Applying Massachusetts law, the United States Court of Appeals for the First Circuit has held that unfair business practices claims brought against an insured insurance broker by a competitor involved professional services within the scope of its professional liability policy and that an exclusion for “unfair competition of any type” did not apply because the allegations did not involve consumer confusion. Utica Mutual Ins. Co. v. Herbert H. Landy Ins. Agency, 2016 WL 1566644 (1st Cir. April 19, 2016).
The insured, an insurance broker for real estate professionals, was sued by one of its competitors in California for unfair business practices and negligence. The suit alleged that the broker violated California state law by improperly offering surplus lines insurers’ policies despite the adequacy of the admitted market. Under California law, an insurance broker is only allowed to offer surplus lines insurers’ policies (with lower premiums) when the admitted pool is deemed inadequate.
The broker sought a defense from its insurer, and the insurer filed suit seeking a declaratory judgment that it owed no duty to defend the broker against the competitor’s claims because the competitor’s negligence claims did not arise out of professional services and because the exclusion for unfair competition precluded coverage. The trial court granted summary judgment in favor of the broker, which the appellate court affirmed.
In doing so, the court first explained that the competitor’s complaint can reasonably be construed to “sketch” a professional liability claim and thus covered under the policy. The court pointed to the allegations that the broker “failed to act with reasonable care in the solicitation and placement [of insurance policies]” and “failed to conduct a diligent search of the admitted market, filed falsified documentation relating to the search, and evaded scrutiny . . . by failing to file required statements.” According to the court, “these activities – soliciting and placing insurance policies, searching the admitted market, and filing related documentation – are part of the professional activity of an insurance agent or broker” as they require “knowledge and skills particular to the insurance profession.” The court also dismissed the insurer’s arguments that professional liability insurance does not cover claims by competitors and that the policy does not apply because the broker did not breach any professional duties owed to the competitor.
The court then turned to the exclusion for “unfair competition of any type,” and held that even though the lawsuit alleged unfair business practices in violation of state law, the lawsuit did not allege consumer confusion, which is how “unfair competition” is defined according to Massachusetts law. The court explained that Massachusetts’s interpretation necessarily means that “unfair competition” will not encompass the full range of unfair business practices prohibited by state statutes that do not deal with consumer confusion. Additionally, the court explained that, contrary to the insurer’s position, the modifier “any type” does not make the exclusion applicable to claims that do not allege any kind of consumer confusion. According to the court, the traditional core of unfair competition is consumer confusion as to the source or origin of goods or services, and that even the expanded meaning taken by some courts to include “confusion as to sponsorship, endorsement, or some other affiliation” would still not capture the competitor’s allegations of negligence against the broker.