Wittner, Poger, Rosenblum & Spewak, P.C., N. Scott Rosenblum and Ramona Marten, Plaintiffs-Appellants, v. The Bar Plan Mutual Insurance, Defendants-Respondents.

This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court. Opinion Missouri Court of Appeals Eastern District Case Style: Wittner, Poger, Rosenblum & Spewak, P.C., N. Scott Rosenblum and Ramona Marten, Plaintiffs- Appellants, v. The Bar Plan Mutual Insurance, Defendants-Respondents. Case Number: No. 70655 Handdown Date: 09/16/1997 Appeal From: Circuit Court of the City of St. Louis, Hon. Michael Godfrey Counsel for Appellant: Jack B. Spooner Counsel for Respondent: Brent W. Baldwin & Bruce J. Weingart Opinion Summary: Court declared Bar Plan policy did not insure malpractice claim where law firm had a basis to believe a claim may be made but did not disclose the fact when applying for renewal of a claims made policy. AFFIRMED. DIVISION THREE HOLDS: (1) Evidence supported finding the Firm had a reasonable basis to believe a claim may be made but failed to disclose the facts when applying for renewal, particularly, where attorneys stipulated to conduct "below acceptable legal standards" in permitting default judgment against client. (2) The misrepresentation was material because it increased the risk of insurance coverage. (3) There was evidence to support a finding of prejudice to the Bar Plan and re-insurers who shared the risk at the time of the claim filed, after policy was renewed, because some re-insurers were not involved on the existing policy which was in force at the time of application for renewal. Citation: Opinion Author: Kent E. Karohl, Judge Opinion Vote: AFFIRMED. Ahrens, P.J., and Crandall, Jr., J., concur. Opinion:

The law firm of Wittner, Poger, Rosenblum, & Spewak, P.C., along with two of its lawyers, Scott Rosenblum and

Ramona Marten (collectively, the Firm), appeal after the trial court entered a declaratory judgment that Bar Plan Mutual Insurance Company (Bar Plan) was not required to cover the Firm in defense of a legal malpractice claim brought against the Firm by Nina Herbert (Client). Bar Plan issued a claims made professional liability policy to the Firm which included coverage of legal malpractice claims. The Firm sought a declaration that the Bar Plan policy covered a legal malpractice claim. The facts are not in dispute. The trial court's judgment declared Bar Plan owed no duty, legal, equitable, or otherwise, to the Firm. No findings of fact or conclusions of law were given, despite being requested. The Firm appealed. In March of 1991, Client met with Scott Rosenblum regarding the possibility of initiating divorce proceedings against her husband. At the time of consultation, Client's husband lived in Texas. Rosenblum advised Client to file for divorce in St. Louis County to gain Missouri jurisdiction if she decided to pursue the divorce. Shortly after meeting with Rosenblum, Client was served with a Summons and Petition for divorce issued in Bexar County, Texas. Rosenblum then assigned the case to an associate, Ramona Marten. Marten met with Client to discuss the Texas matter. Afterwards, Marten unsuccessfully attempted to reach the husband's Texas attorney. On May 6, 1991, Client's husband obtained a Final Decree of Divorce by default in favor of Client's husband. Both Rosenblum and Marten conceded it was below acceptable legal standards for them to have allowed the entry of the default judgment. On or about May 13, 1991, Client received a copy of the divorce decree in the mail. She notified Marten of the decree. Two days later, Marten spoke with husband's Texas attorney in an unsuccessful effort to settle Client's claims for relief in dissolution of the marriage. Afterwards, Marten pursued post-decree motions to set aside the default divorce decree. To accomplish this, the Firm retained and paid for the services of a Texas attorney. The Texas attorney filed a motion for new trial to set aside the divorce decree. In support of the motion, Marten provided an affidavit stating that the default judgment against Client was entered by the Texas court due to her "excusable neglect and mistake." On June 13, 1991, Rosenblum informed the Texas attorney that Client wanted $60,000 dollars from any settlement. The motion for new trial was heard and denied. Therefore, Client did not obtain the benefit of a settlement. On July 20, 1991, Rosenblum received the first of two letters from Client stating her dissatisfaction with the Firm's representation of her in the divorce proceedings. Specifically, she stated: "Your negligence not only hurt me financially, but this is the biggest insult I ever got. I have not received what is mine, because of your professional negligence. I have been going through an emotional distress because of all of this." On July 26, 1991, the Firm retained a second Texas attorney, as appellate counsel for Client's matter. On August 1, 1991, Rosenblum responded to Client's letter, informing her that the only remaining option was to seek appellate review. The Firm bore the cost of the appeal. On January 13, 1992, Client, in correspondence with Rosenblum, again

expressed her dissatisfaction with the Firm's handling of her case. In the second letter, she stated: If you remember in my last letter on July 20, 1991, I asked you among other things to inform me in writing of all the options of the divorce and in case one or two options fail, how you are going to take care of it? Instead, you invited me to your office and when I came in with my brother Paul Gismegian, you told us that you were filing an appeal on your own expense and you will take it all the way to the Supreme Court if you have to. And when I asked you if that is not going to work, what then? You said, that I would have to file a suit against you. I knew then and I know now that this is a very strong possibility. But Scott, I do not want to do that. All I want is my share of my marital property. . . . [D]ue to your mistakes I have a divorce by default . . . . Maybe you think I have no other choice but to accept your silence. But you are wrong, I could file a lawsuit against you right now. (emphasis added). On February 12, 1992, the Texas Appellate Court affirmed the decree. On May 29, 1992, the Texas Court of Appeals denied a motion for rehearing. Rosenblum sent a copy of the Texas appellate opinion to Client on June 17, 1992. He expressed his opinion "it would be of no benefit to take any further action in attempting to set aside the Default Judgment of the trial court." The default divorce decree against Client is final and unmodifiable. On September 14, 1992, Client notified the Firm of her legal malpractice cause of action against it for negligent representation in connection with her divorce. The day the Firm was served with notice of the lawsuit, it notified Bar Plan of Client's malpractice claim. It retained independent counsel to provide legal representation. It stipulated that this was the first notice from it to Bar Plan concerning Client's dissatisfaction with its representation. After conducting an investigation and review of the file materials, on January 6, 1993, Bar Plan sent identical letters to Rosenblum and Marten stating it was declining to cover them both for indemnification and defense of Client's claim. Bar Plan declared in the letter it appeared Rosenblum and Marten were aware of an act, error, or omission capable of giving rise to a claim prior to the May 26, 1992 application, as well as prior to the inception date of the Firm's policy, July 30, 1992. On April 22, 1996, the trial court entered judgment in favor of Bar Plan on the Firm's petition for declaratory judgment. It held Bar Plan owed no duty, legal, equitable, or otherwise to the Firm. THE BAR PLAN POLICY The Bar Plan provided insurance to the Firm with no lapse in coverage from 1984 to 1996. Each year, Bar Plan wrote a new policy with each of its insureds. On or about July 11, 1991, Bar Plan issued the Firm a lawyers professional liability insurance policy. This policy had the effective dates of July 30,1991 through July 30, 1992. The Firm held the policy, with Rosenblum and Marten as two of the named individual insureds. In May of 1992, the Firm submitted its renewal application for lawyers professional liability insurance to Bar Plan after the Texas Court of Appeals affirmed the decree and after Client's letters were received by Rosenblum. Question 20(d) of the renewal application asked:

1. After inquiry of each lawyer named in question 10; has the firm or any member of that firm:

d) have knowledge of any incident, circumstance, act, error or omission which may give rise to a claim not previously reported to us? In answering question 20(d), the Firm did not make any disclosure concerning its representation of Client. The renewal application also states: NOTICE TO APPLICANT - PLEASE READ CAREFULLY: REPRESENTATION: Applicant represents that the statements and information contained herein are true and that Applicant has not suppressed or misstated any facts. Applicant has made inquiry with each lawyer in the firm regarding the accuracy of the answers on this application. Applicant agrees that this application shall be the basis of the policy of insurance issued by the Company and incorporated therein. Applicant agrees to notify the Company of any material change(s) in the statements in the application forms between the date of application and the date of inception of the policy of insurance. Applicant understands that any change(s) may result in an adjustment of the terms and conditions of the policy of insurance and/or premium charges. (emphasis added). Immediately following this language, the renewal application also states: IMPORTANT REMINDER TO AVOID LOSS OF COVERAGE IT IS IMPERATIVE THAT ALL KNOWN CIRCUMSTANCES, ACTS, ERRORS, OR OMISSIONS WHICH COULD RESULT IN A PROFESSIONAL LIABILITY CLAIM AGAINST YOU, YOUR FIRM OR A PREDECESSOR IN BUSINESS BE REPORTED TO YOUR PRESENT INSURER WITHIN THE TIME PERIOD SPECIFIED IN YOUR PRESENT POLICY. PLEASE CONTACT THE BAR PLAN IF YOU DESIRE ASSISTANCE. On July 27 and August 4, 1992, the Firm wrote Bar Plan declaring that "[a]fter inquiry, there have been no changes, modifications, alterations or additions to the Renewal Application of May 26, 1992." Relying on the statements and declarations contained within its renewal application and the two declaration letters, Bar Plan issued its lawyers professional liability insurance policy to the Firm as policyholder. The policy was effective from July 30, 1992, through July 30, 1993, and is the policy which is the subject of this trial and appeal. In relevant part, the policy provides the following under "THE COVERAGE" section:

1. PROFESSIONAL LIABILITY AND CLAIMS MADE CLAUSE:

The Company will pay on behalf of an Insured all sums in excess of deductible amounts stated in the Declarations which an Insured shall become legally obligated to pay as damages as a result of CLAIMS FIRST MADE AGAINST AN INSURED DURING THE POLICY PERIOD AND REPORTED TO THE COMPANY DURING THE POLICY by reason of any act or omission by an Insured acting in a professional capacity providing legal services. PROVIDED ALWAYS THAT such act or omission happens: A. during the Policy Period, or B. prior to the Policy Period, provided that prior to the effective date of this policy: (2) An insured had no basis to believe that the Insured had committed such an act or omission.

In relevant part, the Policy provides the following under "THE EXCLUSIONS" section:

1. THE POLICY DOES NOT PROVIDE COVERAGE FOR ANY DAMAGES ARISING OUT OF:

K. a Claim against an individual Insured(s) who before the policy effective date knew, or should reasonably have known, of any circumstance, act or omission that might reasonably be expected to be the basis of that Claim. The policy also provides the following under the "OTHER CONDITIONS" section:

1. APPLICATION:

By acceptance of this policy, all Insureds agree that the representations in this declaration letter and Applications (including all supplements) attached to and hereby made part of this policy are true and complete to the best of the knowledge of all Insureds. This policy is issued in reliance upon the truth of such representations and all Insureds warrant that no facts have been suppressed or misstated. This policy embodies all agreements existing between Insured and the Company and any agents of the Company relating to this insurance. (emphasis added). Bar Plan's policy is a "claims made" policy providing coverage for those claims first made and reported against the insured during the policy period of July 30, 1992, through July 30, 1993, and otherwise in compliance with the terms and conditions of the policy. Section 527.010 RSMo 1994 provides that Missouri courts "have the power to declare rights, status, and other legal relations, . . . and such declarations shall have the force and effect of a final judgment or decree." The statute allows the courts to afford parties relief from uncertainty. Lockett v. Musterman, 854 S.W.2d 831, 833 (Mo. App. E.D. 1993). In a declaratory judgment action, we sustain the trial court's decree unless it is against the weight of the evidence, unless it erroneously declares or erroneously applies the law, or unless there is no substantial evidence to support it. Abco Tank & Manufacturing Co. v. Federal Ins. Co., 550 S.W.2d 193, 197 (Mo. banc 1977). Furthermore, we review the evidence in the light most favorable to the trial court's judgment and disregard all evidence to the contrary where the court has not entered findings of fact and conclusions of law. Green Acres Enterprises, Inc. v. Freeman, 876 S.W.2d 636, 638 (Mo. App. W.D. 1994). The Firm argues three points of error on appeal. In its first point, the Firm asserts the trial court erred in allowing Bar Plan to avoid providing insurance coverage on Client's claim because Rosenblum and Marten had no reason to know or to be expected to know that entry of the default judgment against Client might lead to malpractice against it. Continental Casualty Co. v. Maxwell, 799 S.W.2d 882 (Mo. App. 1990) examined a question in an insurance application similar to Question 20(d) in the policy before us. However, in Continental Casualty, the insurance company sought to void the insurance policy, not merely deny coverage for an undisclosed claim on an existing policy. In Continental Casualty, we determined an attorney is required to disclose a potential claim against him when a client gives "the lawyer some indication through a complaint or expression of dissatisfaction with his services that a claim might or would be made." Id. at 889, quoting, General Accident Ins. Co. of America v. Trefts, 657 F.Supp. 164, 167 (E.D. Mo. 1987). The Firm contends the only act, event, or omission by Rosenblum and Marten which could have possibly served as the basis for a malpractice claim implicating the Bar Plan policy was the entry of Client's default divorce decree. It argues no Missouri case holds that the entry of a default judgment automatically gives rise to a requirement triggering

disclosure of a possible claim under a claims made insurance policy. It appears to argue the divorce decree essentially reflected what Client was seeking, thus, she was not damaged. That may or may not be correct, but it would be relevant only as a defense to a claim by a client, not as a basis to believe no claim was threatened. However, the Firm adds Client did not complain or express any dissatisfaction to Marten regarding her services in handling the divorce. Therefore, it argues Rosenblum and Marten had no basis for believing that Client might bring a malpractice claim. This argument ignores the evidence supporting a finding of Client's expression of dissatisfaction to Rosenblum. There is evidence to support a finding the Firm had reason to know of a possible claim. It admitted the attorneys' performance was below acceptable legal standards. Furthermore, a claim the divorce decree essentially contained what Client wanted, ignores Client's demand of $60,000 more than what she had been awarded in the default dissolution decree. The Firm was also aware of Client's complaints about the appeal representation. On July 20, 1991, and again on January 13, 1992, Rosenblum received letters from Client informing him that in her opinion, his representation was negligent; that she was emotionally and financially damaged by the Firm's conduct; and, that she could pursue an action against him and the Firm. Rosenblum argues these letters did not suggest Client would file a malpractice claim when the letters are considered along with all communications between Client and himself. The court found otherwise, and its judgment is supported by the evidence of default by omission and statements of a disgruntled former client. In its second point, the Firm continues to claim it made no misrepresentation on its application to Bar Plan, but assuming there was a misrepresentation, it argues as an affirmative defense, the misrepresentation is inconsequential. The Firm maintains a misrepresentation would not have caused Bar Plan to refuse renewal and would not have caused a premium increase or change. It argues the misrepresentation, if found, was not a material misrepresentation and would not have allowed Bar Plan to avoid coverage on Client's claim. Continental Casualty required the insurance company to demonstrate that a representation is both material and false to permit the insurance company to avoid coverage when: (1) the representation is warranted to be true, (2) the policy is conditioned upon its truth, (3) the policy provides that its falsity will avoid the policy, or (4) the application is incorporated into and attached to the policy. Continental Casualty, 799 S.W.2d at 888. All four of these elements are present in the Bar Plan insurance policy. The evidence shows the Firm was aware of a circumstance which could result in a claim. Therefore, its answer on the application was false. However, if the insurance company cannot prove the misrepresentation was material, in order to avoid coverage, it must demonstrate that the misrepresentation made on the application was made fraudulently. Id. The next question concerns whether the misrepresentation in the application is material. "Generally a misrepresentation is deemed material where it is reasonably calculated to affect the action and conduct of the company in

deciding whether or not to accept the risk by issuing its policy covering the risk." Continental Casualty, 799 S.W.2d at 889, quoting Brinkoetter v. Pyramid Life Ins. Co., 377 S.W.2d 560, 563 (Mo. App. 1964). In a deposition, Mark Berry, Bar Plan's vice president of claims, testified he believed disclosure of the complete facts regarding the Firm's representation of Client, absent any other misrepresentation, would not have prevented Bar Plan from renewing coverage, nor would it have changed the premium rate. Thus, the Firm argues any possible misrepresentation on its part was not material. While Mr. Berry may have believed the misrepresentation would not have changed Bar Plan's relationship with the Firm, the possibility remains that if his belief was incorrect, the misrepresentation was material. The Firm's failure to disclose denied Bar Plan the opportunity to determine for itself whether the misrepresentation was material. A requirement for proof of a material misrepresentation to avoid coverage is not universal. "There are some circumstances in which the materiality of a misrepresentation is so clear that it should be declared material as a matter of law." Continental Casualty, 799 S.W.2d at 889. When an attorney misrepresents a fact on an application for professional liability insurance by confirming the non-existence of circumstances which could result in a malpractice claim, the inaccuracy of that answer may be considered material to the issuance of the policy as a matter of law. See, Continental Casualty, 799 S.W.2d at 889. Even if we assume Mr. Berry's conjecture was sound, there are a number of cases that hold some misrepresentations are sufficient to avoid coverage even if disclosure may not have caused any reaction by the insurer against its insured. Haynes v. Missouri Property Insurance Placement Facility, 641 S.W.2d 497, 499 (Mo. App. 1982), found that the materiality of a misrepresentation in an insurance application is determined by whether the fact, if stated truthfully, might reasonably influence an insurance company to accept or reject a risk or to charge a different premium and not whether the insurer in question was actually influenced. Similarly, Crewse v. Shelter Mutual Insurance Co., 706 S.W.2d 35, 39 (Mo. App. 1985), found materiality is based on whether the undisclosed fact would likely influence the conduct of a reasonable man with respect to his transaction with another. The inquiry is what persons engaged in the insurance business, acting reasonably and naturally, in accordance with the practice usual among such companies under such circumstances would have done had they known the truth. Id. From this perspective the misrepresentation was material. Point denied. In its final point, the Firm argues Bar Plan should be required to prove the Firm's alleged late notice prejudiced Bar Plan. It suggests that because Bar Plan insured the Firm when the substandard legal representation occurred, the absence of notice in the renewal application, followed by notice of the claim after renewal, requires proof of prejudice. Insurance companies providing claims made policies are not required to demonstrate prejudice to avoid coverage

when notice of a claim is received after a claims made policy's coverage period has ended. Continental Casualty, 799 S.W.2d at 886. We decline the Firm's invitation to modify the Continental Casualty decision. Continental Casualty found that granting attorneys' request to excuse the delay in notice beyond the policy period would alter a basic term of the insurance contract because the reporting requirement helped to define the scope of coverage under a claims made policy. Id. Furthermore, the notice requirement allows insurance companies to disclaim the risk of receiving untimely notice under a claims made policy. Id. The Firm argues the rationale behind not requiring proof of prejudice does not apply because Bar Plan insured them before the claim arose, at the time Bar Plan contended the claim notice should have been made, and at the time the claim notice was actually made, therefore, there is continuity in Bar Plan's coverage and no increased risk incurred. The facts do not support this argument. Each year Bar Plan writes a new policy with its insureds. It reinsures the majority of its policies with a consortium of reinsurers. The reinsurance consortium buys the risk on all Bar Plan policies which begin in a particular calendar year. The amount of retained risk for Bar Plan differs year by year, depending on the particular reinsurance agreement. Each year some members of the consortium of reinsurers are different than the preceding year, and their share of respective percentage of risk differs year to year. The Firm's argument fails because its delay in alerting Bar Plan about the possibility of Client's malpractice suit affects Bar Plan and a different mix of reinsurers with different percentages of risk on obligations they might otherwise not have incurred. The subject insurance policy was issued August 11, 1992. At that time, the Firm knew: 1) a default divorce judgment was entered in Texas against Client due to its admitted negligence; 2) the trial court refused to set aside the default; 3) there had been two adverse appellate decisions; 4) Client wanted an additional $60,000 of marital property than awarded in the default decree; 5) Client had sent two letters stating she felt it had committed professional negligence as well as caused her emotional distress; and, 6) a lawsuit was a strong possibility. These known facts supported the court's implied finding the Firm knew, or had reason to know, of the possibility Client would file a legal malpractice claim against it. We affirm. Separate Opinion: None This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court.