Applying New York law, a federal district court has held that an insurer has a duty to defend and provide independent counsel to an insured realtor for claims involving intentional acts and repayment of commissions. Great Am. Ins. Co. v. Houlihan Lawrence, Inc., 2020 WL 1487294 (S.D.N.Y. Mar. 7, 2020).  The court also held that, because the underlying case was still pending, the question of whether the insurer had a duty to indemnify was premature.

A class action lawsuit was filed against the insured, alleging that the insured “engaged in a ‘scheme to lure thousands of homebuyers and sellers into dual[ ]agent transactions,’ and failed to properly disclose dual agency arrangements in contravention of New York law” by “paying kickbacks, or extra commission, to agents who received two commissions from dual agent transactions and ‘conceal[ed this practice] . . .from consumers.’”  The complaint asserts claims for breach of fiduciary duty and violations of New York General Business Law Section 349.

The insurer issued a professional liability policy to the insured, which provided specified coverage for “Real Estate Professional Services.” The policy provided that damages did not include “the return, restitution, reduction, compromise, or refund of fees, commissions, expenses or costs for Real Estate Professional Services performed or to be performed by an Insured.”  The policy also excluded coverage for claims “based on or arising out of any dishonest, intentionally wrongful, fraudulent, criminal[,] or malicious act or omission by an Insured,” as well as those “based on or arising out of . . . any disputes involving an Insured’s fees, commissions[,] or charges . . . [or] the gaining of any personal profit or advantage to which an Insured is not legally entitled.”

The insurer retained counsel to defend the underlying lawsuit. The insurer simultaneously brought suit seeking a declaratory judgment that the insurer owed no duty to defend or indemnify under the policy and filed a motion for judgment on the pleadings. The insured filed a counter-claim and filed its own motion for judgment on the pleadings, asserting that the insurer had a duty to defend the underlying suit and that the insured was entitled to independent counsel.

The court denied the insurer’s motion and granted the insured’s motion, holding that the insurer had a duty to defend because some of the allegations in the underlying complaint were “arguably covered by the policy.” The court rejected the insurer’s argument that the “gravamen” of the complaint was for intentional conduct, holding that the complaint alleged in part “wrongs of, at least arguably, an unintentional nature” and that the insured could be found guilty without a finding of intentionality. The court likewise held that the policy’s fee exclusion was inapplicable because the action did not “arise out of” the insured’s commissions, but instead arose out of the insured’s alleged misrepresentations and omissions, explaining that “this cause of action could exist even without the allegation that [the plaintiffs] paid improper commissions to [the insured].”  The court further held that the definition of damages did not relieve the insurer of its duty to defend because the plaintiffs sought damages in addition to the return of commissions, which were “not clearly barred by [the damages provision].

The court also held that the insured was entitled to independent defense counsel based on a conflict of interest with the insurer’s chosen counsel, which arose from the fact that the underlying action could result in a finding that the insured acted negligently, which would place it within coverage, or acted intentionally, which would place it outside of the scope of the policy.

The court declined to issue a decision regarding the insurer’s duty to indemnify, holding that the issue was premature because the underlying lawsuit remained pending.