United States District Court, N.D. California
ORDER DENYING DEFENDANTS' MOTION TO DISMISS RE:
DKT. NO. 13, 29
KANDIS
A. WESTMORE United States Magistrate Judge
Plaintiff
American Alternative Insurance Corporation filed the instant
case against Defendants John G. Warner and Law Offices of
John G. Warner, seeking to rescind a professional liability
insurance policy issued to Defendants. (Compl. ¶¶
1-2, Dkt. No. 1.) On October 7, 2019, Defendants filed the
pending motion to dismiss the complaint. (Defs.' Mot. to
Dismiss, Dkt. No. 13.) The Court deems the matter suitable
for disposition without hearing pursuant to Civil Local Rule
7-1(b), and VACATES the December 5, 2019
hearing.[1] Having reviewed the parties' filings
and the relevant legal authority, the Court DENIES
Defendants' motion to dismiss.
I.
BACKGROUND
Around
2002, the firm Phillips, Downs & Simontacchi, LLP
(“Phillips Firm”) represented Daniel H. Morgan,
Mark S. Cunningham, and MCCE Development, LLC (collectively,
“Morgan Clients”) in several litigation matters
against the City of Novato (“Novato Litigation”).
(Compl. ¶ 24.) Starting in January 2004, the Phillips
Firm jointly represented the Morgan Clients and George Morf
in the Novato Litigation. (Compl. ¶ 24.) During this
representation, the Phillips Firm did not advise the Morgan
Clients or Mr. Morf that there was a conflict of interest due
to the joint representation, nor did the Phillips Firm seek a
waiver of the conflict of interest from either client.
(Compl. ¶ 25.)
On
August 23, 2013, Mr. Morf filed a lawsuit against the Morgan
Clients and the Phillips Firm (“Morf
Litigation”). (Compl. ¶ 26.) Mr. Morf asserted
claims against the Phillips Firm for legal malpractice and
breach of fiduciary duty based on the joint representation,
and against the Morgan Clients for indemnification and
misrepresentations related to the Novato litigation. (Compl.
¶ 26.) Defendants represented the Morgan Clients during
the Morf Litigation, i.e., from August 22, 2013
through the appeal of the June 8, 2015 jury verdict. (Compl.
¶ 27.)
On
April 25, 2016, Defendants sent the Morgan Clients a letter,
advising them of the damages they may be able to recover from
the Phillips Firm for the undisclosed conflict of interest.
(Compl. ¶ 28, Exh. D at 31-32.) Defendants also advised
that the statute of limitations had already expired unless a
tolling exception applied. (Compl., Exh. D at 32-33.)
Defendants stated that they believed the statute of
limitations would start on the date of the adverse judgment,
i.e., June 9, 2015. (Id. at 33.)
On June
6, 2016, Defendants, on behalf of the Morgan Clients, filed a
malpractice suit against the Phillips Firm (“Phillips
Litigation”). (Compl. ¶ 29.) On February 7, 2017,
the Phillips Litigation was dismissed on statute of
limitation grounds. (Compl. ¶ 30.) In part, the state
court found that the Morgan Clients had “incurred
‘actual injury' more than one year before this
malpractice lawsuit was filed when they were compelled to
defend Morf's claim . . . an event which Plaintiff
attributes to defendants' negligence and breach of
fiduciary duty . . . .” (Compl., Exh. D at 29.)
On
April 3, 2017, Defendants submitted an “Application for
Lawyers Professional Liability Insurance”
(“Insurance Application”) to renew their
professional liability insurance policy for the period of May
8, 2017 to May 8, 2018. (Compl. ¶ 14.) The Insurance
Application included the question:
8. After inquiry, are any attorneys in your firm aware:
a. of any professional liability, claims made[, or] claims
made against them in the past five years?
b. of any legal work or incidents that might be expected to
lead to a claim or suit against them?
(Compl. ¶ 15.) Defendants responded “No” to
both. (Compl. ¶¶ 15-16.) The Insurance Application
also contained a “Representations Provision, ” in
which Defendants affirmed that the information contained in
the Insurance Application was true to the best of their
knowledge. (Compl. ¶ 17.) Additionally, on April 12,
2017, Defendants submitted a letter to Plaintiff's agent,
which stated, in part: “I am not aware of any potential
claims, disciplinary matters, investigations or circumstances
that may give rise to a claim.” (Compl. ¶ 19.)
Based
on Defendants' representations, Plaintiff issued Lawyers
Professional Liability Insurance” Policy No.
3LA2PL0000687-02 to Defendants, effective for the policy
period May 8, 2017 to May 8, 2018 (“Policy”),
with a retroactive date of May 8, 1998. (Compl. ¶¶
21, 38.) The Policy states that it does not apply to:
“Any CLAIM arising out of any WRONGFUL ACT occurring
prior to the effective date of this policy if . . . the
INSURED at or before the effective date of this policy knew
or could have reasonably foreseen that such WRONGFUL ACT
might be expected to be the basis of a CLAIM.” (Compl.
¶ 23.)
On
January 16, 2018, the Morgan Clients wrote to Defendants
regarding their malpractice claims against Defendants for
failing to timely file the Phillips Litigation. (Compl.
¶ 31.) Defendants tendered the January 16, 2018 letter
to Plaintiff for defense and indemnity. (Compl. ¶ 32.)
On February 2, 2018, the Morgan Clients filed their complaint
for legal malpractice against Defendants (“Morgan
Litigation”). ...