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A Chubb Ltd. unit must advance defense costs under its management liability policy to a Chicago mortgage broker which was the subject of a federal government investigation, the Delaware Superior Court has ruled.
Chubb unit Ace American Insurance Co. provided a private company management liability policy to Guaranteed Rate Inc., according to Wednesday’s ruling by the Delaware Superior Court in New Castle, Delaware, in Guaranteed Rate Inc. v. ACE American Insurance Co., XL Specialty Insurance Co., Axis Insurance Co. and Endurance American Insurance Co.
GRI received a civil investigative demand in June 2019, from the U.S. Attorney’s office for the Northern District of New York and the U.S. Department of Justice, in connection with alleged violations of the False Claims Act.
GRI provided notice of the demand to its insurer Ace on July 8, 2019, and sought coverage for around $18 million under the 2018-2019 policy. In January 2020, Ace denied that the civil investigative demand constituted a “claim” under the policy.
Ace argued that GRI’s request should have been made prior to disposition of the investigation, according to the ruling. Ace also asserted that “GRI failed to establish that GRI incurred defense costs in excess of the $2.5 million retention,” the ruling said.
The mortgage company filed a motion for partial summary judgment on whether the civil investigative demand constituted a claim, whether a professional services exclusion in the policy applied and whether Ace breached its contract by refusing to acknowledge the demand as a claim, according to the ruling.
The insurer filed a cross-motion arguing that the professional services exclusion barred coverage under the directors and officers coverage under the policy.
In Wednesday’s ruling, the court found that the civil investigative demand falls within the definition of “claim” under the policy and that the claim was first made during the policy period. Therefore, the policyholder’s motion for partial judgment was granted on this issue.
“Advancement is subject to repayment, should subsequent proceedings determine that the policy does not provide coverage. Any relevant policy retention also will apply,” according to the ruling.
The court also found that the professional services exclusion does not apply to prevent coverage under the policy, granting the policyholder’s motion for partial judgment. The exclusion was “drafted broadly” by the insurer, the insurer failed to define "professional services” and the exclusion “must be interpreted narrowly in favor of coverage,” the ruling said.
“The wrongful acts alleged in the underlying investigation involve originating and underwriting federally-insured loans that failed to meet applicable quality-control standards. It appears that the duty to meet certain standards was owed most directly to the federal government, not to the mortgage borrowers … Compliance with applicable quality-control standards is not a professional service provided directly to borrower clients, such that coverage would be excluded by the policy’s professional service exclusion,” the ruling said.
Chubb declined to comment on the ruling.