## Facts

- A Kentucky law firm and its principal attorney represented over 400 claimants in Fen-Phen litigation resolved by a $200 million settlement with contingent fees capped at 30%.
- The attorneys took amounts exceeding the fee cap, controlled a purported charitable trust that made no charitable distributions, and paid the attorney monthly to manage it.
- The Kentucky Bar Association opened a disciplinary investigation of the attorney in February 2002 regarding the settlement conduct.
- The firm carried lawyers’ professional liability insurance that included (i) application-based underwriting and (ii) a dishonesty exclusion barring coverage for claims arising from dishonest, fraudulent, or criminal acts once established in a court or regulatory proceeding.
- In an August 2003 renewal application, the attorney denied that any lawyer was subject to disciplinary inquiry or complaint during the expiring policy period and denied any existing or expected malpractice claims.
- A group of former clients later sued for malpractice and related fiduciary breaches and obtained a $42 million judgment.
- The insurer defended under a reservation of rights, then sued in federal court for declaratory relief seeking rescission and, alternatively, a no-coverage declaration under the policy terms.
- In 2010, the Kentucky Supreme Court permanently disbarred the attorney based on findings of dishonest and unethical conduct connected to the Fen-Phen matter.

## Issues

1. Whether inaccurate or incomplete renewal-application answers, including failure to disclose an ongoing bar investigation, were material misrepresentations permitting rescission of the malpractice policy.
2. Whether the policy’s dishonesty exclusion barred coverage because a “regulatory ruling” established dishonest conduct.

## Decision

- The Sixth Circuit affirmed summary judgment for the insurer.
- The court held the renewal policy was properly rescinded as void ab initio due to material misrepresentations in the application, including the denial of any disciplinary inquiry and the denial of existing or expected claims.
- Independently, the court held the dishonesty exclusion barred coverage because the Kentucky Supreme Court disbarment order qualified as a regulatory ruling establishing dishonest conduct.
- As a result, the insurer owed no duty to defend or indemnify the insured for the underlying malpractice judgment and could recover defense costs advanced under the reservation of rights.

## Legal Principles

- Under applicable insurance law, a liability policy may be rescinded when the insured makes a material misrepresentation or omission on an application and the insurer relies on it in issuing or renewing coverage.
- A misrepresentation is material if it concerns information an insurer would reasonably consider important to underwriting or risk assessment; the insurer need not prove it definitively would have declined coverage.
- When a policy excludes claims arising from dishonest or fraudulent acts once established by a court or regulatory body, a state supreme court attorney-discipline disbarment order may satisfy the “regulatory ruling” requirement.
- Separate, independent coverage defenses (rescission and an exclusion) can each support judgment for the insurer; either ground may be sufficient to affirm summary judgment.

## Conclusion

The Sixth Circuit upheld rescission of the renewed malpractice policy based on the insured attorney’s material application misrepresentations and also held that, even absent rescission, a dishonesty exclusion barred coverage once the attorney’s dishonest conduct was established by a state supreme court disbarment order.


Continental Cas. Co. v. Law Offs. of Melbourne Mills, Jr., PLLC, 676 F.3d 534 (6th Cir. 2012)