NACA's allegations included the following:

First One … subjects the homeowners to a ruthless and well-conceived bait and switch scheme, in which First One repeatedly misrepresents the nature of its business, the nature of the services it provides, and its affiliation, connection or association with NACA. First One passes itself off as a non-profit organization with a mission to provide NACA-like housing counseling services free of charge to homeowners. But in fact, First One does not provide any housing counseling services free or otherwise. Instead, once a homeowner is reeled in, First One charges the homeowner an excessive and illegal advanced fee to compile documents, and then First One passes the homeowner on to NACA, which First One represents is affiliated with First One, to provide the free housing counseling that First One had promised to provide.

First One and Vescera (together, the “insureds”) tendered the NACA case to their insurer, Hartford Casualty Insurance Company, and requested an immediate defense.

Hartford denied coverage, stating that NACA's claims did not trigger coverage under the policy.

The insureds settled the lawsuit with NACA by paying NACA approximately $1.5 million. In 2016, Vescera pleaded guilty to crimes related to defrauding the public through this scheme with First One. He was sentenced to one year and a day in prison.

After the insureds sued Hartford for coverage, the insurer moved for summary judgment.

The Hartford Policy

The Hartford policy provided that it would:

pay those sums that the insured becomes legally obligated to pay as damages because of … “personal and advertising injury” … [and has] the right and duty to defend [First One and Vescera] against any “suit” seeking those damages.

The policy defined:

personal and advertising injury

as arising out of one or more of the following:

d. Oral, written or electronic publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services.

…

f. Copying, in [the insured's] “advertisement,” a person's or organization's “advertising idea” or style of “advertisement”;

g. Infringement of copyright, slogan, or title of any literary or artistic work, in [the insured's] “advertisement” 

The policy excluded coverage for injuries:

resulting from the rendering of or the failure to render financial services by any insured to others

, including:

[p]lanning, administering, managing or advising on … Loan or Mortgage plan, fund or account. 

The district court granted Hartford's motion for summary judgment.

In its decision, the district court found that the policy's financial services exclusion precluded coverage for NACA's lawsuit because all of NACA's alleged injuries, including those caused by misleading advertisements, had resulted from the insureds' “rendering of or the failure to render” mortgage-related advising of others. Moreover, the district court pointed out, the insureds' alleged conduct of charging upfront fees for mortgage modification services, which was alleged in NACA's complaint, was illegal in California. Those alleged acts were “deliberate and illegal” and, the district court said, the insureds had been informed of the illegality of their conduct when the California Department of Real Estate (“DRE”) sent them a letter asking them to stop their activities.

The district court noted that, according to the DRE's letter, which included factual findings and conclusions of law, the insureds “used a form of advance fee agreement” in violation of California law. The district court said that, despite knowing that their conduct was illegal, the insureds “continued their activities.”

The insureds' “inherently harmful acts of illegally charging up-front fees to homeowners seeking mortgage advice, which were the basis of NACA's lawsuit,” were uninsurable under California law, the district court concluded.

The case is First One Lending Corp. v. The Hartford Cas. Ins. Co., No. SACV 13-01500 AG (DFMx) (C.D. Cal. March 13, 2017).