The opinion of the court was delivered by: Robert W. Sweet, Senior District Judge.
Plaintiff Chicago Insurance Company ("CIC") initiated this action against defendants Kreitzer & Vogelman ("K&V"), David N. Kreitzer ("Kreitzer"), Donald H. Vogelman ("Vogelman"), Daniel W. Pariser ("Pariser") and Pariser and Vogelman ("P&V") (collectively the "Defendants"), seeking a declaratory judgment that CIC properly rescinded two lawyer's professional liability insurance policies (the "Policies") issued to K&V on the ground that the applicant made material misrepresentations to induce CIC to issue the Policies. The Defendants have denied that CIC is entitled to rescind the Policies and filed a counterclaim requesting a judgment that CIC has a duty to defend and indemnify the Defendants under the terms and conditions of the Policies. After a trial before the Court and upon all the prior proceedings and the findings and conclusions set forth below, judgment will be granted in favor of CIC, as set forth below.
Two questions were at issue at trial. First, and more easily, CIC sought to prove that Kreitzer's failure to document his disciplinary troubles and a number of potential claims on his application for insurance were material, i.e., whether the knowledge there of would have resulted in CIC not issuing the particular Policies.
The second question is more difficult. The Defendants argue that CIC has waived its ability to rescind the Policies by accepting a premium after it had knowledge of a number of actual claims filed against K&V and at least one employee had knowledge that Kreitzer had been suspended from practice. In addition, they argue that waiver occurred because CIC acted unreasonably in waiting from Spring of 1997 until November 1997 to rescind the Policies. The Defendants also argue, alternatively, that CIC should be estopped from rescinding the Policies because of detrimental reliance they have suffered.
The real problem, it seems, began in December 1994 when Kreitzer failed to be perfectly honest about his difficulties. Had he properly filled out the application, CIC potentially would have rejected it, at which time he might have had the opportunity to purchase tail coverage from his former insurer. Alternatively, Kreitzer could have paid a higher premium and faced greater restrictions, but he would have had insurance coverage from CIC. Unfortunately, given Kreitzer's behavior and the fact that CIC acted within the bounds of reason in its decision to rescind, it must be found that Kreitzer had no right to the Policies and, likely, that his former clients who now seek recompense for Kreitzer's behavior will not receive their due. Although it is easier said than done, forthrightness from the very beginning would have saved Kreitzer — and his former clients — a great deal of time, trouble and money.
This action was commenced on November 19, 1997. The Defendants filed their counterclaim on January 27, 1998.
CIC moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure and Local Rule 56.1 on May 3, 1999. Several of the defendants cross-moved for summary judgment on the same date. The motions, which were marked fully submitted after oral argument on September 15, 1999, were both denied on January 10, 2000. In the opinion, it was held that CIC had failed to establish that no issue of fact was presented regarding the materiality of the misrepresentations. Because CIC improperly relied only on the conclusory affidavit of an underwriter without reference to supporting documentation such as manuals, rules or bulletins, CIC's motion was denied. The Defendants' motion was also denied, based on a finding of a triable issue of fact with regard to the timing of CIC's rescission under a theory of estoppel or waiver.
CIC filed another summary judgment motion on January 9, 2002, and the Defendants cross-moved on March 19, 2002. On July 2, 2002, those motions were denied. CIC's motion was denied for primarily the same reason as discussed above, in that it had merely submitted the affidavit of an underwriter without any recourse to supporting documentation. Similarly, the Defendants' motion on the waiver claim was again denied based on a finding of a material issue of fact as whether a waiver occurred. Because the Defendants failed to object to CIC's motion to dismiss the estoppel claim, however, that claim was dismissed.
On March 27, 2003, pursuant to a stipulation, the action was discontinued as against defendants Pariser and P&V.
A bench trial was held on March 31, 2003. CIC called two witnesses: Diane Fiel, who was in charge of CIC's underwriting operation regarding legal malpractice policies during the relevant time ("Fiel"); and Sharon Eure Burns, a claims attorney manager at CIC. The Defendants called Kreitzer as their sole witness. Post-trial briefing and final arguments were completed on April 30, 2003.
The following constitute the findings of fact of this Court and are based upon the trial, exhibits, and the proposed findings of facts from the parties.
CIC's Foray into Legal Malpractice Coverage
CIC began underwriting legal malpractice policies in early 1995 after Bertholon-Rowland Corporation ("Bertholon"), the 5 managing general agent for the Home Insurance Company of Indiana ("Home Insurance"), approached CIC to take over the New York State Bar Association's program that was previously underwritten by Home Insurance. The program involved more than 10,000 policies worth more than $40 million annually in premiums. As part of the agreement, CIC agreed to renew as many of the Home Insurance insureds as possible for the first year of the program.
CIC's underwriting guidelines dated January 23, 1995 state as follows, in pertinent part:
Renewal Business Underwriting
The renewal evaluation process needs to begin at least
120 days before expiration. In reviewing those accounts,
the following criteria will apply:
• Renewal application at least 120 days before
expiration date. The Company approved solicitation
letter MUST accompany the solicitation. The
solicitation letter will outline any changes in
form or rate since the last renewal.
• Renewal applications may be used with current Home
Underwriting Guidelines, at 12.
On December 30, 1994, Kreitzer executed and delivered to CIC an application (the "Application") on behalf of K&V for a lawyer's professional liability insurance policy for claims during the period of March 26, 1995 to March 26, 1996 (the "1995 Policy").
The Application states in bold type on the first page that "THIS IS A RENEWAL APPLICATION FOR CLAIMS MADE AND REPORTED PROFESSIONAL LIABILITY POLICY." The Application was on a Home Insurance form and bore the name of Home Insurance and the Home Insurance logo on the first page. The Application stated that it would be incorporated in and become a part of any insurance policy issued pursuant to the Application.
The Application was referred by CIC's agent, Bertholon, to CIC for underwriting purposes due to the fact that the Application reported several actual claims against K&V. CIC was not bound by certain underwriting guidelines furnished by CIC to Bertholon when it reviewed the Application for underwriting purposes.
In reliance on the Application, CIC issued the 1995 Policy, bearing number LWB-3007068-0, on October 2, 1995. At the time of its issuance, CIC was aware of four claims against K&V, one of which was more than five years old and thus disregarded. The amount of liability for two of the three remaining claims totaled $126,000. Because of these claims, CIC increased the premium by 10%.
In the Application, Kreitzer did not disclose that there were approximately twenty-eight potential claims. Kreitzer also 7 did not disclose that there were charges filed against him with the Departmental Disciplinary Committee for the Appellate Division of the Supreme Court of the State of New York for the First Judicial Department (the "Disciplinary Committee"). In fact, he left blank the answer to the ...