In its recent decision in ALPS Prop. & Cas. Ins. Co. v. Turkaly, 2018 U.S. Dist. LEXIS 5026 (S.D. W.Va. Jan. 11, 2018), the United States District Court for the Southern District of West Virginia had occasion to consider the circumstances under which rescission of an insurance policy is permissible under West Virginia law.
ALPS insured Michael Turkaly under a series of claims made lawyers professional liability policies. The first policy was in effect for the period September 1, 2015 to August 31, 2016, and the renewal policy became effective upon the expiration of the first policy. Mr. Turkaly stated in his renewal application that he was unaware of any facts or circumstances that could give rise to a claim. Two weeks later, he affirmed in writing that his answers in the renewal application remained true. In fact, Mr. Turkaly had received a request in July 2016 to waive service of a legal malpractice lawsuit filed against him. While he had not been served as of the date that he completed his renewal application, he had been served by the time he affirmed his answers in the renewal application.
In considering ALPS’ claim for rescission, the court observed that under West Virginia law, rescission is governed by W. Va. Code § 33-6-7, which states that misrepresentations shall not prevent recovery under an insurance policy unless the misrepresentations are fraudulent or material, or unless the insurer can demonstrate that it would not have issued the policy, or would have issued the policy on different terms, had it known the true facts. To prevail based on fraud, the insurer is required to demonstrate specific intent to deceive. By contrast, to prevail based on the two other grounds, the insurer need only demonstrate that the misrepresentation was “material.” The standard for demonstrating materiality, as set forth by the West Virginia Supreme Court, is an objective analysis looking to “whether the insurer in good faith would either not have issued the policy, or would not have issued a policy in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as required either by the application for the policy or otherwise.”
Applying these criteria, the court concluded that Mr. Turkaly made two misrepresentations to ALPS: the first in stating that it was not aware of circumstances that could give rise to a claim and the second in reaffirming this representation two weeks later. The court concluded that these misrepresentations were material, reasoning:
… it is fair to conclude that a reasonable insurer would have taken alternative action in offering Michael Turkaly insurance coverage had it known that Michael Turkaly was being sued for mismanaging a trust as a trustee. A reasonably prudent insurer would consider a claim related to a lawyer’s actions as a trustee, whether or not that claim is covered by the policy, relevant to the risk and therefore material to the insurance contract providing professional liability coverage.
The court, therefore, declared the policy to be void ab initio. As a result, ALPS had no coverage obligations to Mr. Turkaly for the underlying suit. At the same time, ALPS was not entitled to return of defense costs it had incurred in defending Mr. Turkaly in the underlying matter.