Filed 9/30/19 Berkeley Assurance Co. v. Law Offices of David M. Wiseblood CA1/4

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION FOUR

BERKLEY ASSURANCE COMPANY,

Plaintiff and Appellant,

v.

LAW OFFICES OF DAVID M. WISEBLOOD et al.,

Defendants and Appellants.

A155070

(San Francisco City & County

Super. Ct. No. CGC 16-556132)

I. INTRODUCTION

In this insurance coverage case, Berkley Assurance Company (Berkley), a legal malpractice insurer, sought declaratory relief rescinding a malpractice policy (the policy) issued to appellants David Wiseblood and his law firm, the Law Offices of David M. Wiseblood (collectively, Wiseblood) on grounds of material misrepresentation by omission for failure to disclose, in one situation, circumstances that could reasonably be expected to result in a malpractice lawsuit by a group of clients (Levinson/Taylor) and, in a second situation, a case in which he had been sued for malpractice by a client (the RAF Enterprises action).

When the Levinson/Taylor matter eventually did ripen into a lawsuit against Wiseblood (the Migdal malpractice action), Berkley provided a defense under a reservation of rights, but filed this declaratory relief action to test its obligations under the policy. The trial court granted summary adjudication in favor of Berkley, declaring the policy rescinded, and granted Berkley an order requiring Wiseblood to reimburse attorney’s fees and costs advanced for Wiseblood’s defense.

Wiseblood appeals. And Berkley cross-appeals, arguing that the court erred in limiting the reimbursement order to fees and costs incurred prior to the filing of Berkley’s motion. We affirm the grant of summary adjudication but reverse and remand with directions to reopen the summary adjudication proceedings to allow Berkley to claim reimbursement of all fees and costs incurred on Wiseblood’s behalf under the policy.

II. BACKGROUND

A. The Migdal and RAF Enterprises Matters and Berkley’s Issuance of Coverage to Wiseblood

Wiseblood represented Levinson/Taylor in a case called Migdal v. Levinson, CGC-12-517687 (Migdal v. Levinson). Over the course of about a year or more of litigation, Wiseblood repeatedly failed to provide adequate discovery responses, thousands of dollars in monetary sanctions were imposed against Wiseblood and Levinson/Taylor (in one instance against Wiseblood alone) and, ultimately, the court issued terminating sanctions against Levinson/Taylor in late 2014.

Six months later, Wiseblood applied for malpractice coverage with Berkley. He identified only one prior malpractice lawsuit against him in the past five years, a case called Agesong. He omitted any mention of any potential for a malpractice suit against him in connection with his representation of Levinson/Taylor, even though he was asked to disclose all recent “claims” against him, as well as circumstances likely to generate litigation against him. Based on this application, Berkley issued its Lawyers Professional Liability Policy No. VUMB0090500 to the Law Offices of David Wiseblood.

The RAF Enterprises action alleged malpractice by Wiseblood and others. Initially, when the RAF Enterprises action was filed in 2010, Wiseblood was not named as a defendant, but he was added as a defendant in an amended complaint filed in 2011. The plaintiffs in the RAF Enterprises action requested dismissal of the case in September 2011. In the course of investigating the accuracy of Wiseblood’s June 2015 application for insurance, Berkley discovered that, in addition to failing to disclose the potential for a claim by Levinson/Taylor, Wiseblood also failed to disclose the RAF Enterprises action.

B. The Coverage Dispute

In April 2016, Berkley learned of the possibility of a malpractice claim against Wiseblood, not from Wiseblood, but from correspondence sent by counsel for Levinson/Taylor demanding settlement of a previously undisclosed “claim” related to Wiseblood’s alleged professional negligence in handling Migdal v. Levinson. Berkley acknowledged receipt of the correspondence, promptly began to investigate the claim, and contacted Wiseblood and Levinson/Taylor’s counsel to discuss it. On June 2, 2016, Berkley sent correspondence to Wiseblood reserving its rights under the policy, including the right to dispute the application of coverage for the Migdal malpractice claim.

On June 13, 2016, Berkley sent Wiseblood a supplemental reservation of rights letter. Berkley pointed out its concern that, before applying for the policy, Wiseblood had knowledge of circumstances pointing to the likelihood the Migdal malpractice claim would be brought. It asked for “any documents, correspondence, or other information explaining how you reasonably perceived the circumstances of this claim prior to inception” of the policy. It also advised Wiseblood that it had become aware of the RAF Enterprises action, and it requested all information related to Wiseblood’s responses to Questions 17 and 18 on his insurance application.

On July 13, 2016, Berkley issued a second supplemental reservation of rights to Wiseblood. Again, Berkley stated that it was apparent that before inception of the policy Wiseblood had knowledge of circumstances likely to give rise to a claim or that Wiseblood could have reasonably foreseen that a claim would be made. Berkley stated that it continued to reserve all rights to deny coverage for the matter, to rescind the policy, and to seek reimbursement from Wiseblood for all defense fees and costs paid by Berkley which were allocated or attributed to the defense of claims that were not covered or potentially covered under the policy.

On August 2, 2016, Levinson/Taylor filed the Migdal malpractice action. Wiseblood does not deny being aware of the circumstances that led to the filing of the Migdal malpractice action when he signed his insurance application in June 2015 or that he was served with the RAF Enterprises action. What he tells us on appeal—according to Berkley, without support in the summary judgment record—is that his former clients in the Migdal matter told him they did not intend to sue him, so as a result he thought the situation did not qualify as a “claim.” As to the RAF Enterprises action, his explanation is that the litigation was so brief and his role was so minor that he did not recall it when he filled out his insurance application.

C. The Filing of the Declaratory Relief Action

On December 22, 2016, Berkley filed a coverage action seeking declaratory relief and rescission of the policy. In this lawsuit, it alleged four causes of action, each for declaratory relief: the first for a declaration that it has no duty to defend the underlying case, the second for a declaration that it has no duty to indemnify any liability that may arise out of the underlying case, the third for a declaration that it has a right to restitution/reimbursement of defense fees and costs advanced in the underlying case, and the fourth for rescission of the policy.

Specifically, the fourth cause of action alleges: “Based upon the material misrepresentations and concealment of facts in the application for insurance, BERKLEY is entitled to rescind the Berkley Policy under the policy terms as well as recover reimbursement for all amounts incurred by it in the defense of WISEBLOOD in the Action, plus interest, pursuant to California Insurance Code sections 331, 332, 359, 447 and California Civil Code sections 1692 and 1693. BERKLEY accordingly seeks an order of this court that it is so entitled and that the Berkley Policy is rescinded, void ab initio and that BERKLEY be awarded restitution and reimbursement for all amounts paid by it in the defense of WISEBLOOD in the Action from WISEBLOOD, plus interest.” (Italics omitted.)

In June 2017, Berkley moved for summary judgment or in the alternative for summary adjudication (summary judgment motion). In opposition, Wiseblood argued that the motion should be denied because the issue of materiality is generally a question of fact for the jury and presents a triable issue here. The court rejected that argument, granted summary adjudication on the fourth cause of action, and hence declared the policy rescinded. The trial court also awarded Berkley $57,459.12 in fees and costs incurred by Berkley in the defense of a malpractice suit brought against Wiseblood by his clients in the Migdal matter, but limited the reimbursement to fees and costs incurred prior to the filing of the summary judgment motion.

III. ANALYSIS

A. Wiseblood’s Appeal

“The rule in insurance cases is that a material misrepresentation or concealment in an insurance application, whether intentional or unintentional, entitles the insurer to rescind the insurance policy ab initio.” (West Coast Life Ins. Co. v. Ward (2005) 132 Cal.App.4th 181, 186–187; O’Riordan v. Federal Kemper Life Assurance Co. (2005) 36 Cal.4th 281, 286–287; see Ins. Code, §§ 331 [“Concealment, whether intentional or unintentional, entitles the injured party to rescind insurance.”], 359 [“If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false.”].) Having reviewed the summary judgment record, we conclude that, on this record, the trial court was correct to conclude that rescission was justified.

1. General Principles of Rescission

Berkley submitted undisputed evidence of two omissions, each of which justifies rescission. First, Wiseblood failed to disclose the RAF Enterprises action, a prior lawsuit against him of which he was aware or should have been aware. There is no dispute that Wiseblood was served with, and can therefore be charged with knowledge of, the RAF Enterprises action. Disclosure was required by Question No. 17 on Wiseblood’s insurance application, which asked how many professional liability claims or suits had been made against the applicant firm or any present lawyers at the applicant firm in the past five years. Wiseblood responded “1” to this question and identified the Agesong suit only.

Second, Wiseblood failed to disclose material information about a potential professional liability claim arising from his representation in the Migdal matter. Question No. 18 on the application asked: “Is the Applicant Firm or any lawyer in the Applicant Firm aware of any fact, circumstance or situation that might reasonably be expected to result in any professional liability claim or suit against the Applicant Firm . . . or any past or present lawyers in the Applicant Firm? . . . [¶] If ‘Yes’, complete a separate Claim/Circumstance Supplement with full details for each.”

In response to Question No. 18, Wiseblood checked the box for “No” despite the fact that numerous adverse court orders had been entered against him personally and his clients in Migdal v. Levinson; more than $10,000 in sanctions had been awarded against him and his clients; terminating sanctions had been granted disposing of the case adversely to Levinson/Taylor; and a default had been entered only six months prior in that case. Based on the information contained in Wiseblood’s insurance application, Berkley issued the policy to Wiseblood.

Wiseblood argues at length that his omissions in response to Question Nos. 17 and 18 were, at worst, inadvertent. But to justify rescission, a misrepresentation or concealment need not be intentional. “ ‘Courts have applied Insurance Code sections 331 and 359 to permit rescission of an insurance policy based on an insured’s negligent or inadvertent failure to disclose a material fact in the application for insurance . . . .’ ” (LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co. (2007) 156 Cal.App.4th 1259, 1269–1270 (LA Sound), quoting Mitchell v. United National Ins. Co. (2005) 127 Cal.App.4th 457, 469.) Wiseblood argues that to affirm here would be, in essence, to create a rule of strict liability. But what he overlooks is that, to justify rescission, a misrepresentation must also be material.

There can be no real argument about the materiality of the omissions proved up by Berkley. “ ‘Materiality is determined solely by the probable and reasonable effect which truthful answers would have had upon the insurer.’ [Citations.] Section 334 explicitly provides: ‘Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries.’ [¶] ‘ “The fact that the insurer has demanded answers to specific questions in an application for insurance is in itself usually sufficient to establish materiality as a matter of law.” [Citation.] [¶] . . . ’ [Citation.] The test is a subjective one; ‘the critical question is the effect truthful answers would have had on [the particular insurer] . . . .’ ” (West Coast Life Ins. Co. v. Ward, supra, 132 Cal.App.4th at p. 187.)

Berkley submitted undisputed evidence that the disclosure of potential claims or suits is material to it in the underwriting of professional liability policies. According to the declaration of its underwriter, Mr. Diamond, the nature and circumstances giving rise to a potential claim or suit affect whether Berkley will increase the premium charged for the policy, change the policy terms or reject the submission without a quote. Had Wiseblood’s actions in Migdal v. Levinson been disclosed, Mr. Diamond stated, Berkley would never have quoted the policy to Wiseblood and would have rejected the submission.

We are unpersuaded that, even if the record did show that Wiseblood’s clients in the Levinson/Taylor matter told him at one point that they had no intention of suing him, such a statement would have relieved him of the obligation to disclose the circumstances of the entry of terminating sanctions in Migdal v. Levinson. Question No. 18, on its face—which asked about any “circumstance or situation that might reasonably be expected to result in any professional liability claim or suit”—plainly sets up an objective standard, not simply Wiseblood’s subjective assessment of the likelihood of suit. From an objective standpoint, any experienced civil litigator would know that the attitude of a client or former client who has suffered a loss in court can quickly move from acceptance to recrimination, especially after consultation with independent counsel.

Uncontradicted evidence of record also shows that Wiseblood had a prior claims record and that Berkley was price-sensitive to that record in the underwriting process. Question No. 17 on the application asked how many professional liability claims or suits had been made against the applicant firm or any present lawyers at the applicant firm in the past five years. Wiseblood responded “1” to this question. According to the requisite supplemental documentation filled out by Wiseblood, that prior claim was based on Wiseblood’s representation of Nader Shabahangi and his controlled company, Agesong, Inc., against two fraud and breach of contract actions and collateral matters (the Agesong suit).

According to Mr. Diamond’s declaration, the disclosure of the Agesong suit in Wiseblood’s application caused the underwriter working on the application to seek approval from Mr. Diamond to quote the risk. That approval was forthcoming, but only at an increase in the premium. Ultimately, the risk was quoted, but at a much higher premium than the base rate ($8,715 rather than $5,500.) From Mr. Diamond’s declaration, a fair inference—indeed the only reasonable inference—is that the existence of and the allegations in the RAF Enterprises action were material information for Berkley that would have affected the price it quoted on the policy, at least, and may have affected whether it submitted a quote at all.

2. Materiality Is Not Reasonably Subject to Dispute

To deal with the unavoidable inference of materiality arising from the evidence Berkley submitted, Wiseblood emphasizes that materiality is a question of fact. This argument proves too little. Granted, materiality is a question of fact, but that does not mean it always presents a triable issue of fact. Where an insurer establishes based on admissible, undisputed evidence that only one reasonable conclusion may be drawn, the issue of materiality may be decided as a matter of law. (Imperial Casualty & Indemnity Co. v. Sogomonian (1988) 198 Cal.App.3d 169, 182 (Imperial Casualty).) We conclude that it was properly decided on that basis here.

Arguing to the contrary, Wiseblood contends, first, that Question Nos. 17 and 18 are ambiguous and that answers to ambiguous questions on an insurance application cannot supply the basis for a claim of rescission. It has been long settled, Wiseblood contends, that the wording of an insurance application question must be free from ambiguity (see Jefferson etc. Life Ins. Co. v. Anderson (1965) 236 Cal.App.2d 905, 912), and that where there is doubt as to the scope of a question, other things being equal, that construction will be adopted which is most beneficial to the insured. (Ashley v. American Mutual Liability Insurance Co. (N.D.Cal. 1958) 167 F.Supp. 125, 132.) But we see nothing ambiguous about Question Nos. 17 and 18.

Wiseblood focuses on the form of the questions, not on their substance. Pointing out that Question Nos. 17 and 18 repeatedly use the word “or,” Wiseblood argues that the questions are unclear because they are compound and prolix. As authority for this contention, he cites section 2274.73 of title 10 of the California Code of Regulations, a regulation promulgated by the California Insurance Commissioner in the context of health insurance applications. Suffice it to say that, while prophylactic rules mandating plain language in insurance applications are understandably warranted in health insurance and other consumer settings, such rules are inapposite for a lawyer seeking professional liability insurance.

Wiseblood next argues that Berkley did not, in fact, ask Question Nos. 17 and 18 and thus it cannot avail itself of the rule that, when an insurer asks a specific question on an insurance application, the simple fact that it posed the question is proof of materiality. Putting aside the fact that we have more here—the record establishes that Berkley actually relied on Wiseblood’s answers to Question Nos. 17 and 18, not just that the questions were posed—this is an odd argument. It is based on the fact that another company, known as Torus, actually drafted Question Nos. 17 and 18, and that Berkley simply adopted and used Torus’s application form.

According to Wiseblood, the policy was written on what was, for Berkley, a relatively new program for insuring “ ‘non-standard’ ” risks (i.e., applicants with “checkered” malpractice claims histories), and that, while it had its own application form, Berkley used the Torus application form instead for this new program. “Given that Berkley did not write the questions in the Torus Application, it cannot opine on the purpose of those questions,” Wiseblood argues. This argument merits little response. For a legal malpractice liability insurer, the “purpose” of questions asking about prior malpractice claims and the likelihood of future claims is too plain for reasonable argument.

Wiseblood insists that Berkley failed to show he reviewed, signed or subjectively understood the Torus application, but that is beside the point. To the extent the question of materiality is a subjective inquiry, it turns on what the insurer knew; and if the insurer was misinformed about a risk—as Berkley was—we look to how the misstated, false or omitted information would have affected the insurer’s conduct in binding the risk, including whether it would have bound the risk at all. This subjective aspect of materiality has nothing to do with the insured’s state of knowledge.

Finally, Wiseblood argues he should have been allowed to put before a jury the credibility of Mr. Diamond’s statements about the issue of materiality. Here, Wiseblood argues, the totality of the facts had to be evaluated by a jury in light of the fact that Berkley’s internal underwriting guidelines show that “severity” (i.e., size of claims) is more important than “frequency” (i.e., how often claims are made) in evaluating an applicant’s loss history. The short answer to this line of argument is that the test of materiality is subjective; that Mr. Diamond’s declaration established without contradiction that the omitted RAF Enterprises action and the Migdal malpractice action were material; and that nothing in the underwriting guidelines cited by Wiseblood contradicts the Diamond declaration.

B. Berkley’s Cross-Appeal

In its cross-appeal, Berkley argues that the trial court erred by limiting its order of reimbursement to the $57,459.12 in attorney’s fees and costs for Wiseblood’s defense incurred prior to the filing of its summary judgment motion, rather than allowing recovery of all fees incurred in the defense of Wiseblood. Berkley contends that its recovery of all fees and costs incurred in the defense of Wiseblood is necessary because that is the only way complete rescission of the policy can be effected. We agree.

“A contract is extinguished by its rescission.” (Civ. Code, § 1688.) “[R]escission effectively renders the policy totally unenforceable from the outset so that there was never any coverage and no benefits are payable.” (Imperial Casualty, supra, 198 Cal.App.3d at p. 182.) “The consequence of rescission is not only the termination of further liability, but also the restoration of the parties to their former positions by requiring each to return whatever consideration has been received.” (Id. at p. 184.) This rule requires the refund by the insurer of any premiums and the repayment by the insured of any defense expenditures incurred on the insured’s behalf. A rescinded policy is extinguished ab initio; in the eyes of the law, the insured never was an insured under it.

Because the trial court correctly ordered the policy rescinded, Berkley may claim reimbursement of all of the benefits Wiseblood was afforded while the policy was in effect. During the pendency of the summary judgment motion and by the time the trial court entered its summary adjudication order, Berkley argues, it incurred an additional $35,569.14 in fees and costs on top of the $57,459.12 it had spent as of the filing of the motion, for a total of $93,028.26. Except to the extent Wiseblood, by calling for reversal, contests any reimbursement, this additional amount of unreimbursed fees and costs does not appear to be contested. But Wiseblood does point out, correctly, that because the trial court specifically denied Berkley’s request to submit supplemental evidence while the summary judgment motion was pending, the record as it stands does not support an award of any additional amount above $57,459.12.

Apparently, the trial court concluded that, to recover additional amounts expended during the pendency of the summary judgment motion, Berkeley would have to proceed by supplemental complaint. We agree with Berkley that that was error. Procedurally, filing a supplemental complaint was an option, but it was not mandatory. Berkley’s fourth cause of action—which put Wiseblood on notice that, as a remedy, Berkley was seeking all defense fees and costs expended on his behalf—was a sufficient procedural vehicle to use for an order awarding the entire amount in the summary judgment proceedings. Allowing the filing of a supplemental declaration for the purpose of updating the amount of reimbursement owed if summary adjudication was granted on the fourth cause of action would not have altered the pending motion in a material way. Thus, so long as Wiseblood was given a fair opportunity to contest any amounts claimed to have been incurred and reimbursable during the pendency of the motion, the court could have and should have allowed Berkley to file such a declaration increasing the specific dollar amount of reimbursement requested before resolving the motion. If Wiseblood raised a triable issue of fact concerning the proper amount of reimbursement owed, a trial could have been held on that issue alone.

Faced with this kind of error on appeal, Imperial Casualty, supra, 198 Cal.App.3d 169, cited by Berkley in support of its cross-appeal, illustrates the correct way to proceed. In that case the insurer, Imperial, filed a complaint against its insureds seeking rescission of a homeowners’ policy ab initio following a fire loss and repayment of advance payments made under that policy. (Id. at p. 174.) Like Berkley here, Imperial sought rescission due to misrepresentations in its insurance application. (Ibid.) The homeowners cross-complained for, inter alia, breach of contract and bad faith. (Ibid.) Imperial filed a motion for summary judgment which was granted as to the complaint and cross­ complaint. (Id. at pp. 175–176.)

On appeal, the court concluded that summary resolution of plaintiff’s rescission claim and defendants’ cross-complaint was proper, but that the judgment was defective because it simply provided that Imperial was “ ‘entitled to judgment as a matter of law on the complaint and cross-complaint as against defendants and cross-complainants Levon and Elicka Sogomonian and to recover costs in the sum of $______.’ ” (Imperial Casualty, supra, 198 Cal.App.3d at p. 185.) As the court noted, “[t]he judgment did not purport to make a specific damage award in Imperial’s favor nor, for that matter, did the court receive any evidence as to the amount of the proceeds advance made or premiums collected.” (Ibid.) The court concluded that the issue of the amount of Imperial’s money damages had not been resolved by the judgment which was entered. (Ibid.) Accordingly, the court ordered that the trial court’s judgment be reversed with directions to enter a new order granting summary adjudication and to conduct further proceedings to resolve any remaining money damage claims that may exist between the parties. (Id. at p. 186.)

We will order a similar disposition here.

IV. DISPOSITION

The trial court’s order granting summary adjudication on Berkley’s fourth cause of action is affirmed, except to the extent it limits Berkley’s right of reimbursement to attorney’s fees and costs incurred before the filing of the summary judgment motion. The judgment is reversed and the cause is remanded with directions to reopen the summary judgment proceedings for the limited purpose of allowing Berkley to supplement, and Wiseblood to contest, the amount of reimbursement owed by Wiseblood as a result of the policy’s rescission.

Berkley shall recover its costs on appeal.

 

_________________________

STREETER, Acting P.J.

WE CONCUR:

_________________________

TUCHER, J.

_________________________

BROWN, J.

A155070