On appeal from the Superior Court of New Jersey, Law Division, Passaic County, Docket Nos. L-4792-00, L-4778-00, and L-4776-00 (consolidated).
Before Judges Pressler, Parrillo and Fuentes.
The opinion of the court was delivered by: Parrillo, J.A.D.
REVISED OPINION FROM JUNE 4, 2002
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Appellant Certain Underwriters at Lloyds, London (Lloyds) brought an action seeking a declaration that the professional liability insurance policy it issued to the law firm of Wheeler, Lawson & Snyder, L.L.P. (law firm) and its individual partners was rescinded or, alternatively, provided no coverage for claims of professional malpractice asserted by two title insurers, First American Title Insurance Company and Lawyers Title Insurance Corporation (collectively, "title insurers") against the law firm and its partners. The trial court denied Lloyd's motion for summary judgment, finding that Lloyds was not entitled, as a matter of law, to rescind its professional liability policy ab initio based upon material misrepresentations in the insurance application; that Lloyds' policy had not been effectively cancelled; and that Lloyds' policy is a policy of primary insurance and does not exclude coverage for claims of negligence against the law firm, as a separate legal entity, and one of its partners, Snyder, both as "innocent insureds." We granted leave to appeal and now reverse. We hold that, under the circumstances, where a partner, acting with authorization and on behalf of his law firm, makes a material misrepresentation on an insurance application, the insurer is entitled to rescission as a matter of law.
The facts are not really in dispute. Edward Lawson, Kenneth Wheeler, and Craig Snyder formed a law partnership and, on August 6, 1997, filed a certificate of registration with the New Jersey Secretary of State for a limited liability partnership, Wheeler, Lawson & Snyder, L.L.P. Wheeler was licensed to practice law in Connecticut and the District of Columbia, but not in New Jersey. Lawson, a New Jersey licensed attorney, and Wheeler, worked at the law firm's principal office in Guttenberg, New Jersey; Snyder, a New York-licensed attorney, worked at the law firm's Manhattan office. Wheeler was the listed registered agent at the partnership's principal address.
The law firm maintained both a business operating account and an attorney trust account, both at Summit Bank. Wheeler, Lawson, and Snyder were all signatories on the business account, but only Wheeler and Lawson were signatories on the law firm's trust account. Essentially, Wheeler was responsible for opening all the bank accounts and for maintaining the books and records of the law firm.
As early as December 1996, Wheeler engaged in the unauthorized practice of law in New Jersey in connection with a number of real estate transactions in the State. Around the same time, Wheeler began misappropriating client trust funds in connection with these real estate closings. Between January and August 1997, Wheeler wrote checks to himself from the law firm's trust accounts totaling at least $5900, and cashed them.
Wheeler's unauthorized practice of law in New Jersey continued through 1998 and into the early part of 1999. For instance, on March 26, 1998, while a partner at the law firm, Wheeler acted as the closing attorney on the refinance of Lawson's condominium in Guttenberg. The closing papers identify him as an attorney-at-law in New Jersey. On April 15, 1998, Wheeler acted as the closing attorney when a law firm client, Joseph Ellis, refinanced his home in Newark. In January 1999, Wheeler acted as the closing attorney for property that Lawson himself was purchasing in Mahwah, New Jersey. Wheeler signed the title closing statement for Lawson and his wife.
At the end of 1997 or beginning of 1998, Lawson discovered Wheeler's misappropriation of client funds, including those of Lawson's mother, Elaine Lawson. When confronted, Wheeler admitted his wrongdoing:
[Wheeler] explained to me what was happening. That we weren't making any money, and his plan was to - and I adopted the plan to generate a large sum of money so that we could pay back all the trust accounts, including my mother's, and then we were going to disband the firm.
The two partners then devised a "kiting" scheme whereby monies from one client trust account would be transferred to pay the obligations of another client. Monies were also being transferred from client trust accounts to the law firm's business account to pay expenses of the law firm, including partners' draws. On occasion, Lawson also used client trust account funds, including those of his mother, for his own personal use. By all accounts, Snyder was neither privy, nor a party, to this scheme.
At the same time, on December 4, 1997, Wheeler, on behalf of the law firm, completed an application for professional liability insurance subscribed by Lloyds. The initial application included questions designed to determine whether the prospective insured had any potential or actual malpractice claims expected, threatened or pending against the law firm. The relevant inquiry is set forth below:
After inquiry, is any attorney in your firm aware of:
(a) Any professional liability claims made against the firm or any member of the firm within the past 12 months?
(b) Any acts, error or omissions in professional services that may reasonably be expected to be the basis of a professional liability claim?
(c) Have all claims and/or incidents been reported to CNA?
If "Yes" to either 8a or b, please complete Supplemental ...