Liars Never Prosper

If Lawyers Lie on Insurance Application Policy Rescinded

Post 4982

Schibell, Mennie &Kentos, LLC, Schibell &Mennie, LLC, and Richard D. Schibell, appealed a May 4, 2023 dismissal order entered after the trial court granted summary judgment to defendants Allied World Insurance Company and Allied World Specialty Insurance Company and denied plaintiffs' cross-motion for the same relief.

In Schibell, Mennie & Kentos, et al v. Allied World Insurance Company et al, No. A-3144-22, Superior Court of New Jersey, Appellate Division (December 20, 2024) the appellate division resolved the disputes.

KEY FINDINGS
Material misrepresentations in an insurance application allow the insurer to void the policy ab initio.
A fact is material if it would influence the insurer's judgment in issuing the policy.
New Jersey law permits contract rescission based on equitable fraud without needing to prove the defendant's intent to deceive.
The Firm's application and renewals contained material misrepresentations, leading to the policy being void from inception.
Since the policy was void at inception due to these misrepresentations, Allied is not liable for breach of contract, the duty of good faith and fair dealing, or violations of the Consumer Fraud Act.
FACTS

The state Office of Attorney Ethics (OAE) found Schibell lied. The OAE also found Schibell issued checks from two different trust accounts to the same clients in duplicate amounts, without ever delivering the checks to the clients. Instead, Schibell endorsed and cashed the clients' checks at a check cashing business in which he held a proprietary interest, without client authorization. Schibell admitted that he failed to "(1) maintain accurate trust account records; (2) deposit the $30,000 fee . . . into his attorney business account; and (3) promptly disburse the $4,595.83 remaining on deposit in the [trust account] into his business account."

A special ethics master (SEM) recommended the Court suspend Schibell's license for six months, based on the findings that he violated rules concerning commingling and record keeping, knowingly making false statements of material fact in connection with a disciplinary matter, and conduct involving dishonesty, fraud, deceit, or misrepresentation. The SEM suggested dismissing the remainder of the charges.

The Disciplinary Review Board (DRB) issued a thirty-six-page opinion on March 20, 2017, affirming the SEM's findings that Schibell's unethical conduct was established by clear and convincing evidence. The Court ultimately adopted the DRB's decision and censured Schibell instead of suspending him from the practice of law.

On June 7, 2016, the Firm submitted an application for malpractice insurance from Allied. Application question 11(a) asked "[h]as any attorney been the subject of any bar complaint, investigation or disciplinary proceeding within the past [five] years?" The Firm responded "No." On three successive years, the Firm submitted renewal applications signed by Schibell providing the same response.

In August 6, 2019, plaintiffs requested coverage under the 2018 policy for a claim asserting Schibell fraudulently converted life insurance policy proceeds intended for the estate of his former partner, Mark Kentos. After its independent discovery of Schibell's disciplinary history, Allied denied the claim.

Schibell admitted he omitted the disciplinary action on his policy application. On October 28, 2019, Allied rescinded the malpractice policy to the Firm.

Plaintiffs filed suit against Allied alleging breach of contract and violation of the New Jersey Consumer Fraud Act (CFA). After the discovery period expired on March 2, 2022, the trial court entered an order granting summary judgment to Allied and denying plaintiffs' cross-motion.

OPINIONS

The Appellate Division concluded that the undisputed facts established plaintiffs'  representation in the malpractice policy application and renewals were material and false and voided the policy ab initio (from its inception).

A fact is material if it naturally and reasonably influenced the judgment of the underwriter in making the contract at all, or in estimating the degree or character of the risk, or in fixing the rate of premium.

Equitable fraud is similar to legal fraud; however, the plaintiff need not establish the defendant's scienter, that is, defendant's knowledge of the falsity and intent to obtain an undue advantage.

Material misrepresentations support rescission of the policy. Plaintiffs were on notice, through the policy language, that Allied would rely on the Firm's representations in the application and renewals as material accepting that if any representation is false or misleading, this Policy shall be void from the inception.

The insurance contract at issue is void at its inception based on the material misrepresentation by the Firm in the initial policy application and continued throughout the renewals.

Both parties filed for summary judgment. The trial court granted summary judgment to Allied leading to the appeal. The Appellate Division affirmed the trial court's decision, concluding that the plaintiffs' misrepresentations voided the policy from its inception.

ZALMA OPINION

Much to the surprise of some litigants and their lawyers the covenant of good faith and fair dealing applies equally to the insured as it applies to the insurer. In this case, the insured lawyer and law firm, misrepresented to its insurer that it had not been disciplined by the state with full knowledge that the statement was false. Rescission was proper because the insurer relied on the statements made by the insured lawyer and law firm. The lawyer and his firm learned that lying to an insurance company on an application for insurance is costly and left them uninsured.

(c) 2025 Barry Zalma & ClaimSchool, Inc.

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