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
on this issue.
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
on this issue.
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
14
Guaranteed Rate, Inc. v. Ace American Insurance Company
Combined Opinion