The New York Court of Appeals rejected an effort by Continental Casualty Company (CNA) to rescind an excess professional liability (E&O) policy issued to the law firm Pepper Hamilton LLP, in a decision under Pennsylvania law that also affirmed summary judgment in favor of two of the firm’s other excess E&O insurers based on the application of a “prior knowledge” exclusion in their policies. Executive Risk Indemnity Inc. v. Pepper Hamilton LLP, No. 130 (N.Y. Oct. 20, 2009).
The dispute centered on Pepper Hamilton’s work on behalf of the now-defunct Student Finance Corporation, which eventually led to significant litigation against Pepper Hamilton. According to the opinion, in March 2002 Pepper Hamilton and one of its partners learned that SFC and its principal (the now twice convicted Andrew Yao), had engaged in securities fraud in connection with SFC’s securitization of student loans. The firm terminated its representation of SFC one month later and in June SFC was forced into involuntary bankruptcy. Pepper Hamilton’s professional liability (or E&O) insurance came up for renewal the following October. In connection with its renewal process, the firm’s general counsel asked all its attorneys whether any were aware of any fact or circumstance, act, error, omission or personal injury that might be expected to be the basis for a professional liability claim. In early August, the partner who was aware of the SFC fraud advised the firm accordingly, but the application submitted by the firm in September did not disclose any information concerning SFC. In April 2004, a new bankruptcy trustee proposed that Pepper Hamilton enter into a tolling agreement with respect to potential claims against the firm by the estate and its creditors. At that point, the firm gave notice to its insurance companies. Lawsuits were filed against the firm in early 2005 and the firm’s primary insurer, Westport, defended the claims.