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The Delaware Supreme Court on Thursday affirmed a lower court ruling in favor of a residential mortgage company in litigation with a Chubb Ltd. unit over its management liability coverage.
Chicago-based Guaranteed Rate Inc. had a management liability policy with Chubb unit Ace American Insurance Co. that provided up to $5 million in coverage subject to a $2.5 million self-insured retention, according to the unanimous ruling by a three-judge panel of the state’s high court in Ace American Insurance Co. v. Guaranteed Rate Inc.
It also had a professional liability policy that is not a focus of litigation, according to the ruling.
In 2017, a former GRI employee filed a whistleblower lawsuit against GRI alleging it had violated the False Claims Act by falsely certifying to the government that the loans it endorsed were eligible for government insurance, according to the ruling.
GRI settled the FCA claims with the government and whistleblower in 2020 for $15.06 million.
GRI admitted in the settlement agreement that it underwrote and originated government-insured loans that were not eligible under the Fair Housing Administration and U.S. Department of Veterans Affairs programs, “despite representing they complied with applicable program requirements,” the ruling said, citing the settlement agreement.
After Ace refused to provide coverage based on a professional services exclusion in the management liability policy, Guaranteed Rate sued the insurer in Delaware Superior Court, which ruled in the policyholder's favor.
“Where the parties disagree is whether the FCA claims arose out of GRI’s loan originating and underwriting services, which triggers the professional services exclusion under the Managing Liability Policy,” the Supreme Court ruling said.
“GRI’s alleged misconduct arose out of the false certifications, not the professional services GRI provided to borrowers,” it concluded.
“Thus, the FCA charges and eventual settlement did not fall within the professional services exclusion on the Management Liability policy,” it said, in affirming the lower court.
Lilit Asadourian, a partner with Barnes & Thornburg LLP in Los Angeles, who represented GRI, said in a statement, “We believe the Delaware Supreme Court ruled clearly and consistently with the law, and look forward to finally collecting the insurance proceeds due to our client.”
She said, “This case carries substantial precedential significance for policyholders across the nation. The court made it clear that FCA claims by the government are separate from the ‘professional services’ that a company provides to its customers and, as such, coverage is available for FCA claims under a management liability (D&O) policy.”
Chubb did not respond to a request for comment.
Dominic Rupprecht, a partner with Reed Smith LLP in Pittsburgh, who represents policyholders and is not involved in the case, said, “This is a straightforward, rational application of the policy language that comports with the policyholder’s reasonable expectations of what should be covered under these types of insurance policies.”
It is “an important win for policyholders seeking coverage for False Claims Act cases,” he said.