Florida Court Allows Rescission of a Professional Liability Policy

In its recent decision in Zurich American Ins. Co. v. Diamond Title of Sarasota, Inc., 2013 U.S. Dist. LEXIS 170981 (M.D. Fla. Dec. 4, 2013), the United States District Court for the Middle District of Florida had occasion to consider whether an insured’s guilty plea can be used as the basis for rescission of a professional liability policy.

Zurich insured Diamond Title under a title agent’s errors and omissions policy issued in 2007.  The owner/operator of Diamond Title was later indicted on several counts of mortgage fraud, conspiracy, bank fraud, wire fraud, and making false statements in connection with a loan application.  She later pled guilty to two counts, including conspiring to make materially false statements to banks and that she committed several acts of wire fraud.  Her plea agreement stated that the conspiracy ran from 2002 through 2008, the purpose of which was “to obtain loans secured by mortgages from FDIC-Insured banks and mortgage lending businesses.” 

Diamond Title was named as a defendant in an underlying suit relating to its duties as an escrow agent involving the purchase of distressed residential properties.  The suit alleged that Diamond Title negligently released money without prior authorization.  Zurich, in turn, sought rescission of the policy on the basis of material misrepresentations made in the insurance application.  Among other things, the application asked:

Does the Applicant or any prospective Insured know of any circumstances, acts, errors or omissions that could result in a professional liability claim against the Applicant? If "Yes", you must complete the attached claims addendum for each circumstance.

Zurich contended that at the time Diamond Title’s owner completed the application in 2007, and answered “No” in response, she was knowingly committing mortgage fraud and that she confirmed as much in her later plea agreement.   As such, Zurich maintained that Diamond Title should have answered “Yes” in response to the question.  The underlying claimant (named as a party to the rescission action), however, argued that Diamond Title’s response was truthful, since while at the time it was aware that it was committing criminal misconduct, it could not necessarily foresee civil liability for its actions.  In this connection, the claimant pointed out that the question inquired into acts that could result in professional liability claims, not criminal acts that would not come within the policy’s coverage in the first instance.   

Noting that the misconduct described in the plea agreement came within the policy’s definition of professional services, the court rejected the attempt to distinguish criminal misconduct from conduct that could give rise to a professional liability claim, explaining:

… the Court disagrees with the Defendant's assertion that criminal acts cannot result in claims for professional liability. A single act can be a basis for both professional and criminal liability. The Policy makes clear that it does not cover liability for criminal acts, even if they are properly characterized as professional liabilities. Rotolo [the owner of Diamond Title] was not relieved of her duty in the application to report acts that could result in a professional liability claim simply because the Policy may not have covered those acts. The Court concludes that Diamond Title's answer to question 21 of the Policy application, that it did not know of any circumstances that could result in a professional liability claim, was a misrepresentation.

The court further reasoned that the misrepresentation was material to the risk.  While the underlying claimant argued that Zurich failed to point to any underwriting guidelines applicable to the facts, the court relied on common sense reasoning that the insured’s failure to disclose a criminal conspiracy was material.  As the court explained:

The Court does not need an underwriter or guidelines to appreciate how not knowing Rotolo and her employee had been committing mortgage fraud in excess of five years left Zurich unable to adequately estimate the nature of risk in issuing the Policy. … As previously discussed, many of these acts could have resulted in claims against the Policy. An objective insurer may not have issued a policy at all. Certainly a policy would not have been issued under the same terms and pricing knowing that Diamond Title was engaged in an ongoing scheme to commit mortgage fraud.