Insurer liable for errors and omissions coverage for wholesale broker

Maxum Indemnity Co. is liable to provide coverage under a professional errors and omissions policy issued to a wholesale insurance broker in a case where fake insurance policies were sold, says an appeals court, in overturning a lower court ruling.

Sherman Oaks, California-based Drive West Insurance Services Inc., a wholesaler that conducts business as Mulberry Insurance Services Inc., issued quotes and binders for insurance coverage to West Chester, Ohio-based National Condo & Apartment Insurance Group Inc., a retail insurance broker, in connection with a commercial real estate/habitation insurance program, according to Wednesday’s ruling by the 6th U.S. Circuit Court of Appeals In Cincinnati in Maxum Indemnity Co. v. Drive West Insurance Services Inc./Mulberry Insurance Services Inc. et al.; National Condo & Apartment Insurance Group Inc. NCAIG then issued these quotes and binders to its own clients, according to the ruling.

Although the quotes and binders issued by Mulberry to NCAIG named Buffalo, New York-based AIX Specialty Insurance Co., a unit of Hanover Insurance Group Inc., and Manchester, New Hampshire-based North American Specialty Insurance Co., a unit of Swiss Re Ltd., as the insurance carriers, those companies had never issued or approved the policies, whose limits “amounted to well over $100 million,” according to the ruling.

At that point, unbeknownst to NCAIG, Michael Ward, who lacked authority to sell insurance policies, was selling these policies through his captive insurance company, but the “insurance coverage that property owners thought they were buying simply did not exist,” according to the ruling.

Both AIX and Swiss Re sent Mulberry “cease and desist” letters with respect to the Ward policies. Meanwhile, Mulberry applied and received professional errors and omissions coverage from Alpharetta, Georgia-based Maxum.

Property owners began filing claims against NCAIG in 2012 in connection with the policies, and NCAIG in turn filed claims against Mulberry.

Maxum denied coverage to Mulberry for the third-party claims and cross-claims asserted by NCIAG on the basis that Mulberry knew about the forged insurance before its coverage began on March 1, 2012.

In March 2013, Maxum filed suit in U.S. District Court in Cincinnati against Mulberry, NCAIG and others seeking rescission of the policy or a declaration it had no obligation to defend or indemnify Mulberry, and the court granted summary judgment to Maxum, ruling the insurer had no obligation to provide coverage.

A three judge appeals court panel overturned that ruling in a 2-1 decision.

“The record does not establish that Mulberry knew of claims prior to March 1, 2012,” says the ruling.

“Moreover, because any dispute about insurance language must be resolved in favor of coverage if language can be reasonably construed to cover a claim, the third-party claims and cross-claims are covered by the policy, as NCAIG contends in its motion for summary judgment,” it states.

“Thus, the district court should not have issued a declaration that Maxum owed no duty to NCAIG or Mulberry. NCAIG is entitled to summary judgment on the issue of breach of the duty to defend and of coverage under the policy,” said the panel in remanding the case for further proceedings.

A dissenting opinion says NCAIG’s interpretation of the policy language is “unreasonable.”