American Guarantee & Liability Insurance v. Jaques Admiralty Law Firm, P.C.

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 05a0008n.06
Filed: January 4, 2005

No. 03-2170

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

AMERICAN GUARANTEE & LIABILITY )
INSURANCE COMPANY, )
)
Plaintiff-Appellee, )
) ON APPEAL FROM THE UNITED
v. ) STATES DISTRICT COURT FOR THE
) EASTERN DISTRICT OF MICHIGAN
THE JAQUES ADMIRALTY LAW FIRM, )
P.C., )
)
Defendant-Appellant, )
)
THE ESTATE OF LEONARD JAQUES )
)
Defendant. )

Before: NELSON and COOK, Circuit Judges; and SARGUS, District Court Judge*

COOK, Circuit Judge. The Jaques Law Firm appeals the district court’s decision allowing

American Guarantee and Liability Insurance Co. to rescind the Firm’s professional liability

insurance policy. We affirm.

I

*
The Honorable Edmund A. Sargus, Jr. United States District Judge for the Southern District
of Ohio, sitting by designation.
No. 03-2170
Am. Guar. and Liability v. Jaques Admiralty Law Firm

The Firm, comprised of approximately eleven attorneys—including Leonard Jaques who

was the Firm’s President, sole director, and majority shareholder—sought professional liability

insurance from American. The insurance application asked: “Does any lawyer . . . know of any

circumstances, acts, errors or omissions that could result in a professional liability claim against any

attorney of the firm, the firm, or its predecessors?” The Firm’s Vice President, who completed the

application on its behalf, checked the “No” box next to the question and typed the following

additional answer: “We have no reasonable expectation of any claims; however it is always possible

on any file for someone to bring a frivolous or groundless action.” American issued the requested

policy, and the Firm later applied for a renewal. The renewal application asked whether any

attorney was “aware of any claim, incident, act or omission in the last year which might reasonably

be expected to be the basis of a claim or suit arising out of the performance of professional service

for others.” Again, the firm responded with a “No” answer, and American renewed the coverage.

Before the renewal policy expired, Leonard Jaques died unexpectedly. Following his death,

the other attorneys in the Firm discovered that, since 1995, Leonard Jaques had misappropriated

more than $15,000,000 of settlement funds owed to clients.

Arguing that Leonard Jaques’s knowledge of potential liability rendered the Firm’s

application responses material misrepresentations and seeking to rescind the insurance policy,

American sued the Firm.

-2-
No. 03-2170
Am. Guar. and Liability v. Jaques Admiralty Law Firm

The district court agreed that the Firm’s applications materially misrepresented that no

attorney knew of circumstances giving rise to liability and granted American’s motion for summary

judgment on its rescission claim.

II

Reviewing the district court’s grant of summary judgment de novo, we start with the parties’

agreement that Michigan state law governs this diversity action and their disagreement about which

Michigan law applies. American views M.C.L.A. § 500.2218 as governing and the district court

agreed. The Firm contests that provision’s applicability, urging this Court to analyze the issues

under Michigan common law instead. M.C.L.A. § 500.2218 provides:

500.2218. Disability insurance; false statement in application materially
affecting risk
Sec. 2218. The falsity of any statement in the application for any disability insurance
policy covered by chapter 34 of this code may not bar the right to recover thereunder
unless such false statement materially affected either the acceptance of the risk or the
hazard assumed by the insurer.
(1) No misrepresentation shall avoid any contract of insurance or defeat recovery
thereunder unless the misrepresentation was material. No misrepresentation shall be
deemed material unless knowledge by the insurer of the facts misrepresented would
have led to a refusal by the insurer to make the contract.
...
(4) A misrepresentation that an applicant for life, accident or health insurance has not
had previous treatment, . . . shall be presumed to have been material.

As the district court opined, M.C.L.A. §500.2218, despite its narrow catchline, covers more

than disability insurance. In subsection (4) the statute specifically also references life, accident, and

-3-
 No. 03-2170
Am. Guar. and Liability v. Jaques Admiralty Law Firm

health insurance. We are not persuaded, however, to extend the statute to professional liability

insurance inasmuch as Michigan courts have not applied M.C.LA.§ 500.2218 beyond the types of

insurance explicitly included in the statutes’ purview. Consequently, as advocated by the Firm, we

apply Michigan common law to determine the outcome of this case.

III

Even under the common law, however, “where an insured makes a material misrepresentation

in the application for insurance . . . the insurer is entitled to rescind the policy and declare it void ab

initio.” Lake States Ins. Co., v. Wilson, 586 N.W.2d 113, 115 (Mich. Ct. App. 1998) (citations

omitted). This proposition holds even in cases of “innocent misrepresentation,” so long as a party

relies upon the misstatement. Lash v. Allstate Ins. Co., 532 N.W.2d 869, 872 (Mich. Ct. App. 1995).

Despite the Firm’s assertions to the contrary, there exists no genuine dispute that its responses

to the insurer constitute a misrepresentation. The Firm concedes that Leonard Jaques knew his

wrongdoing exposed the Firm to potential liability and thus the Firm’s representation that no

attorney possessed such knowledge is inescapably false. The Firm does not challenge either the

district court’s conclusion regarding the materiality of the misrepresentation or its determination as

to American’s reliance on it when deciding to issue the policy. We agree with the district court’s

holdings on these issues, and conclude the Firm’s responses amount to a material misrepresentation.

IV

-4-
 No. 03-2170
Am. Guar. and Liability v. Jaques Admiralty Law Firm

We summarily reject as unfounded The Firm’s contention that a material misrepresentation

is a necessary but insufficient precondition to rescission under Michigan law. Its challenge to

American’s rescission rights as to “innocent” insureds—those who did not participate in the

fraudulent response—merits some discussion, however. Michigan courts have not addressed whether

a material misrepresentation by one insured permits rescission as to innocent insureds in the

professional liability context, and decisions from other states arguably provide some support for the

Firm’s view. See, e.g., First Am. Title Ins. Co. v. Lawson, 827 A.2d 230 (N.J. 2003). The prevailing

rule, however, is that a misrepresentation by an insured in an application for insurance permits

rescission even as to innocent insureds. Mazur v. Gaudet, 826 F. Supp. 188, 194 (E.D. La. 1992).

See also, Home Ins. Co. v. Dunn, 963 F.2d 1023, 1026 (7th Cir. 1992) (reasoning that “the very fact

of a material misrepresentation [by one insured attorney] voids the policy,” even as to innocent

insureds, because the misrepresentation “caused [the insurer] to issue a policy to all the attorneys that

otherwise would not have been forthcoming”); Shapiro v. Am. Home Assurance Co. (Shapiro I), 584

F. Supp. 1245, 1252 (D. Mass. 1984) (discussing the likelihood of joint and several liability among

all insureds for the wrongdoing of one and holding that the insurer could “avoid responsibility to all

the insureds on the basis of [a] misrepresentation”); INA Underwriters Ins. Co. v. D.H. Forde & Co.,

630 F. Supp. 76, 77 (W.D. NY 1985).

After reviewing relevant Michigan law, we find unpersuasive the Firm’s reasons for asking

this court to favor the minority rule. Instead, our assessment of Michigan law leads us to conclude

-5-
No. 03-2170
Am. Guar. and Liability v. Jaques Admiralty Law Firm

that the prevailing rule comports with Michigan insurance law and, therefore, to hold that a material

misrepresentation by one insured permits rescission as to all insureds.

V

The Firm’s policy arguments stressing the injustice innocent attorneys will suffer by allowing

American to rescind the coverage fail to alter our opinion. “While we sympathize with the innocent

insureds’ position, and recognize that innocent employees are likely to suffer if the entire policy is

voidable because of one man’s fraudulent response, it must be recognized that plaintiff insurers are

likewise innocent parties.” INA, 630 F. Supp. at 77 (citations and internal quotations omitted).

Moreover, “[t]here is no reason why the parties could not have negotiated a contract expressly

providing the kind of protection to ‘innocent’ insureds that [the Firm] ask[s] this court to impute to

the agreement.” Shapiro I, 584 F. Supp. at 1252.

We acknowledge that, even under the stricter rule, some courts, faced with a “clear

severability provision,” have denied rescission as to innocent insureds. Shapiro v. American Home

Assurance Co. (Shapiro II), 616 F. Supp 900, 903-5 (D. Mass. 1984). See also Wedtech Corp. v.

Fed. Ins. Co., 740 F. Supp. 214, 218-19 (S.D. NY 1990). The Firm admits however, that this policy

“contain[s] no express ‘severability’ clause.” It presses for severability, nevertheless, by pointing

to the policy provisions pertaining only to coverage issues; these do not bring this policy within the

ambit of the exception. See Mazur, 826 F. Supp. at 194-195.

VI

-6-
No. 03-2170
Am. Guar. and Liability v. Jaques Admiralty Law Firm

The Firm contends for the first time on appeal that American’s failure to return or even offer

to return premiums the Firm paid operates as a bar to rescission. Because the Firm failed to raise this

argument before the district court, we do not consider it here. White v. Anchor Motor Freight, Inc.,

899 F.2d 555, 559 (6th Cir. 1990).

VII

Finding the Firm’s remaining assignments of error without merit, we affirm.

-7-