Guaranteed Rate, Inc. v. Ace American Insurance Company

• Court: Superior Court of Delaware
• Decided: August 18, 2021
• Docket: N20C-04-268 MMJ CCLD
• Status: Published

Opinion

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

GUARANTEED RATE, INC. ) ) Plaintiff, ) ) v. ) ) ACE AMERICAN INSURANCE ) C.A. No. N20C-04-268 MMJ CCLD COMPANY, XL SPECIALITY ) INSURANCE COMPANY, AXIS ) INSURANCE COMPANY, and ) ENDURANCE AMERICAN ) INSURANCE COMPANY ) ) Defendants. )

Submitted: July 14, 2021 Decided: August 18, 2021

On Plaintiff’s Motion for Partial Judgment on the Pleadings

On Insurers’ Cross Motion for Judgment on the Pleadings

OPINION

Brian M. Rostocki, Esq., Reed Smith LLP, Wilmington, Delaware, Lilit Asadourian, Esq. (Argued), Reed Smith LLP, Los Angeles, California, Thomas A. Marrinson, Esq., Reed Smith LLP, Chicago, Illinois, Counsel for Plaintiff

Robert J. Katzenstein, Esq., Smith, Katzenstein & Jenkins LLP, Wilmington, Delaware, David Newmann, Esq. (Argued), Jessica K. Jacobs, Esq., Hogan Lovells US LLP, Philadelphia, Pennsylvania, Counsel for ACE American Insurance Company and XL Specialty Insurance Company

JOHNSTON, J. 1 FACTUAL AND PROCEDURAL CONTEXT

In this insurance coverage case, Plaintiff Guaranteed Rate, Inc. (“GRI”) seeks

coverage for approximately $18 million in connection with a federal government

investigation (“Government Investigation”). The U.S. Attorney’s Office for the

Northern District of New York and the U.S. Department of Justice initiated an

investigation of alleged violations of the False Claims Act.1 GRI received a Civil

Investigative Demand (“CID”) on June 27, 2019.

GRI was in the business of underwriting and issuing federally-insured

mortgage loans. GRI purchased a Private Company Management Liability Policy

from Defendant ACE American Insurance Company (”ACE”). On July 8, 2019,

GRI gave notice of the CID to ACE. By letter dated January 13, 2020, ACE denied

that the CID constituted a “Claim” under the Policy, and declined to advance defense

costs.

GRI has filed a Motion for Partial Judgment on the Pleadings on three issues:

(1) whether the CID was a Claim first made during the Policy period;

(2) whether exclusions in the Policy, including the Professional Services

Exclusion negate ACE’s obligations to advance GRI’s defense costs;

and

1 31 U.S.C. §§ 3729-3733. 2 (3) whether, by refusing to acknowledge the CID as a Claim and refusing

to advance GRI’s defense costs, ACE breached the Policy.

Defendant ACE2 filed a Cross Motion for Judgment on the Pleadings. ACE

contends:

(1) that the Professional Services Exclusion bars coverage under the D&O

part;

(2) that GRI has not pleaded a claim for loss under the EPL part; and

(3) that GRI’s bad faith claim also should be dismissed.

STANDARD OF REVIEW

In a Rule 12(c) Motion for Judgment on the Pleadings, the Court must

consider whether the movant is entitled to judgment as a matter of law.3 Such a

determination by the Court can be made only where there are no material issues of

fact.4 The Court must view the facts in the light most favorable to the non-moving

party.5 The Court also must accept as true all well-pleaded factual allegations.6

2 The Motion originally was filed by all insurer defendants. Defendants XL Specialty Insurance Company and AXIS Insurance Company have been voluntarily dismissed, leaving ACE as the sole movant. 3 Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199, 1205 (Del. 1993) (internal citations omitted). 4 Id. 5 Id. 6 OSI Sys., Inc. v. Instrumentarium Corp., 892 A.2d 1086, 1090 (Del. Ch. 2006). 3 Finally, exhibits attached to the pleadings or incorporated by reference may be

considered.7

ANALYSIS

Insurance Interpretation Standards

The proper interpretation of an insurance policy is a question of law. 8 Policies

should be read as a whole. 9 Terms are given their plain and ordinary meaning. 10

Where the terms are unambiguous, “a party will be bound by its plain meaning

because creating an ambiguity where none exists could, in effect, create a new

contract with rights, liabilities and duties to which the parties had not assented.”11

Coverage provisions are to be read broadly while exclusion provisions should be

read narrowly.12 “The burden of proving the applicability of any exclusions or

limitations on insurance coverage lies with the insurer....”13

7 Id. 8 Intel Corp. v. Am. Guarantee & Liab. Ins. Co., 51 A.3d 442, 446 (Del. 2012). 9 Viking Pump, Inc. v. Century Indem. Co., 2 A.3d 76, 90 (Del. Ch. 2009), aff’d, 148 A.3d 633 (Del. 2016). 10 Id. 11 Hallowell v. State Farm Mut. Auto. Ins. Co., 443 A.2d 925, 926 (Del. 1982). 12 Ferrellgas Partners L.P. v. Zurich Am. Ins. Co., 2020 WL 363677, at *13 (Del. Super.). 13 Alstrin v. St. Paul Mercury Ins. Co., 179 F. Supp. 2d 376, 388 (D. Del 2002); see Cirka v. National Union Fire Ins. Co. of Pittsburgh, PA, 2004 WL 1813283, at *4 (Del. Ch.).

4 Claim First Made During the Policy Period

Pursuant to the Policy, “Claim” is defined in part as “a civil, administrative

or regulatory investigation against the Insured....” “Wrongful Act” includes “any

error, misstatement, misleading statement, act, omission, neglect, or breach of duty

actually or allegedly committed or attempted by” the Insured. “Loss” includes “the

damages, judgments, any award of prejudgment and post-judgement interest,

settlements and Defense Costs which the Insured becomes legally obligated to pay

on account of any Claim first made against the Insured during the Policy Period...for

Wrongful Acts to which this Policy applies....” “Defense Costs” include

“reasonable and necessary costs, charges, fees and expenses incurred by any Insured

in defending Claims.”

The CID, dated June 22, 2019, was issued pursuant to the False Claims Act

“in the course of an investigation to determine whether there is or has been a

violation of 31 U.S.C. § 3729. The investigation concerns allegations that

Guaranteed Rate, Inc. violated the Act by originating and underwriting federally-

insured mortgage loans that failed to meet applicable quality-control requirements.”

GRI received the CID on June 27, 2019. GRI notified ACE of the CID, and

provided a copy on July 8, 2019. The Policy period is June 20, 2018 to July 21,

2019.

5 In Conduent State Healthcare, LLC v. AIG Specialty Insurance Company,14

the Court considered a similar coverage dispute. The Court reviewed split authority

regarding whether a CID is or is not a “Claim.” The Court found “the authority that

supports the CID constituting a ‘Claim’ more persuasive.” The Court held that the

alleged fraud being investigated clearly would be a Wrongful Act. Further, the

insured was a focus of the investigation. The policy’s broad duty to defend required

the insurer to provide coverage “whenever a complaint against the insured, read as

a whole and with all reasonable inferences made in light most favorable to the policy

holder, alleges facts that potentially fall within the scope of coverage.”15 For

purposes of determining coverage, there is no distinction between the investigation

of, or actually alleging, an unlawful act. The duty to pay defense costs must be

“construed broadly, and in favor of coverage whenever factual allegations raise the

possibility of liability covered by the policy.”16

In the instant case, the Court finds that the facts and policy language are

consistent with those in Conduent. The CID falls within the definition of “Claim”

under the Policy. The Claim was first made during the Policy period.

14 2019 WL 2612829 (Del. Super.). 15 Id. at 5-6. 16 Id. at 6. 6 Therefore, Plaintiff’s Motion for Partial Judgment on the Pleadings is granted

on this issue.

Duty to Advance Defense Costs

The obligation to advance defense costs arises when the underlying action

states a claim covered by the insurance policy. 17 The Court reviews the causes in

the underlying action as a whole, considering all reasonable inferences that may be

drawn from the allegations.18

Whether alleged facts fall with the scope of coverage is a matter broadly

construed. Doubts and ambiguities should be resolved in favor of coverage.

ACE argues that GRI’s request for advancement of defense costs was

untimely. ACE contends that the request must have been made prior to disposition

of the investigation. Additionally, ACE asserts that GRI failed to establish that GRI

incurred defense costs in excess of the $2.5 million retention.

The Court finds that “Claim” is defined in the Policy as “a civil, administrative

or regulatory investigation against the Insured.” The CID is part of an investigation

of alleged violations of the False Claims Act. Such violations would be Wrongful

Acts under the Policy definition. Therefore, the CID and related investigation

17 Ferrellgas Partners L.P. v. Zurich American Ins. Co., 2020 WL 363677, at *9 (Del. Super). 18 IDT Corp. v. U.S. Specialty Ins. Co., 2019 WL 413692, at *10 (Del. Super.).

7 constitute a Claim that triggered the duty to advance defense costs under the Policy.

Coverage was requested by the July 9, 2019 notice of the CID.

In any event, advancement is subject to repayment, should subsequent

proceedings determine that the Policy did not provide coverage. Any relevant Policy

retention also will apply. Therefore, GRI is entitled to advancement of defense costs

under the Policy. Plaintiff’s Motion for Partial Judgment on the Pleadings is granted

Professional Services Exclusion

Insurance coverage is interpreted broadly to protect the insured’s objectively

reasonable expectations. Exclusions are strictly and narrowly construed in favor of

coverage.19 The burden is on the insurer to demonstrate that an exclusion applies. 20

In Iberiabank Corp. v. Illinois Union Insurance Company,21 the underlying

case alleged violations of the False Claims Act. In the qui tam action, a former

Iberiabank employee alleged that Iberiabank had submitted false claims and records

to HUD regarding mortgage loans made to borrower clients, in order to secure

mortgage insurance from the FHA.22 The policy was issued specifically to cover

professional services liability. The policy defined “Professional Services” as

19 Medical Depot, Inc. v. RSUI Indemnity Co., 2016 WL 5539879, at *7 (Del. Super.). 20 Alstrin v. St. Paul Mercury Ins. Co., 179 F. Supp. 2d 376, 388 (D. Del. 2002). 21 2019 WL 585288 (E.D. La.), aff’d, 952 F.3d 339 (5th Cir. 2020). 22 Id. at *1. 8 “services performed by or on behalf of [Iberiabank] for a policyholder or third party

client....”23

The Iberiabank court held that “a plain reading of the unambiguous policy

language shows that Iberiabank’s [professional services] claim is not covered.” The

court reasoned that the underlying action accused Iberiabank of committing

wrongful acts against HUD by submitting false and fraudulent information to the

agency. HUD was not Iberiabank’s client. The mortgage borrowers were

Iberiabank’s clients. The alleged wrongful acts were not committed in the

performance of the professional services to the borrower, “but rather in submitting

information to HUD.” The client borrowers did not make False Claims Act claims

and Iberiabank did not provide “Professional Services” to HUD.24

Notably, the insurer seeking to deny coverage for Professional Services in

Iberiabank was Chubb. Chubb successfully asserted that the False Claims Act

allegations were not Professional Services. ACE is part of the Chubb Group of

insurance companies. ACE now argues that the Professional Services Exclusion in

the Policy in this case applies. This means that ACE is contending that the False

Claims Act allegations are Professional Services, and therefore coverage should be

23 Id. at *4. 24 Id. at 5. 9 denied because the Professional Services Exclusion applies. In doing so, ACE

directly contradicts Chubb’s previous position.

In Gallup, Inc. v. Greenwich Insurance Company,25 the underlying litigation

was a qui tam complaint alleging violations of the False Claims Act by “knowingly

mischarging the Government by billing labor to a cost-based contract when the labor

was actually performed to meet requirements on other fixed-price contracts, and

obtaining contracts through improper influence.”26 This Court ruled that a

professional services exclusion did not preclude reimbursement under the policy. 27

The Court reasoned that alleged fraudulent billing practices were not professional

services. Because the policy failed to define “professional services,” the Court

construed the term narrowly against the drafter, and in a manner giving the meaning

most beneficial to the insured.

Further, the Gallup Court found that the professional services exclusion was

drafted so broadly that “virtually any aspect of Plaintiff’s business would be ‘related’

to rendering ‘professional services’ which conceivably would preclude coverage for

all claims made under the Policy. Other courts have commented that interpreting

25 2015 WL 1201518, at *11 (Del. Super). 26 Id. at *3. 27 Id. at *11. 10 exclusionary provisions so broadly as to vitiate all coverage undermines the purpose

of having an insurance policy.”28

The Professional Services Exclusion in this case provides that the Insurer

“shall not be liable for Loss on account of any Claim...alleging, based upon, arising

out of, or attributable to any Insured’s rendering or failure to render professional

services.” The term “Professional Services” is not defined in the Policy.

The Court finds that the Professional Services Exclusion was drafted broadly

by the Insurer. The Insurer failed to define “Professional Services.” The Exclusion

must be interpreted narrowly in favor of coverage. The Wrongful Acts alleged in

the underlying investigation involve originating and underwriting federally-insured

loans that failed to meet applicable quality-control standards. It appears that the duty

to meet certain standards was owed most directly to the federal government, not to

the mortgage borrowers. GRI was in the business of underwriting and issuing loans

to borrowers. Compliance with applicable quality-control standards is not a

Professional Service provided directly to borrower clients, such that coverage would

be excluded by the Policy’s Professional Service Exclusion.

Therefore, the Court holds that the Professional Services Exclusion does not

apply to prevent coverage under the Policy. Plaintiff’s Motion for Partial Judgment

28 Id. at 12.

11 on the Pleadings is granted on this issue. Insurers’ Cross Motion for Judgment on

the Pleadings is denied on this issue.

Employment Practices Liability Coverage Part

The Policy’s Employment Practices Liability Coverage Part (“EPL”)

provides:

The Insurer shall pay the Loss of the Insureds which the Insureds have become legally obligated to pay by reason of a Claim first made against them and reported to the Insurer during the Policy Period..., if such Claim is brought and maintained by or on behalf of...any past, present or prospective full-time, part-time, temporary or leased employee(s) of the Company....

GRI asserts that losses incurred in connection with the Carranza Action are

covered by the Policy. A former GRI employee filed a qui tam complaint under the

False Claims Act, alleging that GRI had retaliated against her by terminating her

employment.

ACE argues that the Carranza Action did not cause any loss that was part of

the Government Investigation and settlement. ACE claims that GRI was not aware

of the Carranza Action when GRI agreed to the settlement.

The Court finds that Plaintiff has stated a claim for coverage under the EPL.

However, this issue presents several questions of fact at this stage of the proceedings,

including:

- when GRI became aware of the Carranza action retaliation claim; 12 - when GRI notified the insurer of the Carranza action;

- whether GRI incurred losses as a result of the Carranza action on the basis

of wrongful employment practices; and

- what portion, if any, of the settlement is allocable to the Carranza claim.

Therefore, the Insurers’ Cross Motion for Judgment on the Pleadings is denied

Bad Faith Claim

In determining other issues, the Court has found that certain questions of fact

remain at this stage in the proceedings. Insurers’ request for dismissal has been

denied.

Therefore, the Court finds that it is premature to decide the validity of a bad

faith claim at this time. Insurers’ Cross Motion for Judgment on the Pleadings is

denied on this issue.

CONCLUSION

The Court makes the following rulings.

The CID falls within the definition of “Claim” under the Policy, and the Claim

was first made during the Policy period. Therefore, Plaintiff’s Motion for Partial

Judgment on the Pleadings is granted on this issue.

13 The CID and related investigation constitute a Claim that triggered the duty

to advance defense costs under the Policy. Coverage was requested by the July 9,

2019 notice of the CID. Advancement is subject to repayment, should subsequent

proceedings determine that the Policy does not provide coverage. Any relevant

Policy retention also will apply. Therefore, GRI is entitled to advancement of

defense costs under the Policy, and Plaintiff’s Motion for Partial Judgment on the

Pleadings is granted on this issue.

The Professional Services Exclusion does not apply to prevent coverage under

the Policy. Plaintiff’s Motion for Partial Judgment on the Pleadings is granted on

this issue. Insurers’ Cross Motion for Judgment on the Pleadings is denied on this

issue.

Plaintiff has stated a claim for coverage under the EPL. However, this issue

presents several questions of fact at this stage of the proceedings. Therefore, the

Insurers’ Cross Motion for Judgment on the Pleadings is denied on this issue.

It is premature to decide the validity of a bad faith claim at this time. Insurers’

Cross Motion for Judgment on the Pleadings is denied on this issue.

IT IS SO ORDERED.

/s/ Mary M. Johnston The Honorable Mary M. Johnston