On Friday, the Sixth Circuit found that a Fen-Phen attorney’s malpractice liability policy coverage was properly rescinded after he and others had been successfully sued for millions of dollars for allegedly breaching their fiduciary duties during the negotiations of the Fen-Phen class action settlement. In February 2002, Mills learned that the Kentucky Bar Association was investigating complaints filed against him in connection with the Fen-Phen class action. In August 2003, Mills applied to renew his professional liability insurance with Continental. Question 3 asked “Are there any claims, or acts or omissions that may reasonably be expected to be a claim against the firm, that have not been reported to the Company or that were reported during the expiring policy period?” Question 4 asked “Has any attorney been disbarred, suspended, formally reprimanded or subject to any disciplinary inquiry, complaint or proceeding for any reason other than non-payment of dues during the expiring policy period?” Mills check “no” on both. The policy also contained a dishonesty exclusion which stated that the policy would not apply to any claim based on or arising out of any dishonest, fraudulent, or criminal or malicious act or omission. Continental Casualty brought suit against Melbourne Mills Jr., seeking a declaration that it was entitled to rescind Mills’s insurance policy. The district court held that Continental was entitled to void the policy because Mills’s response to Question 4 constituted a material misrepresentation under K.R.S. Section 304.14-110.
In Continental Casualty Co. v Law Offices of Melbourne Mills, Jr., PLLC, Case No. 10-5813, the Sixth Circuit affirmed the district court’s decision in favor of the insurance company on two alternative bases. First, Mills’s negative response to Question 3 was a material misrepresentation in light of the ongoing Kentucky Bar Association inquiry. The Court found that Mills’s misrepresentation to Question 3 was material because Continental would not have issued the policy or would not have issued the policy at that rate if it new about the ongoing investigation by the Kentucky Bar Association. Further, the Court held that Mills was required to disclose information about his actions in the Fen-Phen fee-splitting arrangement because “Mills was aware that he had engaged in conduct that led to the disbarment of him and two of his co-counsel.” Second, the Kentucky Supreme Court’s 2010 order permanently disbarring Mills for his actions in the Fen-Phen representation fell within the policy’s dishonesty exclusion. The order determined that Mills had committed “dishonest” and “fraudulent . . act[s] or omission[s]” and was sufficient to bar coverage. The Sixth Circuit therefore found it unnecessary to address whether Mills’s response to Question 4 warranted rescission of the policy. In affirming the district court’s decision, Continental will receive a judgment of $233,674.49, which was the amount of the defense cost Continental paid on his behalf in the class action brought against him.