A mortgage lender accused of violating the False Claims Act by approving government-backed loans that did not meet federal guidelines can seek to recover the $15 million it paid to resolve the allegations from its management liability insurer, the Delaware Supreme Court ruled Thursday.
The high court rejected arguments by Chubb Group’s Ace American Insurance Co. that Guaranteed Rate Inc.’s settlement with the US Justice Department was not covered because the violations involved professional services excluded from the management liability policy. In a 3-0 decision, the court affirmed a Superior Court judgment that found Ace liable, but also rejected GRI’s allegations that the insurer had acted in bad faith.
“This case carries substantial precedential significance for policyholders across the nation,” said Lilit Asadourian, a partner with the Barnes & Thornburg law firm in Los Angeles who represented Guaranteed Rate. “The court made it clear that FCA claims by the government are separate from the ‘professional services’ that a company provides to its customers and, as such, coverage is available for FCA claims under a management liability (D&O) policy.”
The court made it clear that FCA claims by the government are separate from the “professional services” that a company provides to its customers and, as such, coverage is available for FCA claims under a management liability (D&O) policy.”
GRI’s troubles started in 2017, when a former employee filed a whistleblower lawsuit accusing the lender of falsely certifying to the government that the loans it endorsed were eligible for government insurance. Under the federal government’s Direct Endorsement program, the Federal Housing Administration and Department of Veterans Affairs guaranty mortgage loans that meet government deadlines and pay a portion of the losses if the borrower defaults.
The former employee alleged that GRI certified that its loans were eligible for the guaranties, even though the company paid prohibited commissions to its underwriters, pressured employees to endorse bad loans and did not verify borrowers’ financial information.
The US Attorney for the Southern District of New York notified the mortgage company that it was investigating the whistleblower lawsuit, known as qui tam action. GRI notified Ace of the investigation the next month.
GRI had purchased two insurance policies from Ace: A professional liability policy and a management liability policy. The professional liability policy specifically excluded False Claims Act violations from coverage. The management liability policy excluded any damages caused by “professional services,” but did not define the term. The management liability policy had a $5 million limit with a $2.5 million self-insured retention.
In January 2020, the US Attorney’s Office demanded $24 million. GRI eventually agreed to pay $15.06 million to settle the matter. The company admitted that it did not adhere to the government’s self-reporting requirements, made gifts or paid commissions to underwriters and had approved loans that were not eligible for certification.
Ace denied coverage in March 2020, citing the professional services exclusion in the management liability policy.
GRI filed a lawsuit alleging breach of contract and bad faith and seeking a declaration that coverage was owed for the settlement action and legal costs.
The Superior Court ruled that the professional services exclusion did not apply because the government’s complaint related to compliance with quality control standards, not GRI’s business of underwriting and issuing loans. The trial court issued summary judgment in favor of GRI on the breach of contract and declaratory judgment claims, but rejected GRI’s bad faith claim. The court said there was a good faith dispute about whether the insurer had grounds to deny coverage.
Ace appealed. GRI filed a cross appeal, arguing that its bad faith claim should have been approved.
The Supreme Court affirmed the Superior Court’s decision. The opinion cites several cases that rejected broad definitions of “professional services” to include actions such as fraudulent billing practices and improper approval of financial aid to college students.
Ace had argued that the criminal investigation of GRI “arose out of” the professional services it performed.
“Ace’s interpretation of ‘arising out of’ effectively extends coverage of the exclusion to just about anything remotely connected to the professional service,” the opinion says. “Courts have often held that professional service exclusions do not apply when the act complained of is only incidental to an insured’s professional services.”
Dominic Rupprecht, a partner and policyholder attorney at Reed Smith who was not involved with the case, said the decision shows that coverage for False Claims Act accusations may be available if there are no clear exclusions.
“Policyholders, with the assistance of coverage counsel, should critically examine all of their policies for potential coverage and aggressively advocate for their rights,” he said in an email. “The costs of a False Claims Act suit or investigation are too high to simply take an insurer’s ‘no’ for an answer.”
Rupprecht said even before Thursday’s decision, insurers were adding endorsements to their policies imposing sublimits or outright exclusions for liabilities arising under the False Claims Act.
“I would expect that trend to accelerate,” he said.
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