1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 AMERICAN ALTERNATIVE Case No. 19-cv-04628-KAW INSURANCE CORPORATION, 8 Plaintiff, ORDER DENYING PLAINTIFF'S 9 MOTION FOR SUMMARY v. JUDGMENT 10 JOHN G. WARNER, et al., Re: Dkt. No. 71 11 Defendants. 12 13 Plaintiff American Alternative Insurance Corporation filed the instant action against 14 Defendants John G. Warner and Law Offices of John G. Warner, seeking to rescind a professional 15 liability insurance policy issued to Defendants. (First Amend. Compl. ¶ 1, Dkt. No. 56.) Pending 16 before the Court is Plaintiff’s motion for summary judgment on its first and second causes of 17 action for rescission. (Pl.’s Mot. for Summ. J. at 13, Dkt. No. 71.) 18 The Court deems this matter suitable for disposition without a hearing pursuant to Civil 19 Local Rule 7-1(b) and VACATED the October 1, 2020 hearing. Having considered the parties’ 20 filings and relevant legal authority, the Court DENIES Plaintiff’s motion for summary judgment. 21 I. BACKGROUND 22 A. Factual Background 23 In August 2013, Defendant Warner represented Daniel H. Morgan, Mark Cunningham, and 24 their development company MCEE (collectively, “Morgan Clients”) in a lawsuit brought by 25 George Morf (the “Morf Action”). (Warner Decl. ¶¶ 3-4.) The Morf Action was also brought 26 against the law firm Phillips, Downs & Simontacchi, LLP (“Phillips Firm”); in a prior lawsuit, the 27 Phillips Firm had jointly represented Morf and the Morgan Clients. (Warner Decl. ¶ 5.) In the 1 interest due to the joint representation. (Warner Decl. ¶ 5.) 2 In April 2015, Cunningham was dismissed from the Morf Action. (Warner Decl. ¶ 5.) In 3 June 2015, the jury rendered a verdict in favor of Morf and against Morgan and MCCE on the 4 contract and negligent misrepresentation claims. (Warner Decl. ¶ 6, Exh. 1.) The jury also 5 assessed damages against the Phillips Firm for breach of fiduciary duty, although that portion of 6 the verdict was later overturned. (Warner Decl. ¶ 6.) Defendant Warner filed an appeal, which 7 was dismissed on Morgan’s instruction. (Warner Decl. ¶ 7.) 8 In March 2016, Defendant Warner wrote a letter to the Morgan Clients, suggesting that 9 they had a malpractice claim against the Phillips Firm and could demand reimbursement for all 10 attorney’s fees paid during the time there was a conflict of interest (approximately $1.6 million). 11 (Warner Decl. ¶ 8, Exh. 2.) On April 25, 2016, Defendant Warner wrote another letter to the 12 Morgan Clients, evaluating the litigation. (Pl.’s Mot. for Summ. J., Exh. 1 at AAIC000256, Dkt. 13 No. 71-6.) Defendant Warner specifically raised the statute of limitations, explaining that the 14 statute of limitations for a legal malpractice claim was generally the earlier of: (a) one year from 15 discovery of the facts constituting the wrongful act or omission, or (b) four years from the date of 16 the wrongful act or omission. (Id. at AAIC000257.) Defendant Warner further explained that 17 there “is a tolling exception set forth in the legal malpractice statute of limitations, which states 18 that the claim for legal misrepresentation is tolled until such time as the plaintiff has sustained an 19 actual injury.” (Id. at AAIC000257-58.) Defendant Warner stated that in the context of the Morf 20 Action, the statute of limitations would commence upon the entry of the June 9, 2015 adverse 21 judgment. (Id. at AAIC000258.) Defendant Warner also stated:
22 The reason we need to rely upon the tolling exception to this legal practice statute of limitations is because most of the wrongful acts 23 alleged against Scott Phillips occurred many years ago and without a tolling exception any claims against Scott Phillips and his law firm 24 would be barred by the one-year statute of limitations. 25 (Id.) 26 On June 6, 2016, Defendant Warner filed a malpractice complaint on behalf of the Morgan 27 Clients against the Phillips Firm (the “Phillips Action”). (Warner Decl. ¶ 9, Exh. 2.) On February 1 grounds. The court rejected the argument that the Morgan Clients did not suffer an injury until the 2 jury verdict was rendered; rather, the court found they “sustained ‘actual injury’ at the time they 3 incurred attorney’s fees and costs to defend themselves in the Morf action, i.e., more than one year 4 before they filed this action on June 6, 2016.” (Pl.’s Mot. for Summ. J., Exh. 1 at AAIC000253.) 5 On February 10, 2017, Defendant Warner sent Morgan and Cunningham a letter 6 explaining that the court had concluded that the Phillips Action was barred by the statute of 7 limitations. (Warner Decl., Exh. 6.) Defendant Warner explained why he believed the court was 8 incorrect and laid out options going forward, including an appeal. (Id. at 4.) 9 On March 8, 2017, Derek Hall – a broker and underwriter for Plaintiff – e-mailed 10 Defendant Warner regarding the expiration of his professional liability insurance on May 8, 2017. 11 (Warner Decl., Exh. 7; Hall Decl. ¶¶ 3-5, Dkt. No. 71-3.) Hall also attached the insurance renewal 12 application. (Hall Dec. ¶ 5.) 13 On March 16, 2017, Defendant Warner sent the Morgan Clients another letter regarding 14 the Phillips Action, again outlining their options and describing arguments that could be made on 15 appeal. (Warner Decl., Exh. 8.) 16 On April 3, 2017, Defendant Warner submitted his completed liability insurance 17 application. (Hall Decl. ¶ 6; Pl.’s Mot. for Summ. J., Exh. 2.) In Section VI, Insurance and Claim 18 History, the application asked: “After inquiry, are any of attorneys in your firm aware . . . b. of any 19 legal work or incidents that might be expected to lead to a claim or suit against them?” (Pl.’s Mot. 20 for Summ. J., Exh. 2 at 000006.) Defendant Warner selected “No.” (Id.) In Section VII, 21 Additional Information, the application included a provision “Representations,” which stated in 22 relevant part: “I/We specifically asked all lawyers in our firm if they have knowledge of any 23 claim, potential claim, disciplinary matter or circumstances that may Rise against us that is not 24 listed in our response to Questions 7(V) & Questions 8 A and B (VII). All lawyers have 25 responded ‘No’ Please Initial Here.” (Id.) Defendant Warner initialed the Representations. (Id.) 26 Based on Defendant Warner’s application, Hall determined that the premium for 27 Defendants’ professional liability insurance (the “Policy”) would be $5,573.38. (Hall Decl. ¶ 7; 1 Warner the premium quotation, and requested that Defendant Warner provide a No Known Loss 2 Warranty Letter. (Hall Decl. ¶ 8; Pl.’s Mot. for Summ. J., Exh. 2 at 000013-20.) 3 On April 12, 2017, Defendant Warner sent the requested letter to AAIC’s agent, First 4 Indemnity Insurance Agency, which stated in relevant part:
5 I am not aware of any claims, potential claims, disciplinary matters, investigations or circumstances that may give rise to a claim. I have 6 specifically asked all attorneys and employees if they have any knowledge of any claim, potential claim, disciplinary matter, 7 investigation or circumstance that may give rise to a claim that is not listed in our application dated April 3, 2017. All lawyers and 8 employees have answered no. 9 (Warner Decl., Exh. 9; Hall Decl. ¶ 8.) 10 On April 18, 2017, Defendant Warner sent the Morgan clients another letter, again 11 explaining why he believed the state court’s dismissal was wrong and the potential for an appeal. 12 (Warner Decl. ¶ 11, Exh. 10 at 3.) 13 On April 20, 2017, the Policy was issued effective from May 8, 2017 through May 7, 14 2018. (Hall Decl. ¶ 12.) 15 On May 3, 2017, the Morgan Clients confirmed that they had decided not to appeal. 16 (Warner Decl. ¶ 12, Exh. 13.) Defendant Warner had no further involvement with the Morgan 17 Clients with respect to the Phillips Firm until January 2018. (Warner Decl. ¶ 13.) The Morgan 18 Clients did not voice any dissatisfaction with Defendant Warner’s legal work in the Phillips 19 Action, and Morgan continued to pay Defendant Warner for legal services in the Morf case, 20 including payments on April 24, July 1, and October 1, 2017. (Warner Decl. ¶¶ 13-14, Exh. 14.) 21 On January 16, 2018, Defendant Warner received a demand letter from Garet D. O’Keefe, 22 on behalf of the Morgan Clients. (Warner Decl., Exh. 15.) The demand letter stated:
23 I attach the complaint for malpractice we will be filing against your firm for failure to timely file suit against the Phillips firm, among 24 other claims arising from your representation in the Underlying Morf Action. Before you filed the Underlying Phillips Malpractice 25 Action, [Morgan and Cunningham] asked me whether I might be interested in prosecuting those claims as I have extensive experience 26 handling legal malpractice matters on both the plaintiff and defense side. I advised them the statute of limitations had run, but I was not 27 interested in pursuing a claim against your firm for malpractice Phillips. . . . If I were right, then your negligence would be 1 established by a court order dismissing the case on demurrer, which is how the Underlying Phillips Malpractice Action was resolved. 2 3 (Warner Decl., Exh. 15 at 2.) Defendant Warner asserts this was the first time the Morgan Clients 4 had voiced dissatisfaction with his work in the Phillips Action. (Warner Decl. ¶ 13.) 5 On January 17, 2018, Defendant Warner tendered the demand letter to Plaintiff for defense 6 under the Policy. (Pl.’s Mot. for Summ. J., Exh. 5 at AAIC000135.) On January 29, 2018, 7 Plaintiff agreed to defend Defendant Warner against the demand letter, subject to a reservation of 8 rights. (Pl.’s Mot. for Summ. J., Exh. 6 at AAIC000222.) 9 On February 2, 2018, the Morgan Clients filed a malpractice complaint against Defendant 10 Warner (the “Morgan Action”). (Warner Decl., Exh. 16.) On February 9, 2018, Defendant 11 Warner tendered the Morgan Action to Plaintiff. (Cayer Decl. ¶ 7, Dkt. No. 71-2.) On March 12, 12 2018, Plaintiff agreed to defend Defendants, but “reserve[d] the right to deny coverage to the 13 extent that you knew or could have reasonably foreseen that the failure to timely file [the Phillips 14 Action], and the subsequent dismissal . . . against Phillips, would form the basis of a claim against 15 you.” (Cayer Decl. ¶ 8; Pl.’s Mot. for Summ. J., Exh. 7 at AAIC000291.) Also in 2018, Hall 16 prepared the quote for a proposed renewal of the Policy for May 2018-19; based on the notice that 17 Defendant Warner had been sued, Hall calculated that the premium would increase to $6,175.49. 18 (Hall Decl. ¶ 20.) Hall states that if he had known of the Phillips Action dismissal, he would have 19 made the same changes to the calculations, which would have generated the same increase in the 20 Policy’s 2017 premium. (Hall Decl. ¶ 21.) 21 Plaintiff determined that Defendant Warner knew of the Phillips Action dismissal prior to 22 filling out the insurance application. (Cayer Decl. ¶ 10.) On May 2, 2019, Plaintiff issued a 23 supplemental reservation of rights letter, reserving the right to rescind the policy based on the 24 failure to disclose the Phillips Action dismissal. (Cayer Decl. ¶ 12; Pl.’s Mot. for Summ. J., Exh. 25 8 at AAIC002096.) Plaintiff continues to represent Defendant Warner in the Morgan Action. 26 (Cayer Decl. ¶ 15.) 27 B. Procedural Background 1 Defendants’ alleged material misrepresentations. (Dkt. No. 1.) On October 7, 2019, Defendants 2 filed a motion to dismiss, arguing that the application was ambiguous because it asked that 3 applicants state if there were any legal work that “might” be expected to lead to a claim. (Dkt. No. 4 13.) On December 3, 2019, the Court denied Defendants’ motion to dismiss, finding that “use of 5 ‘might’ in the Insurance Application and Policy is not ambiguous or unenforceable.” (Order 6 Denying Mot. to Dismiss at 7, Dkt. No. 39.) 7 On July 30, 2020, Plaintiff filed the instant motion for summary judgment. On August 27, 8 2020, Defendants filed their opposition. (Defs.’ Opp’n, Dkt. No. 79.) On September 8, 2020, 9 Plaintiff filed its reply. (Pls.’ Reply, Dkt. No. 84.)1 10 II. LEGAL STANDARD 11 A. Request for Judicial Notice 12 A district court may take notice of facts not subject to reasonable dispute that are “capable 13 of accurate and ready determination by resort to sources whose accuracy cannot reasonably be 14 questioned.” Fed. R. Evid. 201(b); United States v. Bernal–Obeso, 989 F.2d 331, 333 (9th Cir. 15 1993). “[A] court may take judicial notice of ‘matters of public record,’” Lee, 250 F.3d at 689 16 (citing Mack v. S. Bay Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986)). 17 B. Summary Judgment 18 A party may move for summary judgment on a “claim or defense” or “part of... a claim or 19 defense.” Fed. R. Civ. P. 56(a). Summary judgment is appropriate when, after adequate 20 discovery, there is no genuine issue as to material facts and the moving party is entitled to 21 judgment as a matter of law. Id.; see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). 22 Material facts are those that might affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 23 477 U.S. 242, 248 (1986). A dispute as to a material fact is “genuine” if there is sufficient 24 1 On September 22, 2020, Defendants filed an ex parte application for leave to file a sur-reply to 25 respond to objects regarding his expert witness, Allen Kuo, and to present a new expert witness. (Dkt. No. 87.) On September 24, 2020, Plaintiff filed an opposition. (Dkt. No. 88.) The Court 26 DENIES the ex parte application. As discussed below, the Court did not consider Mr. Kuo’s opinion. Further, based on the parties’ filings before the Court, the Court finds there is a triable 27 question of fact as to whether there is a misrepresentation. Thus, Defendants’ sur-reply is 1 evidence for a reasonable jury to return a verdict for the nonmoving party. Id. 2 A party seeking summary judgment bears the initial burden of informing the court of the 3 basis for its motion, and of identifying those portions of the pleadings and discovery responses 4 that demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. Where 5 the moving party will have the burden of proof at trial, it must affirmatively demonstrate that no 6 reasonable trier of fact could find other than for the moving party. Southern Calif. Gas. Co. v. City 7 of Santa Ana, 336 F.3d 885, 888 (9th Cir. 2003). 8 On an issue where the nonmoving party will bear the burden of proof at trial, the moving 9 party may discharge its burden of production by either (1) by “produc[ing] evidence negating an 10 essential element of the nonmoving party's case” or (2) after suitable discovery “show[ing] that the 11 nonmoving party does not have enough evidence of an essential element of its claim or defense to 12 discharge its ultimate burden of persuasion at trial.” Nissan Fire & Marine Ins. Co., Ltd., v. Fritz 13 Cos., Inc., 210 F.3d 1099, 1103 (9th Cir. 2000); see also Celotex, 477 U.S. 324-25. 14 Once the moving party meets its initial burden, the opposing party must then set forth 15 specific facts showing that there is some genuine issue for trial in order to defeat the motion. See 16 Fed. R. Civ. P. 56(e); Anderson, 477 U.S. at 250. “A party opposing summary judgment may not 17 simply question the credibility of the movant to foreclose summary judgment. Anderson, 477 U.S. 18 at 254. “Instead, the non-moving party must go beyond the pleadings and by its own evidence set 19 forth specific facts showing that there is a genuine issue for trial.” Far Out Prods., Inc. v. Oskar, 20 247 F.3d 986, 997 (9th Cir. 2001) (citations and quotations omitted). The non-moving party must 21 produce “specific evidence, through affidavits or admissible discovery material, to show that the 22 dispute exists.” Bhan v. NMS Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir. 1991). Conclusory or 23 speculative testimony in affidavits and moving papers is insufficient to raise a genuine issue of 24 material fact to defeat summary judgment. Thornhill Publ’g Co., Inc. v. Gen. Tel. & Electronics 25 Corp., 594 F.2d 730, 738 (9th Cir. 1979). 26 In deciding a motion for summary judgment, a court must view the evidence in the light 27 most favorable to the nonmoving party and draw all justifiable inferences in its favor. Anderson, 1 III. DISCUSSION 2 A. Request for Judicial Notice 3 Plaintiff requests judicial notice for: (1) the Phillips Action complaint, (2) the February 7, 4 2017 dismissal of the Phillips Action, (3) the Morgan Action complaint, (4) State Bar Rule 3-500, 5 and (5) State Bar Formal Opinion Interim No. 12-0005. (Pl.’s Req. for Judicial Notice (“RJN”), 6 Dkt. No. 71-5.) 7 The Court takes judicial notice as to the court filings. It is well-known that courts “may 8 take notice of proceedings in other courts, both within and without the federal judicial system, if 9 those proceedings have a direct relation to matters at issue.” United States ex rel. Robinson 10 Rancheria Citizens Council v. Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992). 11 Plaintiff, however, cites no authority in support of judicial notice of the State Bar rule or 12 opinion. Accordingly, the Court denies judicial notice as to these items. See Spindler v. State Bar 13 of Cal., No. CV 18-8712-JLS(E), 2019 U.S. Dist. LEXIS 232614, at *11 (C.D. Cal. Mar. 19, 14 2019) (denying request for judicial notice of State Bar rules where “Plaintiff ma[de] no effort to 15 show how any of these documents meet the requirement of Rule 201 of the Federal Rules of 16 Evidence”). In any case, as discussed below, the Court does not find either relevant to this case. 17 A. Summary Judgment 18 Plaintiff argues that it is entitled to rescind the Policy because Defendants misrepresented 19 or concealed material information on the insurance application, specifically the state court’s 20 February 2017 dismissal of the Phillips Action. (Pl.’s Mot. for Summ. J. at 1.) Defendants, in 21 turn, again argue that the insurance application is ambiguous. (Defs.’ Opp’n at 9-10.) In the 22 alternative, Defendants argue that there was no material misrepresentation. (Id. at 14-15.) 23 i. Contractual Ambiguity 24 As an initial matter, the Court considers Defendants’ argument that the insurance 25 application was ambiguous and therefore unenforceable. First, Defendants point to Question 8, 26 which asks if any attorneys in the firm are aware: “a. of any professional liability, claims made 27 claims made [sic] against them in the past five years?” or “b. of any legal work or incidents that 1 7 at 000006.) Defendants suggest that the lack of a time limit in 8.b. is inconsistent with 8.a.’s 2 five-year time limit. (Defs.’ Opp’n at 9.) These are, however, two separate questions; simply 3 because 8.a. imposes a five-year time limit does not mean 8.b. must do the same. Defendants cite 4 no authority otherwise. 5 Second, Defendants argue that in the Representations section, Defendant Warner was 6 required to initial that he had “specifically asked all lawyers in our firm if they have knowledge of 7 any claim, potential claim, disciplinary matter or circumstance that may Rise to a claim against us 8 that is not listed in our response to Questions 7(V) & Question 8 A & B (VII).” (Defs.’ Opp’n at 9 10; Warner Decl., Exh. 7 at 000006.) Questions 8.a. and b. were, however, in Section VI, not 10 Section VII (which asks only for “Additional Information”). (Id.) Defendants argue this drafting 11 mistake makes the second provision legally unenforceable because it is an incurable ambiguity. 12 (Defs.’ Opp’n at 10.) While there is a drafting error, it does not appear ambiguous; “[a]n 13 ambiguity in a written instrument exists when . . . the written language is fairly susceptible of two 14 or more constructions.” Ike v. Doolittle, 61 Cal. App. 4th 51, 74 (1998) (internal quotation 15 omitted). Defendants fail, however, to explain how this drafting error is susceptible of two or 16 more constructions. No reasonable person would doubt that the Representations refer to 17 Questions 8.a. and b. in Section VI. 18 Defendants also argue that the Representations include the ambiguous term “may,” 19 specifically whether the applicant has knowledge of any claim that may lead to a claim. (Defs.’ 20 Opp’n at 10.) Defendants’ argument is not well-taken. The Court already concluded that the 21 terms “may” and “might” do not render the insurance application ambiguous, relying on California 22 authority. (Order Denying Mot. to Dismiss at 5-7; see also Phoenix Ins. Co. v. Sukut Constr. Co., 23 136 Cal. App. 3d 673, 676 (1982) (finding the phrase “might be expected to be the basis of a claim 24 or suit” to be “perfectly clear”); Admiral Ins. Co. v. Superior Court, 18 Cal. App. 5th 383, 387 25 (2017) (finding that an insurance policy that would not cover a claim arising from an incident the 26 insured knew or could have reasonably foreseen “may result in a claim” clearly provided “no 27 coverage if the insured knew or reasonably could have foreseen that the professional incident 1 authority that requires a different conclusion in their opposition. 2 Finally, Defendants cite to Defendant Warner’s April 12, 2017 letter, which states: “I am 3 not aware of any claims, potential claims, disciplinary matters, etc. that may give rise to a claim.” 4 (Defs.’ Opp’n at 10; Warner Decl., Exh. 9 at 000021.) Defendants argue that this language, which 5 was required by Plaintiff, uses the ambiguous terms “potential claims” and “may.” (Id.) Again, 6 the Court has already found “may” is not ambiguous. Further, Defendants cite no authority that 7 “potential claims” is ambiguous or uncertain. 8 Accordingly, the Court concludes that the insurance application is not unenforceable. 9 ii. Rescission 10 “Governing law permits an insurer to rescind a policy when the insured has misrepresented 11 or concealed material information in connection with obtaining insurance.” TIG Ins. Co. of Mich. 12 v. Homestore, Inc., 137 Cal. App. 4th 749, 755-56 (2006); see also Cal. Ins. Code §§ 331 13 (“Concealment, whether intentional or unintentional, entitles the injured party to rescind”), 359 14 (“If a representation is false in a material point, . . . the injured party is entitled to rescind the 15 contract . . . .”). Here, the parties dispute: (1) whether Defendant Warner misrepresented or 16 concealed information, and (2) whether the misrepresentation or concealment was material. 17 a. Misrepresentation or Concealment 18 “A representation is false when the facts fail to correspond with its assertions or 19 stipulations.” Cal. Ins. Code § 358. Further, “the burden of proving misrepresentation rests upon 20 the insurer.” Thompson v. Occidental Life Ins. Co., 9 Cal. 3d 904, 919 (1973). To warrant 21 rescission, “an actual intent to deceive need not be shown.” Id. at 916. 22 Here, the false representation at issue is Defendant Warner’s failure to disclose the Phillips 23 Action dismissal when asked if he was aware of any legal work that might be expected to lead to a 24 claim. (Pl.’s Mot. for Summ. J. at 21.) Courts have applied an objective “reasonable person” 25 standard to such questions. For example, in Sigelman v. Lawyers’ Mutual Insurance Co., at issue 26 was the plaintiff’s response to the question: “Does the applicant law firm . . . have knowledge of 27 any error or omission or any disagreement with the client which might reasonably give rise to a 1 2008).2 The Court of Appeal found that this question required the court “to consider whether [the 2 p]laintiff’s asserted beliefs were reasonable under an objective standard, such as how a ‘reasonable 3 attorney’ would respond in answer to such a question.” Id. at *14. 4 At the summary judgment stage, the Court cannot definitively conclude that a reasonable 5 attorney would have disclosed the Phillips Action dismissal in the insurance application. Plaintiff 6 relies on cases where the insurance applicant was clearly on notice of a potential claim. For 7 example, in Carolina Casualty Insurance Co. v. RDD, Inc., the defendants were asked whether 8 they “were aware of any fact, circumstance or situation involving [the d]efendants that might 9 reasonably be expected to result in a Claim, such as ‘complaints or accusations . . . of 10 discrimination, harassment, or other Wrongful Acts.” 685 F. Supp. 2d 1052, 1056 (N.D. Cal. 11 2010). The defendants answered no, despite having just received a letter where an employee 12 complained of being subject to sexual harassment on a near-weekly basis for the last year of the 13 employee’s employment, harming her health to the point that she could no longer work for the 14 defendants. Id. Likewise, in Phoenix Insurance Co., the defendant failed to report that he had 15 drafted an inadequate lien for a client even though he knew that the client held him responsible for 16 the lien’s inadequacy. 136 Cal. App. 3d at 677. In both cases, a reasonable person would not 17 have asserted that they were unaware of potential claims under the circumstances. 18 Defendants, in turn, argue that an attorney never needs to report any legal work concerning 19 his practice unless a client expresses dissatisfaction. (Defs.’ Opp’n at 10, 13-14.) The Court 20 disagrees; an attorney could be aware of a potential claim even in the absence of complaints. For 21 example, in Sigelman, the California Court of Appeal found that an attorney was on notice of 22 malpractice claims even where no client complaints were made. There, the attorney failed to 23 disclose a wrongful death complaint he had not timely filed, despite admitting that he had been 24 professionally negligent. 2008 WL 4418183, at *2. The attorney also failed to disclose a 25 wrongful death case that was dismissed after he missed discovery deadlines, and the “court order 26 2 Although “unpublished California Courts of Appeal decisions have no precedential value under 27 California law, the Ninth Circuit is not precluded from considering such decisions as a possible 1 terminating the case outlined in excruciating detail the procedural defects for which [the attorney] 2 was responsible.” Id. at *3. The attorney did not speak to either client after the dismissal of their 3 claims. Id. at *2-3. The Court of Appeal concluded that given that both cases concerned 4 “significant personal losses to the clients of an ongoing nature with potentially high compensatory 5 values,” the lack of reassurance from the clients that they would not sue, and the attorney’s 6 “undisputed knowledge of his own professional errors and omissions” that led to the dismissals of 7 both claims, no reasonable person would have failed to disclose this information in the insurance 8 application. Id. at *16-18. 9 The instant case does not rise to the level of Carolina Casualty, Phoenix Insurance, or 10 Sigelman. Rather, it is more comparable to Continental Casualty Co. v. Stanton Kay & Watson 11 LLP, Case No. 05-cv-5333-MJJ, 2006 WL 8442666 (N.D. Cal. Dec. 11, 2006). There, a law firm 12 was to attend a foreclosure sale in order to provide legal advice for its client. Id. at *2. The law 13 firm had no authority to bid. Both the law firm and client were late to the sale, arriving after the 14 property had been sold. Id. The law firm then brought suit to invalidate the sale; during 15 discovery, the law firm was questioned about its failure to timely arrive at the sale. Id. at *2, 5. 16 The court ultimately upheld the sale. Id. at *2. 17 The law firm did not disclose the foreclosure sale or subsequent lawsuit when renewing its 18 liability insurance. Cont’l Cas. Co., 2006 WL 8442666, at *1. Shortly after its insurance was 19 renewed, the law firm received a tolling agreement from their client regarding claims arising from 20 the failure to timely arrive at the foreclosure sale. Id. The tolling agreement was the first time the 21 law firm learned that its client might pursue claims against it. Id. at *2. 22 The district court found that there was a triable issue of fact as to whether the law firm had 23 misrepresented or concealed information. Cont’l Cas. Co., 2006 WL 8442666, at *6. The 24 insurance company argued that a reasonable person would have disclosed the incident given the 25 sale of the property at a “drastically undervalued price,” as well as the “pointed questioning” of 26 the law firm’s failure to timely arrive at the sale. Id. at *4-5. The law firm, in turn, pointed to the 27 fact that after the deposition, the client had renewed its retention agreement with the firm. Id. at 1 sale late. Id. Further, given that the law firm was only supposed to attend the sale as an advisor, 2 and that the client’s authorized bidder was also late, there was a question of whether the law firm 3 could have expected a claim to arise. Id. Based on these circumstances, the district court 4 concluded that “a ‘reasonable’ person in the place of [the law firm] could, [when applying for the 5 insurance renewal] have concluded that the circumstances surrounding the foreclosure sale was 6 not called for in the Application.” Id. at *6. 7 Such is the case here. A reasonable attorney could conclude that disclosure was required, 8 given the dismissal on statute of limitations grounds and that at issue in the Phillips Action was 9 $1.6 million. But considering the evidence in the light most favorable to Defendants, a reasonable 10 attorney could also conclude that the Phillips Action dismissal was not likely to lead to a claim. 11 For example, Defendant Warner disclosed the statute of limitations issue to the Morgan clients 12 prior to filing the Phillips Action. (Pl.’s Mot. for Summ. J., Exh. 1 at AAIC000257-58.) It does 13 not appear the Morgan clients expressed dissatisfaction to Defendant Warner about the statute of 14 limitations having potentially expired; instead, they hired him to move forward with the Phillips 15 Action. (See Warner Decl. ¶ 9.) After the Phillips Action was dismissed, Defendant Warner 16 immediately informed the Morgan clients of the dismissal, provided his legal analysis, and laid out 17 their options and chance for prevailing on appeal.3 (See Warner Decl., Exhs. 6, 8, 10.) Again, the 18 Morgan Clients did not voice any dissatisfaction, and continued to pay Defendants for legal 19 services in the Morf case. (Warner Decl. ¶¶ 13-14, Exh. 14.) Thus, as in Continental Casualty 20 Co., there is a triable question of fact as to whether Defendant Warner made a misrepresentation or 21 concealed information when he did not disclose the Phillips Action dismissal.4 22 3 Plaintiff suggests that per State Bar Rule 3-500 and Formal Opinion No. 12-0005, Defendants 23 should have informed the Morgan Clients about a potential conflict of interest after the Phillips Action was dismissed. (Pl.’s Mot. for Summ. J. at 20-21; Pl.’s Reply at 5.) Even if true, it is 24 unclear how this disclosure requires that Defendant Warner disclose the Phillips Action dismissal on the insurance application. Further, it appears both the Rule and Formal Opinion were issued in 25 2018 and 2019, after Defendant Warner submitted his insurance application. Thus, it is unclear how these would affect what a reasonable attorney would have done in 2017. 26
4 Defendant provides a declaration by Allen Kuo, who opines whether a reasonable attorney would 27 have disclosed the Phillips Action dismissal. (Kuo Decl. ¶ 4, Dkt. No. 79-3.) Plaintiff objects to 1 b. Materiality 2 “Materiality is determined solely by the probable and reasonable effect which truthful 3 answers would have had upon the insurer. The fact that the insurer has demanded answers to 4 specific questions in an application for insurance is in itself usually sufficient to establish 5 materiality as a matter of law.” Thompson, 9 Cal. 3d at 916. The test is a subjective one, 6 requiring the court to determine “the effect truthful answers would have on the particular insurer, 7 not on some ‘average reasonable’ insurer. W. Coast Life Ins. Co. v. Ward, 132 Cal. App. 4th 181, 8 187 (2005). Further, “[t]he test for materiality is whether the information would have caused the 9 underwriter to reject the application, charge a higher premium, or amend the policy terms, had the 10 underwriter known the true facts.” Mitchell v. United Nat’l Ins. Co., 127 Cal. App. 4th 457, 474 11 (2005); see also Holz Rubber Co., Inc. v. Am. Star Ins. Co., 14 Cal. 3d 45, 61 (1975) (“Materiality 12 is determined by the probable and reasonable effect that truthful disclosure would have had upon 13 the insurer in determining the advantages of the proposed contract. Essentially, we must decide 14 whether the insurer was misled into accepting the risk or fixing the premium of insurance.”); 15 Bennet v. Nw. Nat’l Ins. Co., 84 Cal. App. 130, 136 (1927) (finding that providing the wrong car 16 model was a material misrepresentation that could void the policy because higher premium rates 17 were charged based on the model year). 18 Here, the underwriter for the 2017 renewal of the Policy states that when he prepared the 19 2018 renewal, he “had to change several factors on the underwriting ratings worksheets in 2018 20 from those used in 2017 because of the Morgan Action. These changes resulted in an increase in 21 premium of $6,175.49 . . . .” (Hall Decl. ¶ 20.) Hall further states that if he had known of the 22 Phillips Action dismissal when preparing the 2017 renewal, he “would have made the same 23 changes to the factors on the underwriting ratings worksheets for the Policy as [he] did for the 24 2018 underwriting ratings worksheets. This would have generated the same increase in premium 25 for the Policy as it did for the 2018-2019 policy, meaning that the 2017 premium for the Policy 26 objects to Defendant Warner’s statement that he had insurance coverage between 2016 and 2019. 27 (Pl.’s Reply at 1415.) Again, the Court did not consider this statement, and overrules the 1 would have been $6,175.49 instead of $5,573.38 as quoted and bound.” (Hall Decl. § 21.) 2 Defendants do not dispute this evidence. Rather, Defendants argue that an increase in 3 || premium alone should not be sufficient to have the entire policy rescinded. (Defs.’ Opp’n at 15.) 4 || In support, Defendants contend that the “view that an increase in premium alone is sufficient to 5 || have the entire policy rescinded . . . appears to be the minority view,” relying on out of state 6 decisions. (Ud.) 7 The problem, of course, is that California law is binding on the federal court on issues of 8 state law. California courts have found that an increase in the premium is sufficient to establish 9 materiality. See Holz Rubber Co., Inc., 14 Cal. 3d at 61; Mitchell, 127 Cal. App. 4th at 474; 10 || Bennet, 84 Cal. App. at 136; Merced Cnty. Mut. Fire Ins. Co. v. California, 233 Cal. App. 3d 765, 11 772 (1991) (“Materiality is to be determined solely by the probable and reasonable effect which 12 truthful answers would have had upon the insurer; i.e., was the insurer misled into accepting a 5 13 risk, fixing the premium of insurance, estimating the disadvantages of the proposed contract or 14 || making his inquiries); LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co., 156 Cal. App. 4th 3 15 1259, 1269 (2007) (finding that a misrepresentation was material because it affected “evaluation a 16 || risk and the amount of the premium charged”). 3 17 Accordingly, the Court rejects Defendants’ argument that the premium increase alone is 18 insufficient to satisfy materiality. As the Court, however, has found there is a triable question of 19 fact as to whether Defendants actually misrepresented or concealed information when they did not 20 || disclose the Phillips Action dismissal, summary judgment must be denied. 21 IV. CONCLUSION 22 For the reasons stated above, the Court DENIES Plaintiff's motion for summary judgment. 23 IT IS SO ORDERED. 24 Dated: October 22, 2020
26 United States Magistrate Judge 27 28