Explicit Allegation of Acts Arising from Professional Services Required to Trigger E&O Policy

Applying Illinois law, the United States Court of Appeals for the Seventh Circuit has held that a lawsuit that mentioned that the insured provided professional services to the claimant, but did not directly assert that any of the wrongdoing in the complaint arose from those services, was not a covered claim under a real estate broker’s errors and omissions liability policy.  Madison Mut. Ins. Co. v. Diamond State Ins. Co., 2017 WL 1065557 (7th Cir. Mar. 21, 2017).

Through a real estate broker that represented the original owners of the property, two individuals purchased a home near a dam that created an artificial lake.  As it happened, the broker was also the original developer of the lake and the dam, and she owned a home in the neighborhood.  In 2006, the two homebuyers sued the broker for failing to disclose that the original owners had not obtained the proper legal permit to build the dam.  The broker’s E&O insurer defended the broker in the suit, and the broker ultimately obtained dismissal of the counts asserted against her.

In 2011, the two homebuyers brought a second suit against the broker.  This time, the two homeowners alleged a “pattern of harassment, intimidation, and interference with . . . property rights,” and asserted counts for, inter alia, trespass, malicious prosecution, intentional and negligent infliction of emotional distress, nuisance, and for an order of protection.  The broker tendered the 2011 suit to her E&O insurer.  The E&O insurer denied coverage, asserting that the suit did not arise out of covered professional services.  The broker’s homeowner’s insurer defended and sued the E&O carrier, alleging the two suits were related and therefore the E&O carrier owed a defense.

In the ensuing coverage litigation, the Seventh Circuit held that the E&O insurer owed no duty to defend the broker.  The court acknowledged that there were some overlapping factual allegations between the 2006 and 2011 suits but focused on whether the 2011 suit implicated “professional services.”  The court held that, while the complaint referenced that the defendant was a real estate broker, there were no specific allegations that she had wronged the homebuyers in her capacity as a realtor.  According to the court, the complaint did not allege the violation of any duty of care arising from professional services provided to the homebuyers.  Given the absence of a specific allegation of wrongdoing in the broker’s capacity as a realtor, the court held that the 2011 suit did not arise from a covered professional service and was therefore not covered under the E&O policy.

Wiley Executive Summary

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