CNA can rescind professional liability policy after fraud conviction

A CNA Financial Corp. unit has prevailed in its efforts to rescind the professional liability policy of an accounting firm one of whose owners was convicted of fraud, in a ruling issued Monday.

In April 2010, Chicago-based Continental Casualty Co., a CNA unit, issued an accountants professional lability insurance policy with limits of $2 million per claim and $4 million in the aggregate to Armonk, New York-based Marshall Granger & Co. L.L.P., a certified public accounting firm that was owned and managed by Laurence M. Brown and Ronald J. Mangini, according to court papers in Continental Casualty Co. v. Joseph J. Boughton Jr., Northstar Investment Group Ltd.

In 2011, Mr. Brown pleaded guilty to criminal charges of security fraud, wire fraud and money laundering in connection with selling fictitious stock and promissory notes as part of a scheme that yielded more than $2.1 million in fraudulently obtained profit, according to court papers.

Continental began legal action in U.S. District Court in White Plains, New York, seeking rescission of the policy in June 2011, arguing Mr. Brown had made material misrepresentations in the insurance application.

In November 2011, Mr. Boughton, who is president and CEO of Alpharetta, Georgia-based Northstar and a Granger client, and his firm intervened in the litigation after Mr. Mangini assigned them all of his rights under the policy.

The District Court granted Continental summary judgment as to whether it was entitled to rescind the policy based on the material misrepresentations, but denied summary judgment as to whether Continental had forfeited its right by virtue of unreasonable delay in seeking recission, or had otherwise ratified the policy. A jury ruled in Continental’s favor on this issue in June 2016.

On appeal, Mr. Boughton and Northstar argued Continental cannot rescind the policy, notwithstanding its misrepresentations, because it had “ratified” the policy and unreasonably delayed seeking rescission. A unanimous three-judge appeals court panel of the 2nd U.S. Circuit Court of Appeals in New York ruled in Continental’s favor on both issues.

“The intervenors argue that Continental ratified the policy by amending it,” said the ruling. “The amendments in question, however, merely changed the insured’s name and address.”

The District Court also properly rejected the argument that Continental ratified the policy when it agreed to pay $12,500 to one of the accounting firm’s owners to defray his legal costs, said the panel, in addressing another one of the arguments presented. It was “legally compelled to make the payment,” said the ruling.

It also held that the District Court had properly instructed the jury in the case.