Virginia Court Voids Malpractice Policy Due to Material Misrepresentation

March 12, 2009

In an unusual case, a federal court in Virginia has found that a law firm’s malpractice policy can be voided because a partner failed to disclose to the firm’s insurance company that he had embezzled money from clients.

The case centered on two solo attorneys, Michael Hancock and Stephen Dalton, who joined their businesses in 2006 under the name Dalton Hancock. Upon joining the partnership, Hancock signed a form to add an attorney to Dalton’s claims made malpractice policy through Minnesota Lawyers Mutual Insurance Co.

Unknown to Dalton and his insurer, according to court documents, Hancock had a year earlier begun embezzling clients’ money by moving it from their escrow accounts to his operating account, in part to cover overhead and expenses at the firm. The embezzlement, to which Hancock has admitted, began roughly a year before he signed the form with the insurer and ended roughly a year later.

When two of the clients from whom Hancock had embezzled funds subsequently sued Hancock and the firm, Minnesota Lawyers sought a declaration from the court that the malpractice policy was rescinded and voided because of the material misrepresentation by the insured.

The court agreed in its ruling, which it issued earlier this month along with an order rescinding the policy.

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