Hanover unit obligated to defend real estate brokerage

A unit of The Hanover Insurance Group Inc. is obligated to defend a real estate brokerage in litigation because the charges being filed against it are not necessarily excluded by the deceptive business practices exclusion in its miscellaneous professional liability policy, says a federal appeals court, in affirming a lower court ruling.

Modesto, California-based Paul M. Zagaris Inc. was charged in a putative class action lawsuit filed in state court with receiving undisclosed kickbacks from the sale of natural-hazard disclosure reports to its clients, according to Friday’s ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Hanover Insurance Co. v. Paul M. Zagaris Inc., a California corporation, et al.

Worcester, Massachusetts-based Hanover agreed to defend Mr. Zagaris to defend the insured in the litigation subject to a reservation of rights, but sought a declaration in U.S. District Court in San Francisco it had no duty to defend or indemnify the brokerage.

The District Court ruled against Hanover, and was upheld by a unanimous three-judge appeals court panel. Hanover contended it was not obligated to defend the company under an exclusion in its policy that exempts it from covering claims “arising out of false advertising, misrepresentation in advertising, antitrust, unfair competition, restraint of trade, unfair or deceptive business practices, including, but not limited to, violation of any local state or federal consumer protection laws.”

“The district court correctly reasoned” that the underlying litigation’s causes of action for breach of fiduciary duty and constructive fraud do not necessarily arise out of deceptive business practices and are excluded under the policy, said the ruling.

“As the district court explained, it remains possible that the insured could be found not to have engaged in deceptive business practices even if they are found to have breached their fiduciary duties by failing to disclose their interest in the sales of the (natural-hazard disclosure) reports, or engaged in constructive fraud via the same omission,” said the ruling.

“Hanover has not met its burden to demonstrate that there is no possible scenario” in which the lawsuit claims fall within the policy, said the ruling, in affirming Hanover has a duty to defend the company in the lawsuit.