *

2.   because of non-compliance with Section VII, Claims, subsection A, Notice of Claims relating to the giving of notice to the Company with respect to which any other Insured shall be in default solely because of the default or concealment of such default by one or more Insureds responsible for the loss or damage otherwise insured hereunder,

the Company agrees that such insurance as would otherwise be afforded under this policy shall apply with respect to each and every insured who did not personal participate in committing one or more of the acts, errors or omissions described in either such exclusion or such condition … .

While this provision, on its face, was limited to giving notice of claims to GAIC, and served to protect one insured in the situation where another insured conceals information, the court observed a broader principle in the policy to protect innocent insureds.  The court believed Christy was precisely such an innocent insured when completing the policy application as Tessier withheld information that should have been disclosed.

GAIC pointed out that the application inquired whether any prospective insured was aware of facts that that could give rise to a claim, not just whether Christy was aware of such facts.  GAIC further argued that the innocent insureds language in the policy did not apply to the policy application.  The court did not agree, explaining:

It is not clear, however, that the policy provision excluding imputed knowledge to innocent insureds does not apply to giving notice on the Shortform Application.  Thus, in the absence of language specifically imputing knowledge to innocent insureds of false statements made on the Shortform Application, the contract read as a whole is ambiguous.

In light of this ambiguity, the New Hampshire Supreme Court concluded that the lower court erred as a matter of law on the issue of rescission.  The matter was, however, remanded for further findings on whether application of any other coverage defenses operated to preclude coverage.