Evanston Insurance Co. is obligated to defend and indemnify a title insurer accused in a scheme to defraud Maryland homeowners, and exclusions in its errors and omissions policy do not apply, an appeals court has ruled.
The Maryland attorney general sued Laurel, Md.-based Cornerstone Title & Escrow Inc. and several co-defendants in 2008 on charges of violating the state Protection of Homeowners in Foreclosure Act and the state Consumer Protection Act, according to Wednesday's ruling by the 4th U.S. Circuit Court of Appeals in Cornerstone Title & Escrow Inc. et al. v. Evanston Insurance Co.
Cornerstone's co-defendants were accused of convincing owners of 13 properties on the verge of foreclosure to sell their homes to them and then rent the homes. The co-defendants then charged the homeowners rent that was much higher than the original mortgage payment, “driving the homeowner out of her home and ending any chance for her to repurchase it in the future,” according to court documents.
Cornerstone provided settlement services for the sale-leaseback transactions and failed to deliver checks for proceeds due to the homeowners, according to the ruling.
The attorney general sought to hold Cornerstone responsible not just for its involvement but for its co-defendants' acts as well, according to the appeals court ruling. Cornerstone later agreed to a settlement and paid $100,000 in restitution.
Cornerstone then sought coverage of defense costs and indemnification from Deerfield, Ill.-based Evanston, a unit of Markel Corp., which provided errors and omissions coverage. However, Evanston denied coverage, prompting Cornerstone to sue the insurer in March 2012 in federal court in Baltimore. Cornerstone accused the insurer of breach of duty.
Evanston argued that the allegations in the attorney general’s suit fell within exclusions in the E&O policy, and that it no obligation to defend or indemnify Cornerstone.
The federal court held that two exclusions in the E&O policy — a claim that would result in a profit to which it was not legally entitled and a claim based on alleged theft — negated Evanston’s duty to defend or indemnify Cornerstone.
But Wednesday, a three-judge panel of the 4th Circuit unanimously overturned the lower court’s ruling. Pointing to the profit-related exclusion, the panel said the attorney general’s complaint did not allege that any particular profit went to Cornerstone as required by the exclusion.
“To the contrary, the complaint alleged that all the relevant benefits and funds” went to the co-defendants, the appeals court ruled.
The exclusion also does not apply because the attorney general’s complaint did not allege illegal profiteering by Cornerstone. “Instead, the complaint alleged illegal conduct that produced incidental gains,” the court said.
The theft exclusion also does not apply to the charges against Cornerstone. “The underlying complaint attempts to impose liability on Cornerstone for acts of its co-defendants that have no connection at all to misdirected checks,” the court ruled in remanding the case for further proceedings.