American Alternative Insurance Corp. v. Warner

          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”). ...