Lie on Application & Find Policy Rescinded

MD Refused to Recognize She was Deceived and Misrepresented Facts on Application 

Post 4740

Former patients of Pediatric Partners for Attention and Learning, Inc., sued the clinic and its founder, Dr. Joni Johnson, in state court after learning that the clinic's inhouse psychologist Sharonda Avery, who treated them, was actually not a psychologist at all. The insurer sued to confirm rescission because the application contained false statements.

In Medical Mutual Insurance Company Of North Carolina v. Cathy Gnik, Individually and as Mother and Next Friend of N.A., A Minor and N.L. A Minor; et al, No. 22-1994, United States Court of Appeals, Fourth Circuit (February 16, 2024)

FACTS

Pediatric Partners and Dr. Johnson asked their professional liability insurance carrier, Medical Mutual Insurance Company of North Carolina, to defend and indemnify them in the lawsuits. In response, Medical Mutual brought a declaratory judgment action in federal court, arguing that it could rescind the policy covering Pediatric Partners and Dr. Johnson because of Dr. Johnson's material misstatements in her insurance applications. The district court agreed and granted Medical Mutual's motion for summary judgment.

In 2012, Dr. Johnson founded Pediatric Partners as a multidisciplinary clinic offering medical, behavioral and cognitive services to children and adults in Virginia. That year, Dr. Johnson hired Sharonda Avery as an educational advocate, a position that did not require a license. In 2013, Avery approached Dr. Johnson about becoming Pediatric Partners' in-house psychologist, claiming that she had recently obtained a Ph.D. in General Psychology and would soon earn a Psy.D. in Clinical Psychology. However, Avery was lying.

Before Avery assumed her new role, Dr. Johnson asked Avery for proof of her license to practice psychology. When Dr. Johnson asked for proof of that license, Avery did not provide any. Avery's inability to produce a license did not stop her and although dishonest, Avery was resourceful. She provided Dr. Johnson with fake Ph.D. and Psy.D. diplomas. This apparently satisfied Dr. Johnson, so Avery began administering cognitive testing to patients while holding herself out as a psychologist.

In the spring of 2014, the Virginia Department of Health Professions ("VDHP") received a complaint that Avery was practicing psychology without a license. A VDHP investigator visited Pediatric Partners and spoke with Dr. Johnson about the complaint.

After Avery's promotion Avery told Dr. Johnson, without elaboration, that she did not think she could become permanently licensed. Even so, Dr. Johnson permitted Avery to continue providing testing and therapy services

THE APPLICATION

Later in 2017, while Avery was working part-time at Pediatric Partners, Dr. Johnson sought professional liability coverage from Medical Mutual. Dr. Johnson completed an Entity Professional Liability Application ("Entity Application") and, separately, a Medical Practitioners Professional Liability Application ("Practitioner Application"). The Entity Application included the question, "Has the Applicant or any of its employees ever been the subject of disciplinary investigative proceedings or a reprimand by a governmental or administrative agency, hospital, or professional association?" Despite knowing about the 2014 VDHP inquiry, Dr. Johnson answered, "No."

Medical Mutual issued a professional liability policy to Dr. Johnson and Pediatric Partners for a period of September 1, 2017, to September 1, 2018. But the policy had a retroactive effective date of September 1, 2012, meaning it covered claims based on conduct going back to that date.

In September 2017, Dr. Johnson terminated Avery-not because of Avery's fraud, but due to her increasing unavailability. Dr. Johnson claimed that she only learned of Avery's fraud after Avery left Pediatric Partners.

Dr. Johnson filed claims with Medical Mutual based on two complaints made to the VDHP against her. Whatever the details, there is no dispute that these complaints related to Avery's fraud. Still, Medical Mutual renewed the policy-albeit at a higher premium after identifying the complaints in the policy renewal worksheet-for a period of September 1, 2018, to September 1, 2019.

Authorities arrested Avery in 2019 on multiple state charges stemming from her fraudulent conduct. In 2020, she was convicted.

The district court granted Medical Mutual's summary judgment motion, concluding that Medical Mutual had clearly proven that Dr. Johnson's answer to the disciplinary investigative proceedings question was a material misstatement.

ANALYSIS

The Virginia Code permits an insurer to rescind an insurance policy if the insured made a material misstatement in the policy applications.

Dr. Johnson's subjective knowledge of the falsity of her representation is irrelevant. Under Virginia law, unless an insured qualified her statements as being to the best of her knowledge, or with some similar limitation, "clear proof of mere falsity of the statements [is] sufficient."

Courts in Virginia apply traditional principles of contract interpretation when reviewing insurance policies and when a policy term is unambiguous, a court will apply its plain meaning. Considering the entire phrase and its context, "disciplinary investigative proceedings" is not ambiguous.

Medical Mutual contends that the affidavits of two of its underwriters carried the burden of clearly proving the materiality of Dr. Johnson's misstatement. Both underwriters indicated that, had Dr. Johnson accurately represented that one of her employees had been the subject of a disciplinary investigative proceeding, Medical Mutual would have learned of the 2014 investigation into Avery and refused to issue the policy.

Based on the underwriters' affidavits and the renewal worksheet, the court found that Dr. Johnson's misstatement was material. Medical Mutual has clearly proven that it would have issued the policy at an increased premium if at all-had Dr. Johnson accurately represented that Avery had been the subject of disciplinary investigative proceedings.

Accordingly, there is no genuine dispute of material fact that Dr. Johnson made a material misstatement in her policy applications. The judgment was affirmed.

ZALMA OPINION

Insurance is a business of utmost good faith where neither party to the contract of insurance will do nothing to prevent the other from receiving the benefits of the contract. Dr. Johnson, in bad faith and with knowledge, lied to Medical Mutual to obtain the insurance and ignored the fact that she knew Avery was not licensed, was not a college graduate - let alone the holder of a Phd. Rescission is an equitable remedy where the court concludes it would not be fair to require an insurer to indemnify an insured who obtained the policy by misrepresentation and concealment of material facts.

(c) 2024 Barry Zalma & ClaimSchool, Inc.

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