In an insurance coverage action for breach of contract the Superior Court of the state of Delaware found that two exclusions commonly used by carriers to get out of covering regulatory investigations don't apply when the government is investigating the insured under the False Claims Act. The case is Guaranteed Rate v. Ace Am. Ins. Co., 2022 Del. Super. LEXIS 367 (Super. Ct. Aug. 24, 2022).
Guaranteed Rate, Inc. (GRI), an underwriter and issuer of federally-insured mortgage loans, sought $18 million from insurer ACE in connection with the settlement of a government investigation. The U.S. Department of Justice and the U.S. Attorney's Office for the Northern District of New York investigated alleged violations of the False Claims Act, and on June 27, 2019, GRI received a Civil Investigation Demand (CID). The parties filed cross-motions for summary judgment. GRI subsequently filed a motion for judicial notice of two False Claims Act cases, which GRI believes to have similarities relevant to their arguments against ACE.
GRI is seeking indemnification for approximately $15,060,000 in settlement costs with the U.S. Department of Justice, arising from the company's defects in underwriting individual loans. The company asserts that the settlement represented "damages the Government allegedly incurred for insurance payments it made to third parties, plus a multiplier under the False Claims Act." The policy's Professional Services Exclusion 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 insureds rendering or failure to render professional services. According to the language of the Settlement Agreement, the settlement must be a "loss," not taxes, fines, penalties, or disgorgement. ACE denied coverage arguing that the civil investigative demand did not qualify as a "claim."
ACE argued that whether it has a duty to indemnify GRI for the settlement depended on acts revealed in the DOJ investigation, not the acts alleged in the CID. The insurer also asserts that the investigative facts show that the settlement was derived directly from defects in GRI's underwriting of the individual loans issued to borrowers, and thus arises out of GRI's professional services within the scope of the Exclusion. ACE further argues that the settlement is a loss arising out of professional services classified as "underwriting errors," and reasons that the "actual facts" show that the damages were calculated on the basis of underwriting errors in individual loan files, rather than on the basis of quality control deficiencies.
The Delaware court found that "underwriting errors" versus "quality control deficiencies" was a distinction without a difference. The court further confirmed that the Professional Services Exclusion did not bar coverage.
On the EPL claim, ACE argued that GRI lacked knowledge of the retaliation claim until after the settlement agreement, and that the disclosure of the claim had no impact on the settlement amount. GRI argues that it suspected the claim despite the complaint remaining under seal. The court found that there was no evidence that the retaliation claim increased the settlement amount, and the entire settlement was covered and no exclusions or affirmative defenses applied.
Barnes and Thornburg, partner Lilit Asadourian, counsel for the plaintiffs, provided the following quote on the industry relevance of the case.
"Overall, this is an important decision for D&O coverage because the court found that 2 exclusions that carriers regularly use to get out of coverage for regulatory investigations don't apply when the government is investigating the insured under the False Claims Act. In addition, the court previously held that a Civil Investigative Demand is a "Claim" under the D&O policy."