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Mortgage firm investors can’t recover under Lloyd’s excess D&O policy

Mortgage firm investors can’t recover under Lloyd’s excess D&O policy

In a lawsuit that is the outgrowth of the subprime mortgage crisis of a decade ago, a federal appeals court has upheld a lower court ruling and held that investors in a mortgage company cannot access a Lloyd’s of London excess directors and officers liability insurance policy.

The litigation was filed by class representatives of investors in Los Angeles-based QHL Holdings Fund Ten L.L.C. and Agoura Hills, California-based Golden State TD Investments, L.L.C., who had invested in Calabasas, California-based Quality Home Loans Inc., according to court documents related to Friday’s ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Ruth Ann Wunderman Cooper and Marc Sobel et al. v. Certain Underwriters at Lloyd’s et al.

Between 2003 and 2007, QHL had engaged in the real estate mortgage brokerage business, focusing on real estate financing for borrowers “who would normally be considered in the industry to be high risk individuals,” according to court papers.

It funded its financing by raising money, then using its capital to either sell mortgage loans or issue bond financing deals in the secondary market through Roseville, California-based Countrywide Home Mortgage. 

Its insurance coverage included a $5 million Lloyd’s excess D&O policy, according to the court papers.

QHL and the investment vehicles filed for bankruptcy in 2007, and a settlement was eventually approved by the bankruptcy court.

The investors then filed suit in U.S. District Court in Los Angeles seeking access to the Lloyd’s policy. A unanimous three-judge appellate court panel upheld the lower court in ruling the investors were not entitled to coverage under the policy.

“The excess policy unambiguously requires exhaustion of underlying policy limits,” said the panel. “This forecloses the possibility of exhaustion through payment by parties other than the underlying insurers,” it states

“A settlement agreement attached to the first amended complaint expressly states that an underlying insurer paid only $3.47 million out of a $5 million policy limit. Plaintiffs’ allegations of exhaustion contradict he settlement agreement and are properly disregarded,” said the decision in upholding the lower court’s ruling.

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