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In a case that will test the New Jersey Supreme Court’s social-guardian impulses, the justices heard arguments March 3 on whether one lawyer’s lie on a malpractice insurance application should leave the whole firm without coverage. If the answer is yes, legal malpractice carriers will be free to rescind policies for entire firms if they decide material facts have been misrepresented. That means a lot of law firms that believe themselves covered could be wearing armor riddled with holes. If a law firm has gone belly-up, such a rescission would work to the detriment of those whom malpractice insurance is designed to compensate: the clients, who could be left holding the bag. The Appellate Division believed otherwise, ruling last year that rescission is permissible even if the other partners were “innocent insureds” under a policy clause stating that coverage would remain in effect for partners not complicit in acts that would be cause for rescission. First American Title Ins. Co. v. Lawson, 351 N.J. Super. 407 (2002). Now the plaintiffs’ lawyers are arguing that the justices should take a liberal view of insurance, erring on the side of coverage rather than exclusion, which is a New Jersey Supreme Court tradition. While insurers have a right to demand full disclosure in an application, “We all know that doesn’t happen in real life,” said Russell Finestein, a partner at Chatham, N.J.’s Finestein & Malloy. He argued that other lawyers in a firm have a “reasonable expectation” that they and the firm will have coverage, even if one partner has misrepresented his past. It all started when Kenneth Wheeler, of Guttenberg, N.J.’s Wheeler, Lawson & Snyder, failed to disclose potential malpractice claims while filling out the firm’s application for legal malpractice insurance with Certain Underwriters at Lloyd’s in late 1997. As early as January 1997, Wheeler had been misappropriating client trust funds in connection with real estate closings, writing checks to himself from the law firm’s trust accounts totaling at least $5,900 and cashing them. Based on his representations, Lloyd’s subscribed to a policy covering the firm and its partners, effective through April 1999. The policy was almost canceled when a premium was not paid by the Dec. 19, 1998, due date but was reinstated in January 1999 when Wheeler paid the premium and executed a warranty that he was not aware of claims against the firm or its partners during the past five years nor of any basis for a claim. In the interim, partner Edward Lawson discovered Wheeler’s misappropriation of client funds and confronted him. The two then devised a “kiting” scheme to pay back the trust accounts. Monies from one client account were transferred to pay obligations of another. Monies were also transferred from trust accounts to the firm’s business account to pay expenses, including partners’ draws. Partner Craig Snyder, who worked in the firm’s Manhattan office, was not aware of the scheme. In early January 1999, before Wheeler’s execution of the warranty, the Office of Attorney Ethics notified the firm that it would conduct an audit of its books as a result of grievances received about the handling of real estate transactions. At about the same time, two of the real estate clients brought suits claiming misappropriation of closing funds. Their title companies, First American Title Insurance Co. and Lawyers Title Insurance Co., paid the defrauded clients and then filed suits against the firm and its partners to recover the monies expended. The trial court found liability against Lawson, Wheeler and the law firm, but denied the motion by Lloyd’s for summary judgment that it was entitled as a matter of law to rescind its policy as void ab initio, even against Snyder, an innocent party. At the New Jersey Supreme Court on March 3, lawyers for Lloyd’s took a hard line. “These are emotional arguments, not legal arguments,” said Diane O’Neil, a partner at Newark, N.J.’s Mendes & Mount. She said Snyder and the firm as an entity are “bound by those misrepresentations, even if he was not aware of them.” O’Neil’s partner, Robert Priestley, said malpractice insurance carriers need to know in advance of potential malpractice claims before they can issue a policy. “They expect to be dealt with in utmost good faith,” he said. “That clearly did not happen here.” Lawson is the only one of the partners to have been disbarred. Wheeler was never admitted to practice in New Jersey, despite his doing real estate closings in the state.

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