The central issue addressed by a federal court in these proceedings was whether an insurer was entitled to reform professional liability insurance because of alleged misrepresentation in a renewal application. An authorized partner (applicant) in the insured law firm answered the following question in the application form in the negative for the annual renewal:

"Is the firm aware of any circumstances, or any allegations or contentions as to any incident which may result in any claim being made against the firm or any of its past or present Owners, Partners, Shareholders, Corporate Officers or Employees or its predecessors in the business?" The applicant signed the form directly below the following statement:

"I/we hereby declare that the above statements and particulars are true and I/we have not suppressed or misstated any material facts, and I/we agree that this application shall be the basis of the contract with the Company."

The record showed that: The renewal application was signed on November 8; the insured's bookkeeper asked the insurer to increase the policy limits from $2 million per claim/$3 million aggregate to $5 million per claim/$5 million aggregate, when five new attorneys were added to the firm in December; the policy was renewed with the higher limits effective the anniversary date the following March.

The insurer sought reformation of the policy to its previous lower limits when claims were brought against the firm because of alleged losses stemming from a $26 million loan by a savings and loan association to a real estate development corporation in which the applicant and another law firm partner (or family members) were shareholders. The other partner, who had also been counsel for the savings and loan, was relieved by it from that position two weeks before the effective date of the renewal policy.

The court noted, and the applicant acknowledged in retrospect, that he knew of these relationships at the time of the signing of the application. It found that he "credibly testified" that he did not intend to defraud the insurer. But, though no third parties had made claims against the law firm prior to the removal application, the negative statement in the application was relative to circumstances that could lead to a claim. The applicant knew of them.

The court reformed the insurance policy to its prior lower limits.

(ESOLDI ET UX., Plaintiffs v. ESOLDI ET AL., Defendants. United States District Court for the District of New Jersey. No. 92-5190 (WGB). April 9, 1996. CCH 1996 Fire and Casualty Cases, Paragraph 5820.)