The Superior Court of Delaware held that a directors and officers liability insurer must advance defense costs to a mortgage broker targeted in a federal government investigation of alleged False Claims Act violations. In Guaranteed Rate, Inc. v. ACE American Insurance Company, No. N20C-04-268 MMJ CCLD (Del. Sup. Ct. Aug. 18, 2021), Guaranteed Rate received a Civil Investigative Demand from federal authorities in June 2019 regarding the company’s underwriting and issuance of federally-insured mortgage loans. Eleven days later, Guaranteed Rate provided notice of the CID under a private company management liability policy issued by ACE American Insurance Company.
The parties cross-moved for judgment on the pleadings. The court’s opinion focused on three principal issues: (1) whether the CID was a “Claim” first made during the policy period; (2) whether the policyholder’s request for reimbursement of defense costs was untimely because it was not made prior to the disposition of the investigation; and (3) whether a professional services exclusion negated ACE’s obligations to advance defense costs. The court ruled in favor of the policyholder on each issue.
The CID is a “Claim” First Made During the Policy Period
ACE denied coverage, arguing that the CID did not qualify as a covered “Claim,” defined in the D&O policy as “a civil, administrative or regulatory investigation against the insured.” To trigger coverage, the policyholder must show that the investigation is for a “Wrongful Act,” defined to mean “any error, misstatement, misleading statement, act, omission, neglect, or breach of duty actually or allegedly committed or attempted” by Guaranteed Rate.
Citing prior Delaware precedent recognizing an insurer’s “broad duty to defend” where the insured was “a focus of the investigation” of alleged fraud, the court stated that there is “no relevant distinction” between the “investigation of” and “actually alleging” an unlawful act. Because the government’s investigation of Guaranteed Rate focused on potential violations of the False Claims Act, the court found, the CID fell within the policy’s definition of “Claim.”
Guaranteed Rate’s Request for Defense Cost Reimbursement Was Timely
ACE also claimed that, despite receiving notice of the CID 11 days after it was served, it had no duty to advance defense costs because Guaranteed Rate did not request payment until after the investigation had concluded. The court rejected this position. Because the CID was a claim alleging wrongful acts under the policy, ACE’s duty to advance defense costs was triggered when Guaranteed Rate gave timely notice and requested coverage and not at a later point when the request for reimbursement was made. The court did note, however, that ACE’s advancement is subject to repayment if it is later determined that the policy does not provide coverage.
The “Professional Services” Exclusion Does Not Apply
The court also rejected ACE’s invocation of a “Professional Services” exclusion, which excludes loss for claims “alleging, based upon, arising out of, or attributable to any Insured’s rendering or failure to render professional services.” ACE claimed that the exclusion applies because the underwriting and mortgage origination activities at issue in the CID constitute “professional services.” The court disagreed for two reasons.
First, it pointed to a prior coverage dispute regarding claims alleging violations of the False Claims Act similar to those at issue in the CID. In that case, Chubb (part of the same insurer group as ACE) argued that the alleged false submissions to HUD regarding mortgage loans made to borrower clients were not “professional services” because it sought to deny coverage under a policy issued specifically to cover professional services liability. The court highlighted that ACE now argued that the professional services exclusion in a D&O policy applies to the same conduct its affiliate argued did not constitute professional services, which “directly contradicts Chubb’s previous position.”
Second, separate from ACE’s prior inconsistent position, the court found that ACE’s interpretation was not supported by the conduct alleged in the CID. The court found that the exclusion was “drafted broadly” but failed to define the term “professional services.” Recognizing that exclusionary language must be interpreted “narrowly in favor of coverage,” the court noted that wrongful acts alleged against Guaranteed Rate were the failure to meet applicable quality-control standards in originating the underwriting federally insured loans. Those services were provided to the federal government, not to mortgage borrowers, and compliance with quality-control standards is not a “professional service” provided “directly to borrower clients” that could be excluded by the policy’s professional services exclusion. Thus, the exclusion did not apply.
Guaranteed Rate is another example in a recent string of pro-policyholder decisions in Delaware on issues ranging from allocation and choice of law to forum disputes and the definition of “Securities Claim.” Although the court noted that the advancement of defense costs remains subject to repayment if subsequent proceedings show that the claims were not covered, the decision is a strong pronouncement for policyholders seeking coverage for government investigations costs, especially for those arising out of alleged False Claims Act violations. With increased chance of healthcare, cybersecurity, and similar fraud arising out of the pandemic, False Claims Act enforcement aimed at curtailing false billings to the government remains a significant exposure across many industries.
Other highlights include:
Applying a favorable “duty to defend” standard to reimbursement obligations under a D&O policy, recognizing that the insurer’s duty to advance defense costs is construed broadly—whenever a claim against an insured, read as a whole and with all reasonable inferences made in the light most favorable to the policyholder, alleges facts that “potentially” fall within the scope of coverage.
Following the well-reasoned decisions in Delaware and elsewhere that government subpoenas and similar investigation demands seeking testimony or documents constitute “claims” under standard D&O policy language, concluding that “there is no distinction between the investigation of, or actually alleging, an unlawful act.”
Properly construing exclusionary language narrowly in favor of coverage, especially where the insurer seeks to enforce its preferred interpretation of undefined terms, and taking the insurer to task for taking a position that directly conflicts with its prior interpretations of similar policy language in similar False Claims Act cases.
Refusing to require requests for reimbursement of defense costs prior to the disposition of an investigation and, more generally, reinforcing that an insurer’s advancement obligations are triggered at the time notice is received and not at the time of the subsequent request for reimbursement for the purposes of determining timeliness for such payment requests.