United States Court of Appeals
For the First Circuit
No. 07-2762
NEW FED MORTGAGE CORPORATION,
Plaintiff, Appellant,
v.
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Lynch, Chief Judge,
Boudin, Circuit Judge,
and Schwarzer,* District Judge.
Robert S. Wolfe with whom Robert Wolfe Associates, P.C. was on
brief for appellant.
John P. Connelly with whom Robert A. McCall and Peabody &
Arnold LLP were on brief for appellee.
September 30, 2008
*
Of the Northern District of California, sitting by
designation.
LYNCH, Chief Judge. This case involves the use of false
credit information that is material to the risk of home mortgage
lending transactions.
New Fed Mortgage Corporation, a mortgage originator, sued
its insurer, National Union Fire Insurance Company of Pittsburgh,
PA, in 2007, alleging that National Union had wrongfully denied it
coverage under an errors and omissions ("E & O") policy. On cross
motions, the district court granted National Union's motion for
summary judgment because it found that New Fed's claim fell within
an exclusion in the policy. The district court later denied New
Fed's motion to alter or amend the judgment. We affirm, albeit on
grounds of a different policy exclusion.
I.
In reciting the facts, we draw all reasonable inferences
in New Fed's favor, as we must on summary judgment. Mellen v. Trs.
of Boston Univ., 504 F.3d 21, 24 (1st Cir. 2007).
New Fed is a residential mortgage originator and broker.
It receives mortgage applications from prospective borrowers and
presents those applications to lenders for approval. If a lender
approves a mortgage, it pays New Fed a fee for arranging the loan.
New Fed makes its profit on the spread between its costs in the
processing, selling, and funding of the loan and the amount
realized when the loan is sold to an investor.
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As part of its services, New Fed provides lenders with
information regarding the mortgage applications it receives,
including the prospective borrower's credit report obtained from an
independent credit bureau. Lenders use the borrower's credit
history, among other factors, to assess the value and terms of a
particular mortgage. They give greater value and better terms to
a mortgage as the likelihood increases that the borrower will repay
it. If a lender approves a mortgage believing the borrower's
credit history to be stronger than it is, the lender may well
suffer a loss because the loan's terms do not reflect the lender's
risk. Moreover, lenders often resell various interests in the
mortgages they own to other financial institutions. The
consequence of this reselling is that the loss incurred from a
mortgage obtained on the basis of an inaccurate credit report can
be far reaching.
Kevin Dunn worked under contract as a mortgage broker for
New Fed starting in June 2005. New Fed's mortgage brokers assist
prospective borrowers in completing their mortgage applications.
They gather information regarding the applicant's financial history
and explain to each applicant the terms of the proposed loan. New
Fed paid Dunn on commission and only upon the closing of the loan,
giving him incentive to have third party lenders approve the loans
he prepared. The record indicates that Dunn, while working for New
Fed, falsified the credit reports he had received from the
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independent credit bureau in several of the mortgage applications
he processed by assigning higher credit scores to the prospective
borrowers.1
Decision One Mortgage Company, LLC -- now defunct -- was
a mortgage lender. In November 2003, it entered into an agreement
to use New Fed's services to receive mortgage applications,
including credit data. New Fed's brokerage agreement with Decision
One provided that New Fed "warrant[ed] the accurateness and the
truthfulness of all information, credit or otherwise," it submitted
to Decision One. New Fed also agreed to indemnify Decision One for
the losses that "may be incurred by Decision One arising out of
. . . any breach" by New Fed of any warranty under the contract.
Between January and April 2006, Decision One approved
fifteen mortgages from New Fed in which Dunn had altered the credit
reports. In April 2006, Decision One through the course of an
internal audit noticed discrepancies between the credit reports it
had independently obtained and those New Fed had provided for the
fifteen mortgages. On April 20, 2006, Decision One notified New
Fed of the problem.
New Fed investigated the matter. New Fed discovered that
Dunn had prepared all fifteen mortgage applications but was unable
to determine exactly how Dunn had altered the applicants' credit
1
New Fed asserts that lenders obtain their own independent
credit reports before approving a mortgage.
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scores. New Fed considered it most likely that the original credit
reports sent by email to Dunn from the credit bureau had been
scanned into an outside computer system, altered, and published in
altered form. The altered reports were then substituted for the
original credit reports in the loan package submitted to Decision
One. Dunn denied altering the credit reports to New Fed's
investigators. Following the conclusion of New Fed's
investigation, Dunn resigned.
Decision One resold four of the fifteen mortgages to a
third party for a total price of $1,034,150. After Decision One
discovered that New Fed had falsified the credit reports, the third
party investor who had purchased four of the mortgages from
Decision One required Decision One to repurchase each mortgage at
its original price.
On August 24, 2006, Decision One orally requested
indemnification from New Fed for the losses that it would incur
through the repurchase and resale of those four loans. New Fed
asked that Decision One make its demand in writing. On October 2,
2006, Decision One sent New Fed a demand letter, alleging that
Decision One had suffered "substantial losses" relating to those
four mortgages "[a]s a result of the fraudulent information
included in the loan packages submitted by New Fed." The letter
requested that New Fed either purchase the four mortgages at their
original price or compensate Decision One for the losses it would
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realize when selling the mortgages at auction. New Fed responded
but did not offer to compensate Decision One.
Decision One eventually sold the four loans together at
auction. On February 15, 2007, Decision One requested that New Fed
pay it $233,052.75, the total loss incurred in the repurchase and
resale of the four loans.
At all relevant times, New Fed carried E & O coverage
through National Union. "An errors and omissions policy is
intended to insure a member of a designated calling against
liability arising out of the mistakes inherent in the practice of
that particular profession or business." Massamont Ins. Agency,
Inc. v. Utica Mut. Ins. Co., 489 F.3d 71, 74 (1st Cir. 2007).
Under the policy, National Union agreed "[t]o pay on behalf of the
Insured . . . Damages resulting from any Claim(s) . . . for any
Wrongful Act of the Insured." But the policy excluded from
coverage "any Claim . . . alleging fraud, dishonesty, or criminal
acts or omissions on the part of the Insured."
On June 28, 2006, New Fed sent National Union a notice of
potential claim and advised it that Decision One had discovered
"irregularities" in the credit reports for fifteen mortgage
applications. National Union acknowledged the receipt of New Fed's
claim notice and assigned the case to a claim examiner on September
1, 2006. On October 12, 2006, New Fed notified National Union of
the pending repurchase of the four loans by Decision One. On
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November 3, 2006, New Fed asked National Union to decide if it
would provide coverage and a defense under the E & O policy. New
Fed filed a sworn proof of loss statement under the E & O policy on
November 17, 2006. New Fed included a copy of Decision One's
October 2 demand letter with its proof of loss statement. By
December 28, 2006, National Union had refused to cover New Fed
under the E & O policy because it found that Decision One's claim
against New Fed involved employee dishonesty.
II.
New Fed brought a diversity action in the District of
Massachusetts to compel National Union to provide coverage and
defense costs under the E & O policy. The parties filed cross
motions for summary judgment. The district court granted summary
judgment to National Union, relying sua sponte on a rationale not
advanced by the insurer. New Fed filed a timely appeal to this
court.
III.
Summary judgment is appropriate where "there is no
genuine issue as to any material fact and . . . the movant is
entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c).
We review the district court's grant of summary judgment de novo
and "may affirm the district court's decision on any grounds
supported by the record." Collazo v. Nicholson, 535 F.3d 41, 44
(1st Cir. 2008) (quoting Estades-Negroni v. Assocs. Corp. of N.
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Am., 377 F.3d 58, 62 (1st Cir. 2004)). Here, no dispute of
material fact exists. Massachusetts law governs New Fed's claims
against National Union. The interpretation of an insurance
contract under Massachusetts law is a question of law. Allmerica
Fin. Corp. v. Certain Underwriters at Lloyd's, London, 871 N.E.2d
418, 425 (Mass. 2007).
The insured has the initial burden of proving that a loss
falls within the policy's description of covered risks. Markline
Co. v. Travelers Ins. Co., 424 N.E.2d 464, 465 (Mass. 1981). It is
the insurer's burden to show the applicability of a particular
exclusion. Hanover Ins. Co. v. Talhouni, 604 N.E.2d 689, 692
(Mass. 1992). We need only address the applicability of the E & O
policy's fraud and dishonesty exclusion.
We give the terms of New Fed's E & O policy their "fair
and reasonable meaning." Cody v. Conn. Gen. Life Ins. Co., 439
N.E.2d 234, 237 (Mass. 1982) (quoting MacArthur v. Mass. Hosp.
Serv., Inc., 180 N.E.2d 449, 450 (Mass. 1962)). "A policy of
insurance whose provisions are plainly and definitely expressed in
appropriate language must be enforced in accordance with its
terms." Id. (quoting Hyfer v. Met. Life Ins. Co., 61 N.E.2d 3, 5
(Mass. 1945)). Here, the E & O policy excludes from coverage "any
Claim . . . alleging fraud, dishonesty, or criminal acts or
omissions . . . on the part of the Insured." The policy defines
"Insured" to include both New Fed and any employee or independent
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contractor. Thus, Dunn's actions could fall within this policy
exclusion.
Whether the policy provides coverage is determined by
comparing the allegations of the underlying claim -- here, Decision
One's October 2 demand letter -- with the policy provisions. Med.
Records Assocs., Inc. v. Am. Empire Surplus Lines Ins. Co., 142
F.3d 512, 514 (1st Cir. 1998) (citing Sterilite Corp. v. Cont'l
Cas. Co., 458 N.E.2d 338, 340 (Mass. App. Ct. 1983)). Decision
One's demand letter alleges that New Fed submitted "fraudulent
information" in four mortgage applications. The letter stated:
"[T]he credit reports for the [prospective borrowers], which were
obtained by New Fed and submitted to Decision One in support of the
loan applications, were altered to reflect higher credit scores
than those scores actually provided to New Fed by the credit
bureau." Decision One's allegations place New Fed's conduct
squarely within the E & O policy's2 fraud and dishonesty exclusion,
and New Fed is not entitled to indemnification.
2
An E & O policy may be contrasted with a fidelity bond.
"Fidelity bonds are a sort of 'honesty insurance,' insuring against
employee dishonesty. . . . Although often referred to as insurance,
it is not liability insurance, but rather a two-party indemnity
agreement through which the insurer reimburses the insured for
losses actually suffered in accordance with the contract
provisions." FDIC v. Ins. Co. of N. Am., 105 F.3d 778, 785 (1st
Cir. 1997).
New Fed had fidelity bond coverage through National
Union, but National Union denied New Fed's claim under the bond.
New Fed has not pursued its claim under the bond here.
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New Fed has also argued that under Massachusetts law, an
insurer may not deny indemnity coverage because of the insured's
fraud or dishonesty without a showing that the insured intended to
harm the injured party. But New Fed has cited no authority to
support this proposition, and we find no legal basis for it. We
add that even if there were an "intent to harm" requirement, it
would likely be satisfied here. The employee, whose actions are
imputed to the insured employer, had to know that a false credit
report was likely to lead to overpayment and loss.
We turn to the issue of New Fed's claim for defense costs
under the E & O policy. An insurer's duty to defend is broader
than its duty to indemnify under Massachusetts law. Dryden Oil Co.
of New Eng. v. Travelers Indem. Co., 91 F.3d 278, 282 (1st Cir.
1996). "The reason [for this disparity] is that an insurer's
obligation to defend is measured by the allegations of the
underlying complaint while the duty to indemnify is determined by
the facts, which are usually established at trial." Travelers Ins.
Co. v. Waltham Indus. Labs. Corp., 883 F.2d 1092, 1099 (1st Cir.
1989). An insurer has a duty to defend where the third party's
allegations against the insured are "'reasonably susceptible' of an
interpretation that they state or adumbrate a claim covered by the
policy terms." Liberty Mut. Ins. Co. v. SCA Servs., Inc., 588
N.E.2d 1346, 1347 (Mass. 1992) (quoting Cont'l Cas. Co. v. Gilbane
Bldg. Co., 461 N.E.2d 209, 212 (Mass. 1984)). But where the third
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party's allegations against the insured "lie expressly outside the
policy coverage and its purpose, the insurer is relieved of the
duty to investigate or defend the claimant." Herbert A. Sullivan,
Inc. v. Utica Mut. Ins. Co., 788 N.E.2d 522, 531 (Mass. 2003)
(quoting Timpson v. Transamerica Ins. Co., 669 N.E.2d 1092, 1095
(Mass. App. Ct. 1996)). Here, National Union has no duty to defend
because Decision One alleged misconduct by New Fed that is plainly
excluded from coverage.
The district court's decision rested on an unrelated
policy exclusion, which we need not consider here.
IV.
The district court's grant of summary judgment to
National Union is affirmed.
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