James River Insurance Company v. Hebert Schenk, P.C.
United States Court of Appeals for the Ninth Circuit on appeal from the District Court of Arizona, Maricopa County
Cite as 06-15622

The Ninth Circuit orders the reversal and remand of judgment on Insurance controversy

Jack Hebert was an attorney from the law firm Hebert Schenk. He was retained by David Nolan and Cherry Nolan in November of 2001 to represent them in connection with the negotiations and possible litigations that might arise out of their failed business venture with the Walls (Tony and Shirley Walls).

As the event goes, a sudden twist of relationship arose between Nolan and Hebert that resulted to the cessation of their attorney-client professional relationship.

This was evidenced by a letter written by the Nolans addressed to Hebert which among other stated a demand to Hebert to return Nolan’s documents and waiver of the $1,162.38 in legal fees. This was acknowledged by Hebert and consequently returns the documents and waives the fees.

In the meantime, on April 19, 2004, Hebert Schenk applied for a professional liability insurance policy with James River Insurance Company (James River).

Subsequently, prior to the issuance of the policy, James River faxed an insurance quote to Hebert Schenk which among require submissions of updated signatures, other supplements and a statement of no known claims or incidents.

Hebert Schenk responded that it had no known claims and no known claims incidents to report.

Based on the representations, on June 12, 2004, James River issued a 1 year professional liability insurance policy to Hebert Schenk.

Following the course of events, the Nolans filed claims for negligence and breach of fiduciary duty in Arizona Superior Court against Hebert and the firm Hebert Shenck.

By reason of the suit, Hebert Shenck demanded James River for their defense citing the insurance policy.

James River provided defense representation to Hebert and the firm, with reservations that:

• They will later on deny coverage on the ground that Nolans claims were both reasonably foreseeable


• That the same were undisclosed prior to the issuance of insurance policy as to amount to material misrepresentations.

Subsequently, James River filed an action in the district court of Arizona seeking

1. A declaration that the Nolans’ malpractice claims are not covered by the insurance policy and


2. recoupment of the payments made for the defense.

Hebert Schenk counterclaimed and made the following contentions:

• that James River breached the insurance contract by refusing to defend against the Nolan lawsuit


• That James River committed bad faith by engaging in a series of wrongful acts for the purpose of denying coverage

James River moved for summary judgment on the declaratory judgment action and the counterclaims.

The district court granted both motions and held partly that Arizona Revised Statutes § 20-1109 permits a denial of coverage because the insured’s omission constitutes legal fraud. Also, the court rejected the counterclaims because the insurer provided for the malpractice defense.

Armed with new expert testimony, Hebert Schenk moved for reconsideration with respect to the counterclaim of bad faith.

The court however, denied the motion on the view that the evidence should have been provided earlier.

Thus, the firm (Hebert Schenk) appeals the adjudication of the declaratory judgment action and the counterclaim of bad faith to the United States Court of Appeals for the Ninth Circuit.

The sole issue on appeal was that whether the district court erred in granting summary judgment to a professional liability insurer on a claim seeking a declaration of no coverage, and on counterclaims for breach of contract and bad faith under Arizona law.

The appellate court has ruled in these respects:

• Under Arizona law, where law firm applied for professional liability insurance and failed to mention a letter it had received from a client complaining of deficient representation in response to the insurer’s inquiry whether the firm was "aware" of "any incident which may result in a claim being made against" the firm, this failure was insufficient to entitle the insurer to summary judgment on its claim seeking a declaration of no coverage for the subsequent litigation between the client and the firm because reasonable persons could differ as to whether the insurer’s question elicited a statement of opinion or fact.


• Summary judgment in the insurer’s favor based on language in the policy that excluded any "foreseen" claims from coverage was also unwarranted because it was not clear that the client’s suit was reasonably foreseeable.

In full, the appellate court orders the reversal of the district court’s findings and remanded the case for further proceedings.