Can the Innocent Survive Rescission? The Innocent-Insured Exception to the Wrongful-Acts Exclusion

Professional liability policies typically exclude coverage for claims arising out of an insured's knowing, wrongful acts, but, in recognition of the fact that a single policy may extend coverage to multiple insureds working together in association, insurance companies sell the policies with language reinstating coverage for innocent insureds, those of the insureds who had no knowledge of the allegedly wrongful acts of their colleagues. Recently, this innocent-insured coverage has received scrutiny. In two decisions involving professional liability policies, courts have granted an insurer summary judgment, finding that the material misrepresentation regarding prior conduct of a member of an insured firm was grounds for rescinding the coverage of all of the insureds, including those who were innocent and unaware of the wrongdoing. TIG Ins. Co. v. Robertson, Cecil, King & Pruitt, No. 1:01CV00143, 2003 WL 253167 (W.D. Va. Jan. 31, 2003); First American Title Ins. Co. v. Lawson, 798 A.2d 661 (N.J. Super. Ct. App. Div.), appeal granted, 807 A.2d 191 (N.J. 2002). These decisions stand in marked contrast to recent decisions on similar issues by courts in Massachusetts and New York, confirming that innocent insureds are entitled to coverage following the exposure of a co-worker's covert wrongdoing. See In re Perrone, 284 B.R. 315, 320 (Bankr. D. Mass. 2002); Fuchsberg & Fuchsberg v. Chicago Ins. Co., No. 00 Civ. 3118 DLC, 2001 WL 484013, at * 7 (S.D.N.Y May 7, 2001), aff'd sub nom. Fuchsberg & Fuchsberg v. Galizia, 300 F.3d 105 (2d Cir. 2002); Holloway v. Sacks & Sacks, Esqs., 713 N.Y.S.2d 162, 164 (N.Y. App. Div. 2000).