The New Jersey Appellate Division ruled that a legal malpractice insurer does not owe coverage to its insured for a legal malpractice suit related to its representation of a defunct investment firm sued for securities fraud.  In Ironshore Indemnity, Inc. v. Pappas & Wolf, LLC, the court determined that, in examining the totality of the circumstances, the law firm made material misrepresentations on its renewal application for insurance.  Specifically, the firm stated that it was not aware of any circumstance that could result in a professional liability claim against the firm.  However, partner Hercules Pappas admitted in a deposition several months prior that he was concerned about getting sued.  His attorneys, however, argued that he was not concerned about legal malpractice claims specifically, and instead was merely concerned in general about facing a lawsuit.

The Appellate Division examined New Jersey’s “subjective standard” in considering a challenge to an insured’s prior knowledge representation.  While the standard examines an individual’s state of mind, the court noted that, under New Jersey law, subjective intent may not be controlling when there are undisputed facts which reveal otherwise.  This prevents a court from “ignoring reality” by viewing the totality of the circumstances, and not isolated statements from the insured.

In examining the totality of the circumstances, the court found that Pappas knew of the potential relevant claims by his former client, Carr Miller Capital.  To that end, Pappas was aware of the legal issues facing to the investment firm, and testified that he was concerned about claims against him as an attorney because “things happened, lawsuits get filed and people get sued.”  Therefore the court held that Pappas made a material misrepresentation on its renewal application, which justified Ironshore’s denial of coverage.  The case provides an interesting insight to how New Jersey courts will examine the totality of the circumstances in a denial of coverage case.  While an insured may testify they are not aware of certain facts, a court will not hesitate to look at other factors when determining if they made a material representation.

Thanks to Douglas Giombarrese for his contribution to this post.