Don't Overlook The Legal Malpractice Insurance Application

As part of the process of renewing or replacing legal malpractice insurance, law firms are typically required to complete an application. Law firms that treat the application as a formality and fail to give the application the proper amount of consideration, do so at their own risk. Indeed, an inaccurate response on the application can lead to severe consequences for the firm.

The types of questions on an insurance application vary based on a variety of factors. Typically, the first application for insurance from an insurer is likely to be much more extensive than an application for the renewal of a policy. In an initial application, the insurer often seeks background information regarding the firm's practice that the insurer will use in deciding whether to issue a policy and in setting an appropriate premium for the coverage.

A renewal application, on the other hand, typically asks whether any information has changed from the time the firm submitted the initial application that may affect the nature of the risk insured by the insurance company, such as the size of the firm or its main practice areas. The renewal application will also ask whether the firm has anything else new to report regarding claims or potential claims.

While the applications may look different, the consequences for an incorrect answer can be the same for both initial and renewal applications. In particular, a misrepresentation on a policy application may justify the rescission of that policy, leaving the firm with no insurance coverage for a claim. Indeed, under California law, an insurer seeking to rescind a policy usually need only show that a misrepresentation was made and that the misrepresentation was material to the insurer's decision to issue the policy. Notably, it is typically not a defense that the misrepresentation was unintentional.

Innocent Insureds

Even more frightening is the fact that rescission typically applies to the policy in its entirety, and thus attorneys who did nothing wrong and who had no part in completing the application can lose coverage. Section 650 of the California Insurance Code specifically provides that, unless the policy states otherwise, "rescission shall apply to all insureds under the contract."

The severe consequences of a misrepresentation were on display in a recent decision by the Illinois Supreme Court. In that case, the insured lawyer completed the firm's malpractice renewal application but failed to disclose a potential...